Why is the U.S. dragging its heels on crypto and blockchain regulation, as the rest of the world forges ahead with financial innovation?
Powers On… is a new monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an Adjunct Professor at Florida International University School of Law, where he teaches a course on ‘Blockchain, Crypto and Regulatory Considerations.’
Dear Readers: Here is my first opinion piece for Cointelegraph since my retirement a month ago from law firm practice (and prior to that, the SEC) after a 40 year career. It is an exciting opportunity for me, and hopefully an interesting one for you. The shackles of politically correct, business sensitive communications are now gone, and I no longer have to ‘pre-clear’ or worry about the potential of my words offending regulators, politicians, colleagues, or clients of my law firm.
You will be hearing my personal and (mostly) objective views, which will be free from material conflicts. I seek no business from you for this endeavor. I only seek to be read, and perhaps stimulate dialogue to influence the actions of others — whether regulators, businesses, or legislators — to promote the advancement and adoption of blockchain technology, its use cases for businesses and banked and unbanked populations, and the safe and responsible regulation of cryptocurrencies.
My first column is on where I see the United States in comparison to the rest of the world in its accommodation, acceptance and adoption of blockchain, Bitcoin and other cryptocurrencies.
I start on this important topic because I worry that the United States, and its institutions and regulators may, by their actions and inactions, and whether by design or otherwise, be undermining the development, use and availability of digital assets for citizens of this country. And this could be to the detriment of us all.
These actions include generally hostile Congressional hearings on blockchain and Facebook’s Diem, née Libra; as well as SEC enforcement actions which continue to target the ICOs of 2017 and 2018; and FinCEN regulations proposed the week before Christmas seeking to require regulated financial institutions and MSBs to disclose virtually all cryptocurrency transactions and information on the institution’s customers and counterparties involving unhosted digital wallets.
The only bright spots have been the thoughtful writings and speeches by SEC Commissioner Hester Peirce and actions by the recently departed acting Comptroller of the Currency, Brian Brooks, in allowing financial institutions to custody digital assets and use blockchains for financial transactions.
What most politicians and regulators in the U.S. fail to appreciate is that while we stifle blockchain advancement and the use of cryptocurrencies for capital formation, there are other countries and jurisdictions which welcome and embrace it. In failing to adapt, the U.S. faces the real risk that this new technology will be “owned” by other countries, some of which may be adversaries and competitors.
In China, there is the People’s Bank of China’s digital currency and electronic payments project. That pilot, using digital currency and wallets issued by China’s Central Bank, has reportedly processed over three million transactions totaling over $160 million as of last November.
In Switzerland, not only has the country encouraged blockchain adoption, but the city of Zug implemented blockchain for both government and residential use.
In Sweden and Georgia, land registries are on the blockchain.
Capital raising is the lifeblood of many developers, entrepreneurs and blockchain companies. It is essential for the health and expansion of blockchain projects and their communities. The mechanism of choice is often an offering of digital tokens. Yet, many U.S. politicians and regulators have a myopic and provincial view embracing the thought that all which occurs in blockchain transactions must be adopted by, or guided by, U.S. policy views.
But guess what? As many regular readers of this publication, or investors in Bitcoin and other cryptocurrencies know, every day there are financial transactions occurring worldwide over the internet and various blockchains, with no government oversight or approval. Immune to, and regardless of, what Congress, the SEC, CFTC, FinCEN and the U.S. Fed says or wants. These currencies represent living entities and businesses that have vibrant lives beyond these shores.
At the time of writing, CoinMarketCap lists thousands of cryptocurrencies on its platform. These tokens are traded on dozens of exchanges, many of which are not registered in or regulated by the United States. And while the U.S. equity markets primarily trade from 9:30 a.m. to 4:00 p.m. EST Monday through Friday, tokens never stop trading. They don’t know the difference between weekdays and weekends. They’re bought, hoarded, traded and shared between both sophisticated and unsophisticated investors and traders all around the world.
The U.S. has sought, and may continue to seek, to stop this with new laws and regulations: But this is an exercise in futility. The cat is not only out of the bag, it is feasting lavishly at the table.
In the process of attempting to stifle innovation, the U.S. will lose world dominance for the U.S. Dollar and the power and influence of its political and economic institutions. Acting Comptroller Brooks aptly wrote parting words and advice to the new Biden Administration in The Hill last month: “[i]f the United States focuses on the risks and not the benefits [of cryptocurrency and decentralized finance], we will fall behind as the global financial system is rewired.”
So, where does that leave us, with the new Biden Administration and Congress? What can we expect and what should Americans be doing to make sure the U.S. continues as the dominant player for capital formation, trading and world affairs?
A quick glance at Congress is hardly encouraging. On January 15th, House Speaker Nancy Pelosi named Representatives Alexandria Ocasio-Cortez and Rashid Tlaib to the important House Financial Services Committee, chaired by Representative Maxine Waters. Waters has not shown any obvious friendliness toward, or deep understanding of, blockchain, digital currencies and their useful applications. Ocasio-Cortez and Tlaib will likely have other issues which they will prioritize. In the U.S. Senate, neither Senators Mike Crapo nor Sherrod Brown of the Senate Banking Committee have been standouts for advancing cryptocurrencies. Although at least Brown had embraced a Central Bank digital currency and the maintenance of digital wallets for Americans at the onset of the pandemic as part of the relief bill.
The SEC will likely be under the leadership of former Goldman Sachs partner and CFTC Chairman, Gary Gensler. It is less apparent what will occur. Gensler has been a professor at MIT and has taught a class on blockchain, banking and cryptocurrencies in the business school. In reviewing some of his lectures and materials for the class, there is no question he has a full and helpful grasp on the subject matter and issues that arise from an evolving political and regulatory framework. He also wrote an opinion piece for CoinDesk a year ago on December 15, 2019, entitled “Even if a Thousand Projects Don’t Make it, Blockchain is Still a Change Catalyst.”
The Gensler writing concludes with some thoughts of encouragement:
“Though literally thousands of projects have yet to land on broadly adopted use cases, I remain intrigued by Satoshi’s innovation’s potential to spur change-either directly or indirectly as a catalyst. The potential to lower verification and networking costs is worth pursuing, particularly to lower economic rents and data privacy costs, and promote economic inclusion. Further, shared blockchain applications might help jumpstart multiparty network solutions in fields that historically have been fragmented or resilient to change.”
Yet, elsewhere in the piece he ruminates that “the question remains what uses will cryptocurrencies and blockchain have beyond acting as a catalyst of change? Beyond Bitcoin providing a scarce digital speculative store of value, and niche applications in digital exchanges, gaming, and gambling, what applications will be sustainable for cryptocurrencies as a new form of private money?”
Gensler also had a reputation as an aggressive regulator. While he accomplished much at the CFTC in fulfilling the mandates of Dodd-Frank, especially in the creation of a swaps exchange, he ruffled some feathers with other regulators and abroad. He also sued large financial institutions in enforcement actions. So it is not clear where he will set the priorities of the SEC as Chairman. One thing does seem certain, though. As an apparent believer in regulation and its enforcement, we can expect Gensler to seek broad regulation over as much of the blockchain ecosystem as his fellow Commissioners, the courts and Congress will allow.
From my point of view, over-regulation is not a good thing for blockchain and its adoption and broad acceptance. Nor is regulation by prosecution, a phrase coined many years ago in a book title by former SEC Commissioner Roberta Karmel. Reasonable and thoughtful regulation is needed.
Yes, I accept and agree that investor protection is important. But a major element in the development of blockchain technology and philosophy is to allow all people — sophisticated and unsophisticated, banked or unbanked, wealthy or poor — to interact, peer-to-peer, without government or other third-party interference.
I do not adhere to the philosophical belief which some regulators and Congressional staff have that most retirees are simple idiots and will blow their savings on cryptocurrency scams by foreign exchanges and issuers. We should not claim that for the protection of the few we must over-regulate and kill innovation in this nascent technology and industry, and thus become the enemy of the many. Smart regulation, and laws that stop crime, protect investors and businesses, and promote the best uses of blockchain technology seems right here.
In any event, education and disclosure are two of the important hallmarks of the Federal securities laws and best way to stop fraud. Not prohibiting the conduct entirely, or making it so difficult to proceed.
It will be interesting to see how things go in the coming year. Are we marching toward a coherent and sensible regulatory framework for this industry? Or toward a stifling environment that will drive innovation and economic growth overseas?
I know where I’m placing my hopes.