Congress Meets Crypto

If you spend much time on social media, you know how discussions about cryptocurrency can quickly turn nutty.  Congressional hearings on complicated financial issues are rarely any better. 

So it was encouraging that a House Financial Services Committee hearing today on "Digital Assets and the Future of Finance" was for the most part a calm and thoughtful exploration of stablecoins, blockchain, crypto's potential misuse, and other issues.  If you missed it, it's worth watching a replay. 

Many of the committee members showed a surprising level of understanding about cryptocurrency as well as restraint from partisan posturing.  (It was all relative, of course: There were still various digs at the Biden administration regulators and Facebook, an aside about  the Hamster coin, and an odd Babe Ruth analogy.)  

Are these signs that Congress is now ready to start  considering a new regulatory regime for cryptocurrencies?

Six executives from Coinbase Global, Circle, FTX, and other cryptocurrency companies told the committee that while they would welcome more regulatory clarity, they hoped that whatever Congress ends up doing would be a light touch. 

“It’s healthy that the industry be regulated,” Samuel Bankman-Fried, founder and chairman of the FTX exchange, told lawmakers. But, he added, the industry is already regulated “in a number of ways." 

The hearing was well timed. Crypto has had spectacular growth -- cryptocurrencies have roughly doubled in value this year and are now a $2 trillion-plus market.

At the same time, crypto has increasingly come into the crosshairs of the Securities and Exchange Commission, whose chairman, Gary Gensler, has referred to it as "the wild west,"  being "rife with fraud, scams, and abuse in certain applications." This year, the regulator has challenged some of the biggest players in the industry, including Coinbase. 

Changes are likely to be coming, from the Biden administration if not Congress. "The rise of cryptocurrencies and 'stablecoins,'" Daren Fonda wrote in a Barron's cover story in September,  "has spurred a rethinking of what a currency is, who regulates it, and what it means when it’s no longer controlled by a national government."

One of the biggest questions about the ascendancy of crypto --  what does it mean for the hegemony of the U.S. dollar? -- came up in the hearing. 

Brian Brooks, CEO of Bitfury Group, who led the Office of the Comptroller of the Currency for much of 2020, said that "internet-enabled dollars" were needed so that U.S. currency could remain the world's dominant reserve currency. Such digitization would allow "us to compete on features, not just history," he said. 

While the hearing was largely substantive, a divide was evident: Democrats tended to be more concerned with protecting investors, while Republicans worried about regulation stifling innovation and growth.  

As a result, Daren noted on Barrons.com, "lawmakers appear far apart on how to regulate exchanges, stablecoins, and digital assets more broadly."

One possible legislative next step, wrote Tory  Newmyer of the Washington Post, would be to craft "a law that hands federal bank overseers more explicit authority to regulate stablecoins," which are pegged to the U.S. dollar.  The Treasury Department and other regulators called on Congress in early November to pass such rules for stablecoins.  

Daren is not optimistic, writing: 

The industry wants rules in place, to be sure, but would like them to be loose, allowing companies to flourish without excessive government intervention.

Striking that balance has never been an easy task for lawmakers, especially in a sharply divided Congress. Crypto’s complexity only makes it tougher. 

Read the rest of Daren's report here.