WASHINGTON — Federal policymakers have made plenty of noise lately about the state of cryptocurrency regulation. On Wednesday, it was the crypto sector’s turn.
The CEOs of leading crypto ventures appeared before the House Financial Services Committee with somewhat of a hybrid message: There is a certain need for more regulation of their industry, they said, but not to the extent that some in Washington want.
“It’s healthy that the industry will be regulated,” said Samuel Bankman-Fried, founder and CEO of the crypto exchange FTX, one of six witnesses testifying at the hearing. “I think it is also already regulated in a number of ways. I think that there are points that need to be addressed, to give oversight of various aspects of the industry that do not have sufficient oversight right now.”
Under the Trump administration, regulators appeared willing to promote crypto innovation through enabling banks to offer crypto services and granting bank charters to crypto-focus firms, among other things.
The Biden administration has sung a decidedly different tune. Acting Comptroller of the Currency Michael Hsu has suggested he questions some of the charter approvals and other policies approved by his predecessor, Brian Brooks, while Securities and Exchange Commission Chair Gary Gensler has referred to crypto as the “Wild West.”
Last month, the President’s Working Group on Financial Markets, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency concluded that only insured depository institutions should be able to issue stablecoins. The Federal Reserve is also exploring whether it should issue its own digital currency.
But the CEO of the crypto firm Circle, the issuer of the stablecoin USDC, testified that his company’s model is safer than that of an FDIC-insured bank.
“An FDIC-insured bank is FDIC-insured because the bank is taking risks with deposits,” said Jeremy Allaire. In August, he announced that Circle was seeking to become a National Digital Currency Bank.
Allaire argued that the reserves behind stablecoins are not exposed to the same types of risks. “Well-designed stablecoins are safer than bank deposits because bank deposits, you’re taking a risk on the lending book of the underlying bank,” he said.
Some Democratic lawmakers on the House committee urged regulators not to wait for legislative action before taking steps to better regulate the sector.
“The regulators need to listen to this hearing very carefully,” said Rep. Brad Sherman, D-Calif. “Don’t cop out and say we are not going to do anything until we pass meaningful legislation.”
But the CEOs stressed that policymakers should not adopt new policies to regulate the sector without fully understanding the benefits of the technology.
“Crypto policy should take into account not only any new risks introduced into the system, but also the risks in the present system that are being solved by decentralization,” said Brooks, who is now CEO of Bitfury after having run the OCC during the Trump administration.
However, there was some disagreement between the panelists about whether decentralized finance would benefit from having a dedicated federal regulator to supervise the digital-asset sphere.
“We believe the government should regulate digital assets under a new framework” and “responsibility for this new framework should be assigned to a single federal regulator and a new registration process established for marketplaces for digital assets,” said Coinbase Inc. CEO Alesia Haas.
“Our existing regulatory system does not work effectively for the open, decentralized networks that crypto has created,” Haas said in her prepared remarks. “Financial regulation was built around a series of financial intermediaries — transfer agents, clearing houses and traditional brokers — which are not necessary to effectuate crypto transactions.”
But Brooks disagreed, pointing to the already-fragmented regulatory environment in the U.S.
“The last thing we need to do is add another regulator to a system that’s already got dozens of regulators,” Brooks said. “What we need to do instead is have parity for crypto activity along with traditional finance.”
“If I make a crypto lending platform, I should probably be regulated by the FDIC. If I’m a crypto trading platform, I should probably be regulated by the [Commodity Futures Trading Commission] and SEC,” Brooks added.
Brooks criticized regulators in the Biden administration for being too hesitant to grant bank charters to crypto firms. “Is it consistent to take the position that only banks should be allowed to issue stablecoins,” Brooks said, “but then fail to grant bank charters to the largest issuers of stablecoins?”
While witnesses ostensibly addressed their answers to members of Congress, much of the commentary carried implications for the nation’s financial regulators who are currently trying to grasp the risks posed by crypto at large.
But several Republicans on the House committee expressed doubts that the nation’s current financial regulators had the capacity to police the crypto industry today without crushing innovation in the process.
“The U.S. has a huge opportunity with crypto, but my fear is that this regulatory state is going to crack down on an industry that the regulators really don’t understand yet,” said Rep. Ted Budd, R-N.C.
Among the financial regulators, the SEC has been the most aggressive in seeking to police crypto. Gensler has frequently said that the sector needs to implement stronger investor protections and the agency has pushed for a broad classification of many crypto assets as securities.
But CEOs testifying at the hearing pushed back against that view.
“Existing laws, regulation and legal precedent make it clear that blockchain tokens are not securities,” said Haas, “and we believe that the law clearly shows that blockchain-based digital assets are one of two things, either a new form of digital property or a new way to record ownership.”
Brooks, meanwhile, suggested a better approach to policing the crypto sector would be to incorporate it into the regulated banking sector.
“A national policy agenda that takes crypto compliance seriously should assess whether it makes more sense to continue to keep crypto activities largely out of the regulated financial system, or to bring them inside the system precisely so they can be supervised and operated with appropriate levels of risk management,” he said.
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