Washington’s growing “crypto caucus”

Screen Shot 2022 05 01 at 5.14.48 PM

As US President Joe Biden’s bipartisan infrastructure bill was on the verge of passing Congress late last year, Republican Patrick McHenry from North Carolina took notice of a clause requiring cryptocurrency exchanges to report their transactions and customer information to federal tax authorities. [1] Since then, a bipartisan coalition of senators and lawmakers interested in digital assets have voiced their concerns over how new legislation could significantly damage the thriving industry. 

Although the bill was eventually passed with the clause intact, many politicians on Capitol Hill have already begun seeing the vast potential of crypto technology. According to a survey conducted by the White House, the value of digital assets surpassed a $3tn market cap last November, up from $14bn five years ago. [2] The survey also suggests that over 15% of adult Americans have purchased, traded or used cryptocurrencies, while over 100 countries are exploring options to develop their own digital currencies. [3]

The expansion of crypto technology in the American market has taken place without any written rules. Regulators in the cryptocurrency industry have substituted enforcement actions for rulemaking, known as “regulation by enforcement.” This has left investors appealing for a formal regulatory framework. [4] While lawmakers worry that the Securities and Exchange Commission (SEC) is trying to regulate digital assets on its own accord, SEC chair Gary Gensler has warned that the market is “rife with fraud, scams and abuse.” [5] As regulators try to apply existing investment rules to an entirely new asset class, there is a growing sentiment that Congress must intervene and clarify the legality of certain practices. The current regulatory vacuum threatens the transformative potential of digital finance and could allow rival nations such as China and India to surpass the US as the leader of this global industry. Without regulatory clarity and consistency, “the industry will go elsewhere, and that will be a huge loss for our economy and our country,” says Josh Gottheimer, a Democratic congressman from New Jersey. [6]

In response to pressure from both Democrats and Republicans in Congress, the Biden administration’s recent executive order on cryptocurrencies was a seminal moment for crypto advocates. Rather than banning crypto technology, American leadership now sees such assets as an opportunity to reinforce its position “in the global financial system and at the technological frontier.” [7]

The most pressing piece of crypto legislation tackles how to regulate the fast-growing stablecoin industry. [8] Purely decentralized digital currencies such as Ethereum and Bitcoin are price volatile, whereas stablecoins are pegged to real currencies—typically the dollar—as a basis for their market value. [9] Regulators are therefore concerned about the real value behind stablecoins and how their volatility could potentially trigger significant losses in the traditional banking system. 

One of the proposed bills would require all stablecoin issuers to either become a regulated financial institution or prove that they can back every digital dollar with fiat dollars, US Treasuries, or other liquid and stable assets. [10] Others lawmakers are gathering support for bills that offer answers to the long-standing debate on what type of asset cryptocurrency is. In other words, if cryptocurrencies are not classed as securities, they would be ineligible for regulation by the SEC. [11] This would force an individual or group to claim control of such assets and undermine the decentralized nature of cryptocurrencies. It is worth noting that the SEC has already begun pursuing crypto issuers and exchanges on this matter. In June 2019, it successfully argued that Kik Interactive Inc.’s offering of its digital tokens satisfied the criteria for an investment contract, which requires an asset to be the investment of money, in a common enterprise, and with a reasonable expectation of profits to be derived from the efforts of others. [12] The court concluded that Kik had violated the Securities Act of 1933 because it failed to register its tokens as securities and comply with compulsory investor disclosure requirements.

Support for the financial technology industry circumvents the American political divide. If these alliances persist, partisan cooperation could keep the US at the forefront of the world’s financial systems. 


References

[1] Puterbaugh, John. “Two Things Crypto Investors Should Know About the Infrastructure Bill President Biden Signed” NextAdvisor with TIME. November 29, 2021. https://time.com/nextadvisor/investing/cryptocurrency/infrastructure-bill-crypto-taxes/. Accessed March 30, 2022.

[2] The White House. “Fact Sheet: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets”. March 9, 2022.  https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/. Accessed March 30, 2022.

[3] Ibid.

[4] Levey, Curt. “Regulation By Enforcement Is Stifling Cryptocurrency” The Federalist Society. April 29, 2021. https://fedsoc.org/commentary/fedsoc-blog/regulation-by-enforcement-is-stifling-cryptocurrency. Accessed March 30, 2022.

[5] CBS News. “Crypto market “rife with fraud, scams and abuse,” SEC chief says”. August 3, 2021. https://www.cbsnews.com/news/cryptocurrency-market-fraud-scams-abuse-securities-and-exchange-commission-chairman-gary-gensler/. Accessed March 31, 2022.

[6] Stacey, Kiran. “Meet the ‘crypto caucus’: the US lawmakers defending digital coins” Financial Times. March 29, 2022. https://www.ft.com/content/29f32905-1933-458e-aa29-7f1685109ea1. Accessed March 30, 2022.

[7] The White House, supra note 2.

[8] Stacey, supra note 6.

[9] Reiff, Nathan. “Gold-Pegged vs. USD-Pegged Cryptocurrencies” Investopedia. July 26, 2021. https://www.investopedia.com/tech/goldpegged-vs-usdpegged-cryptocurrencies/. Accessed March 31, 2022.

[10] Stacey, supra note 6.

[11] Barton, Roger. E., Mcnamara, Christopher. J., & Ward, Michael. C. “Are cryptocurrencies securities? The SEC is answering the question” Reuters. March 21, 2022. https://www.reuters.com/legal/transactional/are-cryptocurrencies-securities-sec-is-answering-question-2022-03-21/. Accessed March 31, 2022.

[12] SEC v. Kik Interactive Inc., Case Number: 19-cv-05244 (United States District Court for the Southern District of New York).

Author

cormac.thorpe@yale.edu