The Senate Committee on Banking, Housing, and Urban Affairs and the House of Representatives’ Financial Services Committee each held recent hearings to discuss cryptocurrency and, in particular, the proposed creation of a new digital currency by a prominent US technology company. Both hearings primarily focused on what economic and security concerns a new, privately issued digital currency may raise, how best to regulate the new currency and what role the US and Congress could play in advancing or hindering the growth of cryptocurrencies and blockchain technology more generally.
As a gating matter, the committees questioned whether a company operating in the private sector should be permitted to issue its own currency. Several committee members brought up memories of the recent financial crisis and expressed reluctance to allow the introduction of a new currency by a public company with a massive, international base of users for fear of undermining the global financial system. This concern primarily centered on the possibility of competition between the new currency and sovereign currencies or the issuing company and central banks. Senator Sherrod Brown summed up this argument by accusing the issuing company of wanting to run a “for-profit version of the Federal Reserve for the whole world.” A representative of the company countered this argument by stating that the creation of the currency in question would not cause the issuing company to function as a bank or compete with sovereign currencies, but could instead be likened to a payment system. The entry by a public company into the typically government-controlled realm of currencies seemed to be a tough pill to swallow for many committee members on the heels of the financial crisis that occurred only a decade ago.
The proposed currency also faced a host of security and privacy questions that have dogged digital and cryptocurrencies for years. Lawmakers demanded both sufficient privacy features to protect users from having their data and money compromised, and also sufficient security features to prevent the use of the currency for illicit activities. The discussion by both committees indicated that any new digital or cryptocurrency will need to toe the line between adequate privacy to protect its users and adequate regulatory ability to prevent use for illegal means in order to receive Congress’s stamp of approval.
Given the concerns raised by the committees, much of the questioning also centered on how exactly to regulate a blockchain-based, fiat-backed digital currency issued by a public company and how each of these characteristics may result in separate avenues of regulation. Several committee members asked whether the company issuing the currency should be designated a systemically important financial institution (a SIFI) to be regulated by the Financial Stability Oversight Council. The SIFI distinction was created under the Dodd-Frank Act in 2010 to more closely regulate institutions that would pose a serious risk to the economy should they collapse. A currency issued by a company with a massive user base could face scrutiny as a SIFI and be forced to comply with the regulatory burden that accompanies the distinction.
Other committee members argued that since the currency would be fiat-backed and be linked to an underlying basket of securities, it may fit the definition of an exchange-traded fund (an ETF) and would need to be regulated as such. The SEC is in the process of exploring a similar line of thinking in regard to so-called “stablecoins,” which could offer clarity on how the SEC views the application of the ETF classification to cryptocurrencies. Lastly, one congressman posed the question of whether such a currency should be considered a security under the Howey test. Depending on how a digital or cryptocurrency is structured, it appears as though lawmakers would consider regulation of such a currency as, at a minimum, a SIFI, an ETF or a security.
While it is clear that some lawmakers are currently very wary of cryptocurrencies and blockchain technology, last week’s hearings forced Congress to begin confronting some of the most pressing questions regarding the regulation of these technologies. Several committee members recognized that the US currently lacks the regulatory framework necessary to allay the legitimate concerns voiced by their colleagues, but, optimistically, stated the need for the US to lead the way in creating such a framework and praised the subject company’s innovation in creating its own currency. Representative John Rose stated his desire to create “as certain a regulatory regime as possible” for blockchain technology if it is seen as the next great technological innovation. Senator Mike Crapo closed the Senate committee’s hearing by wondering whether blockchain technology could be used to offer more privacy and security than our current financial transactional system and remarking that he would like to review more information on the possibility. Hopefully, initial skepticism will give way to a desire to grow and regulate these new innovations.