U.S. House Committee Works Toward Clarifying Crypto

Federal cryptocurrency regulations in the United States are at least two years behind Europe and countries like Japan and Singapore, which is causing companies to move to other regions and threatening the benefits the sector could bring to the economy and US innovation

That's according to Rep. French Hill, R-Ark., vice chair of the House Financial Services Committee, which has been working on cryptocurrency reform for nearly half a decade.

The committee is set to discuss two crucial laws this month. One would support the creation of a stablecoin, a type of cryptocurrency whose value is tied to a currency or other assets. The other bill deals with integrating cryptocurrencies into the broader American financial system, creating regulations for cryptocurrency brokers and cryptocurrency exchanges that would protect banks, corporations, and individuals who deal with digital assets. and related technologies.

No date has been set for discussions of the bills, which could advance to a House vote this fall.

“We're late here, so Europe and other jurisdictions are definitely ahead of us,” Hill told Arkansas Business. “We would have moved these bills into 2020 and 2021, but this work was terribly delayed, like much of the United States, by the pandemic.”

The most pressing legislative concern, Hill said, “is providing regulatory clarity so that investors are protected, innovators can innovate and start new companies, and people bring their money to the US to invest in Web3 distributed ledger projects. ”.

Web3 describes a next-generation Internet based on distributed ledger technologies.

Cryptocurrency has long been under scrutiny, largely because digital currencies have been used to finance terrorist or illegal activities, such as drug trafficking.

In addition to federal efforts to crack down on its illicit uses, there has also been growing mistrust in the industry after cryptocurrency exchange FTX filed for bankruptcy in November. sending shock waves through the industry and prompted swift action by financial regulators, particularly the US Securities and Exchange Commission, to block further consequences.

Other crypto failures, including the collapse of cryptocurrency bank Celsius Network last summer, have also attracted negative regulatory attention and numerous SEC investigations.

“Right now, with all the litigation instituted mainly by the SEC, you have people announcing that they are moving their companies to London, or to the European Union, or to Singapore, which are jurisdictions that are real places with real enforcement, real policemen on the way. but have a good regulatory framework,” Hill said.

Lawmakers seek to create a regulatory framework in the US to prevent the cryptocurrency industry from leaving before more companies, entrepreneurs, and ultimately money are lost.

Furthermore, they view the regulations as crucial to instill confidence in digital currencies and avoid the extreme fluctuations in value that some currencies have experienced. They also want to stop another FTX-like debacle.

“If our invoices were current, FTX would not have failed,” Hill said. “It would not have existed if we had regulatory clarity.”

But regulatory clarity has been difficult.

The industry is navigating financial regulations that “were established under statute in the 1930s and interpreted in the 1940s,” said Carol Goforth, a professor at the University of Arkansas School of Law and an expert on crypto regulation. "Bylaws that have not changed since the advent of cryptocurrencies, distributed ledgers, and the decentralized nature of cryptocurrencies."

Goforth has advised both Hill and Sen. John Boozman, Republican of Arkansas, a ranking member of the Senate Agriculture Committee, who has also worked on cryptocurrency rules.

“In the US, we are in a space where we have a lot of regulation. We have many regulators. What we don't have is a clear set of guidelines for crypto businesses and decentralized finance,” Goforth said.

"This is an area where technology moves so fast that it's hard for regulators to keep up, and it's been nearly impossible for businesses to make sure that what they're doing complies with necessary consumer protections."

Seeking Transparency

The 165-page draft of the digital asset market structure proposal is dense. Its goal is to modify the financial regulations of the crypto industry that were established almost a century ago. Their goal is to bring transparency to crypto exchanges and crypto brokers.

It also works to define when a cryptocurrency can be classified as a security or a commodity, a point of contention among regulators. And it begins to crystallize the supervisory roles of different agencies, mainly the SEC and the Commodities Futures Trading Commission.

There are "enhanced disclosure requirements" that include "the nature of the risks surrounding digital assets, including source code, project economics, development plan, related and affiliated persons, and other risk factors."

A summary of the proposal from the House Financial Services Committee and the House Agriculture Committee, which has also been crafting legislation, calls the document a "functional framework [that] it would provide digital asset firms with regulatory certainty and fill the gap that exists between the authorities of the CFTC and the SEC.”

“It defines who has an exchange and how it is regulated and how it works,” Hill said. “It defines custody, where these tokens are kept. You have rules against fraud, rules against mixing, and then if you're a promoter, how do you tell the public what your business plan is and how much you own?

"It's nowhere near perfect, and it's still nowhere near fully vetted," Hill said.

The reception has been positive.

“We support smart regulation,” said Tom Harford, founder of the Arkansas Blockchain Council. "The idea that any industry should be totally unrestricted and unregulated is a different kind of utopian fantasyland that doesn't make any rational sense, but neither does the polar opposite."

A joint statement by Rutgers University law professors Douglas Eakeley and Yuliya Guseva and Goforth, the UA-Fayetteville law professor, said the draft “takes positive steps to provide a clearer definition” but “does not address the issue of which digital assets are correctly characterized as investment contracts”.

The professors also raise concerns about whether the proposed bill gives regulators enough oversight of digital commodity exchanges and digital commodity brokers. They raise concerns about the regulation of "foreign domiciled" companies.

The other draft proposal focuses on regulations for stablecoins.

Hill insists that a stablecoin is not a central bank digital currency, or CBDC, which, like the US dollar, would be managed by the Federal Reserve. Some countries, including China, are adopting CBDCs, raising concerns that authoritarian regimes could abuse them to monitor citizens through the transactions they make.

On its website, the Fed says no decisions have been made "on whether to pursue or implement" a CBDC; however, the agency "has been exploring the potential benefits and risks of CBDCs from a variety of angles."

Stablecoins, as the name suggests, would add more stability to cryptocurrency valuations and lead to more practical uses for digital currencies for consumers and businesses. They would be issued by the private sector but subject to state and federal regulations.

This bill would “define what is stable and define what then is a quality stablecoin. This would clean up many aspects of the payment system and payment innovation,” Hill said.

“We want the definition of what is stable for a fiat-based stablecoin that is highly liquid, that is valued daily and that there is no lack of transparency around it and that is under US law and regulation, that it is a better place to be than anywhere else in the world.”

'do no harm'

On June 28, Hill joined a virtual town hall with crypto and Web3 entrepreneurs in northwest Arkansas to discuss policy.

Dylan Stewart of Syscoin, a company focused on blockchain technology innovation, moved to Northwest Arkansas from South Korea, where he began working on cryptocurrency.

Stewart asked Hill how people who invest in new technology "can continue to innovate and prosper here in the US instead of going to greener pastures if they feel like they can't do their jobs here."

Hill compared the rise of the crypto industry to that of the internet in the 1990s. He said he sees the ecosystem as the “next critically important aspect of technology that will affect all consumption and production in the US.”

“The most important thing we can do right now is, like a doctor, do no harm,” Hill said.

"I'm optimistic about it, but we have to take that first step on the journey, and I'm sure we're somewhere in the right field of that first step."