The United States urgently needs to create a central regulatory framework for digital assets that protects all parties involved to minimize fraud and abuse, according to several experts, who think that Congress should intervene to create such a framework so that America becomes a global cryptocurrency leader.
And the race is on. Central banks around the world are considering the development of central bank digital currencies (CBDCs) to update their financial systems, hasten domestic and international payments, and thwart competition from cryptocurrencies like bitcoin.
China’s efforts, for example, are among the most advanced globally and the country is already developing a digital currency for its central bank currency, the yuan. The United States, however, hasn’t done anything similar yet for the U.S. dollar.
“2021 was the year of the cryptocurrency. More Americans than ever before are taking notice of this transformational shift in technology,” U.S. Rep. Patrick McHenry (R-NC), ranking member of the House Financial Services Committee, said recently. “But, as with any new and fast-growing industry, there are questions that need to be answered.”
For instance, how do federal policymakers ensure that the cryptocurrency revolution happens in the U.S. and not overseas, McHenry asked during the committee’s hearing last month on digital assets.
“Let me be clear: this technology is already regulated. This technology is new and exciting. It promises a new direction for financial economies, services, and products,” he said during the Dec. 8, 2021, hearing. “Of course, we need reasonable rules of the road, but the knee-jerk reaction of lawmakers to regulate out of fear of the unknown will only stifle American ingenuity and put us at a competitive disadvantage.”
There’s similar concern in the U.S. Senate, where Sen. Pat Toomey (R-PA), ranking member of the U.S. Senate Banking, Housing, and Urban Affairs Committee, said Congress should work on legislation surrounding stablecoins (a cryptocurrency), while being careful not to stifle innovation in an evolving digital economy or risk undermining America’s global competitiveness.
“Let’s have the humility to recognize that many of our views about how financial services are delivered and how investments work are quickly becoming outdated,” Toomey said during a Dec. 15, 2021, Senate Banking Committee hearing.
At the same time, several experts recently told Financial Regulation News that for the U.S. to become a global leader in the digital assets space, federal lawmakers are going to have to step it up and provide improved legislative support.
“The most important step that Congress can take is to develop a digital asset public policy framework that provides business certainty and promotes innovation,” said Michelle Bond, CEO of the Association for Digital Asset Markets (ADAM). “Doing so will allow the U.S. to harness the forthcoming wave of digital innovation, keep important jobs in the United States, and grow the U.S. tax base for decades to come.”
At the federal level, regulatory certainty and clarity for digital assets in the U.S. is lacking, said Teana Baker-Taylor, chief policy officer for the Chamber of Digital Commerce. “It has become critical for Congress to intervene with legislative solutions to support a policy framework for digital assets,” she said.
For example, Baker-Taylor said that the U.S. Securities and Exchange Commission (SEC) has intimated that it thinks most digital assets exchanged or sold are a security, while the U.S. Commodity Futures Trading Commission (CFTC) has considered most to be a commodity.
“So, we have two regulators potentially viewing the same financial asset in two different ways,” Baker-Taylor wrote in an email. “This creates confusion and uncertainty for both the innovators and the investors.”
Congress can cut through the current ambiguity by articulating a framework that is technology-neutral and implements clear guidance for federal regulators and clarity for market participants,” said Baker-Taylor. “Policy guidance which includes input from all stakeholders, in both industry and government, will produce the most meaningful regulatory solutions, and Congress is the best arbiter for this.”
She also pointed out that clarity and certainty are not only crucial for the industry, investors, and adopters of blockchain technology, but also for the U.S. to retain its leadership in the digital asset markets and broader global financial services ecosystem.
“Other jurisdictions, such as Singapore and Europe, are developing policies that may be attractive to digital asset companies and investors, undercutting U.S. leadership,” said Baker-Taylor.
Congressional moves
To help bolster innovation in an evolving digital economy and enhance America’s competitiveness in this arena, Congress should allow for the fast-moving innovation in the digital asset space, said Baker-Taylor.
“It is important that whatever Congress does allows for that pace of innovation and does not hinder innovators from doing what they do best: developing new products and services that may be transformative,” she said.
A good example for reference was the way Congress approached mobile technologies in the ‘90s. Many innovators were then operating in a similarly opaque regulatory environment as digital asset innovators are operating in today, she explained.
“By setting a light-touch policy framework for the internet and mobile technologies, Congress brought some clarity for regulatory oversight, while being technology-neutral and giving the innovators some certainty so that they could continue to develop new products and services with confidence,” said Baker-Taylor. “This policy approach generally served that industry well and ensured that the U.S. remained the global leader in the technology space.”
Ongoing engagement with the industry is also crucial so that policymakers, regulators and their staffs understand the technology, emerging innovations, their evolution, and the applications these technologies can play in society, she added.
“Bipartisan, broad-based engagement with all the players in the ecosystem is an approach that will ensure a vibrant, well-functioning industry and regulatory environment,” Baker-Taylor said.
ADAM’s Bond said it’s also important for Congress to consider how the billion-dollar firms behind the projects not only create the technology, but they live and interact in local communities, leading to greater prosperity — everything from local school districts to local restaurants benefit from the growth generated by innovation.
“The innovation in the digital economy is here, it is real, it is happening,” Bond said.
“Private funding is fully onboard, and this is not an experiential area that needs public funding for research. The most important thing Congress can do is to generate a public policy framework that provides business certainty and promotes innovation.”
The role of banks
The Bank Policy Institute (BPI), a nonpartisan research and advocacy group representing the nation’s leading banks, and the Consumer Bankers Association (CBA), which partners with the nation’s leading retail banks to promote policy, think banks must be involved in the digital assets space and federal banking agencies should release improved guidance for them to do so.
The organizations say that banks have been at the forefront of technological innovation, and as more use cases emerge for digital assets, their members are evaluating where and how such innovations can be applied in their own businesses to best serve the needs of customers.
“Both the public and federal banking agencies benefit from increased involvement by banks in offering digital asset products and services,” said BPI and CBA in joint comments filed in July 2021 on a request for information issued by the Federal Deposit Insurance Corporation (FDIC) seeking input on insured depository institutions’ current and potential activities related to digital assets.
According to BPI and CBA, banks are already subject to comprehensive and robust risk management, supervision and examination processes. Banks are also subject to consumer protection laws and regulations, carry deposit insurance, undertake anti-money laundering practices, maintain strong capital buffers, and have substantial experience incorporating new technologies into the financial system, the groups said.
To encourage banks to provide digital asset products and services, federal banking agencies should clarify and expand existing supervisory guidance “to clearly and unambiguously state” that banks are permitted to engage in any activity — regardless of the involvement of digital assets — so long as a bank has the power and authority to provide a particular product or service and continues to operate in a safe and sound manner; and to develop a regulatory framework for banks to independently apply to the treatment of digital assets, according to their comments.
“The sustained growth in digital assets highlights the need for further federal regulatory guidance and the value of increased involvement by banks, which are key components of the domestic and global financial system,” according to the BPI and CBA comments. “The interest in and the use of digital assets by consumers and businesses is here to stay. Federal banking agencies and the institutions they regulate must play an essential part in further developing the norms of transacting digital assets.”
Next steps
ADAM’s Bond said it is clear that there is work to do, but that the nation is at a great starting point with hearings on Capitol Hill and the Biden Administration being in office for a year now, which “presents a real window to get something done on a bipartisan basis to advance the industry and provide guardrails for market integrity and consumer protection.”
One idea that both Republican, Democrat, and industry representatives are starting to consolidate around, Bond added, is the idea of establishing an industry self-regulatory authority to work with regulators of primary jurisdiction to ensure consumer protection and market integrity effectively, “an idea that ADAM fully supports,” she added.
“A self-regulatory organization strikes the perfect balance. It increases regulatory oversight, empowers the current regulators with no loss of jurisdiction, is a cost-effective approach. and is necessary to promote the highest standards of ethical trading and governance,” Bond said.
Also known as an SRO, Bond said precedence exists for SROs from across many forms of industry, and a strong regulatory framework would increase predictability for businesses by setting expectations up front, protecting customers by putting guardrails in place, and giving them recourse in the event things go wrong.
“SROs serve as connective tissue between regulators and industry. In the digital asset space, self-regulatory organizations would be closely overseen by the SEC and/or the CFTC,” said Bond, noting that an SRO also would be cost-effective for the federal government, could advance policy goals by providing market protections, and the SRO’s regulatory clarity will provide business certainty and allow firms to grow in the U.S. and not offshore jobs.
The Chamber of Digital Commerce’s Baker-Taylor said there are several areas of digital assets that require clarity, including the regulatory treatment of tokens, clear lines of delineation of who is responsible for regulatory oversight of crypto spot markets, custody and private key management, cybersecurity and business continuity standards, and reporting requirements.
For example, she pointed out that the Financial Accounting Standards Board (FASB), which sets accounting standards for private and public U.S. companies, has not developed any accounting standards for digital assets.
“The lack of uniform standards has led to companies with crypto holdings having to figure out the appropriate accounting method on their own,” Baker-Taylor said. “This impacts financial statements and discourages companies from buying and holding digital assets. It is essential that businesses and investors of all types are able to clearly reflect the value of their assets on their balance sheets.”
U.S. Rep. Tom Emmer (R-MN), along with the Congressional Blockchain Caucus, appears to agree and sent a letter to the chairman of FASB urging the establishment of appropriate accounting standards for companies with digital asset holdings and emphasized that uniform accounting standards are needed to provide companies and stakeholders the necessary clarity to confidently engage with these assets.
The Chamber of Digital Commerce and its members are encouraged by the progress that’s been made in Congress thus far. For example, the bipartisan Eliminate Barriers to Innovation Act of 2021, H.R. 1602, which Rep. McHenry introduced in March 2021 to create a working group on digital assets between the SEC and the CFTC, passed the U.S. House of Representatives in April 2021.
“While the Senate hasn’t taken up the proposal, it was a good start,” Baker-Taylor said.
Another bill McHenry introduced last year, the Clarity for Digital Token Act of 2021, H.R. 5496, would amend the Securities Act of 1933 to provide a safe harbor for transactions in certain tokens. The bill, which McHenry sponsored in October 2021 with several other Republicans, is under consideration in the U.S. House Financial Services Committee.
U.S. Sen. Cynthia Lummis (R-WY) also has indicated that she will be introducing legislation outlining a comprehensive policy framework for digital assets in the coming days, said Baker-Taylor. “Our hope is that a similar proposal would move forward in the House,” she said.