By Chris Matthews
A partisan divide over regulation of cryptocurrencies was on display Wednesday on Capitol Hill, when members of the House Financial Services Committee questioned the leaders of some of the nation’s largest digital asset firms in a hearing.
Democrats’ questions focused on what they called a lack of investor protection in markets for digital assets and the potential for volatility in crypto markets to destabilize the broader economy, while Republicans focused on the technology’s potential to lower costs for financial services and create a decentralized internet that shifts power from big tech firms to everyday Americans.
“Currently, cryptocurrency markets have no overarching or centralized regulatory framework, leaving investments in the digital assets space vulnerable to fraud manipulation and abuse,” said Rep. Maxine Waters of California, the Democratic chairwoman of the financial services panel.
Waters also raised concerns over the impact of cryptocurrencies on the environment, saying that “the computing power needed to mine some of the coins…can rival the energy needs of entire countries like Sweden or Argentina.”
Republicans focused on the idea that the distributed-ledger technology that enables the functioning of cryptocurrencies like bitcoin /zigman2/quotes/31322028/realtime BTCUSD +1.62% and ether /zigman2/quotes/108573964/realtime ETHUSD +2.84% could usher in the age of so-called Web 3.0, or an internet where networks will operate through decentralized protocols, rather than through centralized institutions like Facebook /zigman2/quotes/205064656/composite FB -4.23% or Google /zigman2/quotes/205453964/composite GOOG -2.56% .
Brian Brooks, former acting comptroller of the currency and CEO of crypto company Bitfury, described the early version of the internet as “a curated walled garden” featuring “a set of content that was not interactive.” That was followed by ‘Web 2.0’ defined by social networks that relied on and enabled users to create their own content.
“What makes Web 3.0 different is the ability to own the actual network, and that’s what crypto assets themselves represent,” he said.
Republicans also argued that most cryptocurrency companies are already heavily regulated by a patchwork of state and federal agencies, a point that Sam Bankman-Fried, CEO of crypto exchange FTX and Coinbase Global /zigman2/quotes/225893452/composite COIN -13.38% CFO Alesia Hass made in their opening remarks.
“I want to be clear that this technology is already regulated,” said Rep. Patrick McHenry of North Carolina, the ranking Republican on the committee. Though “the regulations may be clunky and they may not be up to date,” he added, he warned his colleagues against further regulating the industry “out of the fear of the unknown.”
The Securities and Exchange Commission is currently considered enforcement actions against crypto exchanges that do not register with the agency as a securities exchange, according to recent comments by Chairman Gary Gensler .
Coinbase’s Hass pushed back on these threats, telling lawmakers that her company engages in a “robust assessment” of each of the assets it sells on its platform, to make sure that none meet the definition of a security under federal law. If an exchange offers securities, it must register with the SEC.
Witnesses also criticized a recent report on stablecoins issued by the President’s Working Group on Financial Markets, which recommended that Congress pass legislation requiring that stablecoins be issued by a federal regulated bank.
“The report raises legitimate risks, but its recommended solutions go too far,” said Danelle Dixon, CEO of Steller Development Foundation, which maintains the distributed network that issues the cryptocurrency lumens /zigman2/quotes/226392992/realtime XLMUSD +3.93% . “Instead, we advocate for a regulatory approach that focuses more on stablecoin reserves by requiring stable coin arrangements be fully reserved by appropriate assets.”
Stablecoins are a type of digital asset that attempts to maintain a one-to-one peg with the U.S. dollar /zigman2/quotes/210598269/delayed DXY +0.04% , and are used by crypto traders to store unused funds. Advocates for the technology say it will become a major means of payment for goods and services outside the crypto world, because it’s a cheaper and more efficient means of payment than traditional financial services companies offer.
FTX’s Bankman-Fried suggested that Congress pass laws that would give primary regulatory authority over the crypto industry to a single federal regulator under a new framework, but he said he would welcome stricter oversight of spot markets for cryptocurrencies like bitcoin. Though the Commodity Futures Trading Commission oversees bitcoin derivatives markets, neither the CFTC or SEC perform regular oversight of spot markets for cryptocurrencies.
“I am not concerned about more regulation,” he said. “I think getting consumer protection in areas where there is not currently enough can be extremely helpful for a robust ecosystem.”