Last July, the House Financial Services Committee approved two major pieces of legislation aimed at creating a regulatory framework for the cryptocurrency industry, the Financial Innovation and Technology for the 21st Century Act and the Clarity for Payment Stablecoins Act. Neither came up for House votes that year, but committee Chair Congressman Patrick McHenry said at a Bitcoin summit last week that he hopes they can be passed by the House and Senate before the 2024 elections.
I’m no political analyst, but I have some projects that would benefit from the legal clarity in the legislation. (Disclosure: I am an active crypto investor and have venture capital investments and advisory relations with companies in the space). Currently, various institutions are making their own determinations including the Internal Revenue Service, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve and the courts. Some of those conflict, and others make life difficult for people working in crypto. Many would welcome clear guidelines from Congress, with specific assignments to various agencies to refine and interpret the different individual issues.
You might expect progressives who don’t follow crypto closely to be generally supportive of innovation, while conservatives would tend to be skeptical of non-traditional ways of doing things. But crypto reverses that assumption. Most Democrats seem to prefer to let the experts at agencies deal with the issues, and for Congress to wait and see how that works out before issuing new rules. Most Republicans seem inclined to rein in the discretion of agencies, and to defer to the private sector to figure things out for itself. Therefore, hopes for the passage of any legislation rest on the general deregulatory sentiment to bring votes from almost all Republicans, with a few crypto-friendly Democrats putting things over the top.
An important point is that neither bill deals directly with crypto. Rather they focus on how traditional fiat currency will move in or out of the crypto economy. Crypto is a set of mathematical tools, including public-key cryptography and game theory, for organising networks of individuals and resources. It can function just fine without any connection to the traditional economy — in fact that’s the whole point. But without the ability to exchange crypto assets for traditional currency, the networks must be self-sufficient. Members have to provide the necessary resources — developer time, servers, etc. — and to take compensation in the services the networks deliver.
It’s more efficient for networks to sell crypto assets to investors for traditional cash, and use that cash to pay developers, buy servers and otherwise fund the necessary network infrastructure. Those investors want to be repaid in traditional currency as they may have no interest in the services the network provides.
While employing traditional capital speeds the development of crypto, it introduces many problems. It creates opportunities to use crypto for ransomware, tax evasion, money laundering and financial fraud. It allows bubbles and crashes unrelated to the fundamental economic value of services produced by crypto. It can shift the focus of crypto projects from genuinely new and useful services real people want to hot areas that people think others will pay for in the future.
Of course, money is not the root of all evil. Even without connections to the traditional financial system, crypto networks can be organised for good or bad purposes. They can be used to fight poverty, injustice and environmental destruction, or support terrorism, criminal activities or dictators. They can be used to make people happy, or to oppress; to educate, or to mislead. They are tools, not magic beans.
A good analogy for thinking about this is amateur versus professional sports. People used to care a lot about the difference; valuing the purity and sportsmanship of the Olympics and college athletics against the tawdry sportstainment industry of professional sports run by money-grubbing owners hiring mercenary players to produce splashy public spectacles for advertisers.
Similarly, a lot of my generation of cryptophiles get nostalgic about self-sufficient crypto projects, built and used by volunteers for mutual benefit. They are aghast at the hype, fraud, delusion, crime, misrepresentation and greed that are camp followers to the crypto advance, and that many people think is all there is to crypto. To this way of thinking, the proposed crypto legislation is a deal worked out between people who want to get rich from crypto and those who want to get power regulating crypto.
But big-time amateur athletics was never real. The amateur rules were used to enforce class distinctions and abuse athletes. Governments found ways to pay their Olympic athletes and big-time college athletics was notoriously corrupt.
Congressman McHenry claimed in his address at the Bitcoin Policy Summit 2024 that Bitcoin was unstoppable. What’s actually unstoppable is money getting into anything of significant economic value. Crypto cannot maintain its amateur status, it has to turn pro. And if it’s going to go pro, it should be on a business-like basis with clear rules and regulations. I won’t comment on the specific provisions of the measures — which are reportedly being changed in active but sub rosa negotiations — because I have some interests there. But the general idea that Congress should take the lead rather than let competing agencies fight out the future of crypto is a good one.
Aaron Brown is a former head of financial market research at AQR Capital Management. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
