The U.S.'s approach to regulating cryptocurrencies holds in the balance the country's status as a leader in the field, several crypto executives told the House Financial Services Committee at a hearing Wednesday.
"Without tailored legislative solutions that are openly debated with public participation, the United States risks unnecessarily onerous and chilling laws and regulations," Alesia Haas, CFO of Coinbase Global, said in prepared remarks. "This could effectively push crypto activity underground or to offshore exchanges that have little or no compliance programs."
Lawmakers and regulators should resist looking at the crypto space as a homogenous and mysterious monolith, said Brian Brooks, the CEO of Bitfury who, until January, served as the acting chief of the Office of the Comptroller of the Currency (OCC).
"Treating 'crypto' as a single unitary activity whose main feature is a need for financial regulation would be like treating the original internet in the 1990s as primarily a tax policy issue," Brooks said. "Instead of focusing only on micro questions such as whether a particular token is a security or whether a particular exchange-traded fund may be offered, it would be worthwhile for the elected branches of government to grapple with the bigger questions."
The OCC, under Brooks' leadership, issued guidance regarding banks' use of stablecoins and blockchains, as well as an interpretive letter clarifying that national banks can provide cryptocurrency custody services. The agency also gave conditional approval for trust bank charters to a handful of crypto firms.
Brooks, in his testimony Wednesday, went on to list several of the questions he thought lawmakers should consider.
"Is it consistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins?" he asked. "Or does it make sense to bring enforcement actions challenging certain cryptoassets as unregistered securities, but then fail to allow those assets to be registered and trade on a national securities exchange or alternative trading system?"
Lawmakers at the hearing, by and large, showed a partisan divide in the concerns they sought to address. Many Democrats focused on measures to counteract potential fraud while Republicans centered their thoughts on ensuring regulation doesn't stifle innovation.
“We don’t need knee-jerk reactions by lawmakers to regulate out of fear of the unknown rather than seeking to understand,” said Rep. Patrick McHenry, R-NC, the panel's ranking member.
On anti-money laundering, Haas said crypto is easier to track than fiat currency because public blockchains can act as permanent searchable databases for law enforcement. About 64% of ransomware cash-outs in 2021 stem from three foreign exchanges, she said.
Denelle Dixon, CEO of Stellar Development Foundation, addressed innovation, saying it has been hampered in other parts of the world "when regulators and lawmakers react quickly, and arguably prematurely, to address perceived risks around cryptocurrency."
"Let's create an open loop for innovation here in the U.S.," she said.
Brooks asserted the U.S.'s delay in organizing a regulatory framework has led to opportunities lost — and he illustrated the point with more questions.
"Can anyone explain, for example, why Fidelity Investments, one of America's best-known investment advisers, had to go to Canada to offer a Bitcoin [exchange-traded fund]? Or why … crypto exchanges, stablecoin issuers and others can receive e-money licenses to access the payments system in the United Kingdom, but in the United States that privilege is reserved exclusively for chartered banks?" he asked. "There is a reason why crypto talent is no longer concentrated in Silicon Valley. … A surprising number of talented founders have left for Portugal, Dubai, Abu Dhabi, Singapore and other jurisdictions that are not at all unregulated but that have a more positive posture toward innovation and growth."
Rep. Brad Sherman, D-CA, took a moment to call out regulators, saying, according to American Banker, they "need to listen to this hearing very carefully."
“Don't cop out and say we are not going to do anything until we pass meaningful legislation," Sherman said.
Ghosts in the room
At least one witness, FTX CEO Sam Bankman-Fried, noted in a tweet after the hearing that he had anticipated a defensive atmosphere more akin to when Facebook executives — be it CEO Mark Zuckerberg or Diem co-creator David Marcus — testified on the nascent Libra project in 2019.
"I came in expecting some hostility and grandstanding, but instead found the discussion to be by and large productive and helpful," Bankman-Fried wrote. "I'm excited to keep engaging with lawmakers and regulators to refine the regulatory landscape."
It is notable, however, that Diem was not among the entities represented by witnesses. Nor was Tether, the world's largest stablecoin — which has weathered a steady pursuit by regulators over whether it carries the reserves it claims.
Another elephant in the room Wednesday may have been the President's Working Group report on stablecoins, which Dixon called "overbroad."
Dixon said her company disagrees with two recommendations in the report: first, that stablecoin issuance be limited to insured depository institutions. "This is not narrowly tailored to the actual risk identified [because] ... banks hold fractional reserves while stablecoin arrangements are predominantly intended to be fully reserved," she said. "In short, we believe the recommended solution targets the wrong risk."
Second, Dixon said, the working group seeks federal supervision for "any entity that performs activities critical to the functioning of the stablecoin arrangement," she said — an uneven burden when compared with regulation in banking.
"Banks rely on countless vendors and technology providers critical to their provision of banking services — internet service providers, for example — which are not subject to federal prudential regulation," she said, adding the report "failed to articulate why the entire stablecoin value chain should be made subject to federal banking regulation when the entire banking value chain is not."
Dixon wasn't the only witness to look across asset classes. Haas suggested creating "parity" among them.
"Digital asset platforms should be subject to the same third-party reporting rules on our customers' gains and losses that brokerage firms, like Fidelity and Charles Schwab, operate under today," Haas said.
Dixon added she hoped the hearing would demystify the crypto space.
"Crypto and stablecoin shouldn't be buzzwords, thrown around to incite fear of the unknown," she told lawmakers. "I urge you all to look at this industry and technology beyond the narrow lens of applications that often dominate the news. That approach risks putting us back where we started, repeating our past mistakes."