Congress needs to act on crypto, but the Senate is far behind
On February 8th, the House Financial Services Committee held a hearing to discuss whether the definition of “accredited investor” unfairly limits access to investment for the non-affluent. Objectively speaking, the hearing was full of substantive debate between proponents and opponents of the current definition. (My colleague Jennifer Schulp testified that the definition unfairly limits access.)
Unfortunately, the debate in the House stands in stark contrast to what happened a week later in the Senate, when the Banking Committee held a hearing entitled Crypto crash: Why financial system safeguards are needed for digital assets. For the most part, the hearing was politics as usual, and pretty much everyone did their best to connect the FTX accident with the need for new regulation.
One of the biggest problems with this topic is that scams are already illegal. While it’s true that the US needs to get its regulatory act together, that’s not because it hasn’t outlawed fraud. You’d never know it from the hearing, but scamming is even illegal for anyone dealing with crypto.
It is simply not true that, for example, centralized crypto exchanges have the green light to commit fraud or engage in illegal finance. They do not have the approval of all the anti-money laundering regulations that – thanks in large part to the US – are pervasive throughout the developed world.
What’s equally disappointing is that the only person who came close to discussing an actual regulatory proposal was Yesha Yadav, a witness arguing for a self-regulatory organization (SRO) in crypto. Give both Chairman Sherrod Brown (D-OH) and Ranking Member Tim Scott (R-SC) credit for exploring the issue, but that discussion didn’t exactly dominate the hearing, and fraud is still illegal without an SRO.
For the most part, the hearing did little more than demonstrate that federal regulators, particularly the Securities and Exchange Commission (SEC), have failed to provide any kind of regulatory clarity, or even useful guidance, over the past fifteen years. But that is hardly news.
And that is disappointing because there are more than enough substantive proposals that the hearing could have delved into.
For example, my Cato colleagues and I have developed detailed bills to regulate stablecoins and to apply existing securities laws to cryptocurrencies. Others have proposed similar ideas. In 2020, SEC Commissioner Hester Peirce introduced a sensible safe harbor proposal that would have at least contributed to some balance between crypto innovation and regulation. (House Financial Services Chairman Patrick McHenry (R-NC) introduced legislation based on Peirce’s idea.)
That balance was badly needed then, and the situation is worse now.
The committee should grill SEC Chairman Gary Gensler about what problems he has with these approaches and, more importantly, what approaches would be better in those cases where legislation is needed. Crypto has been around for more than a decade and it has been growing steadily, so there is no longer any excuse for inaction. (Ranking Member Scott was right to pull out Chairman Gensler for this very reason.)
And I should give credit to Duke’s Lee Reiner for including, in his written testimony, a few concrete ideas about stablecoin regulation. Some discussion of stablecoins came into the hearing, but they are only one type of crypto. Regardless, there is no good reason to find ourselves in 2023 without regulatory clarity on stablecoins.
The most popular type of stablecoin is one backed by cash and government bonds. These narrow stablecoins are a no brainer. At the very least, the SEC and federal banking regulators could have given the go-ahead these types of stablecoins – they are essentially tokenized versions of the very safest securities and assets out there. They are close cousins to money market funds, but they don’t really have an investment component.
Aside from the SEC, the biggest stumbling blocks have been the banking regulators and the US Treasury Department. The Biden administration released a report that sent most of the decisions to Congress and, worse, used some of the most twisted logic imaginable.
The report argued that stablecoins were so dangerous that only federally insured banks should be allowed to issue them, and that limiting issuance to banks would prevent excessive concentration of economic power.
Shortly after they released the report, the Treasury Secretary sent Undersecretary for Domestic Finance Nellie Liang to testify in the House. Liang agreed to agree that stablecoin issuers backing tokens with ultra-low-risk securities (such as short-term government bonds) and cash do so. not must be heavily regulated as if they were commercial banks.
It was a bold sequence, even by Washington standards.
Apart from all these details, too many public officials lose sight of the actual problems and what caused them, creating a huge obstacle to doing something more sensible and useful.
Members and witnesses give their speeches at hearings, and that is politics. But in an instant, everyone is mixing up soundbites with what actually caused problems in the markets. As a result, they ignore what financial regulation should aim for and what it can achieve.
The process is eerily reminiscent of what happened in the wake of the financial crisis in 2008 and in the wake of the stock market crash of 1929.
In the former case, Congress convinced the public that deregulation caused the crisis of 2008. Congress relied on this myth—in truth, there was no significant economic deregulation before 2008—to pass the sweeping Dodd-Frank Act, and the false account of what happened is still part of the conventional wisdom.
Similarly, the myth that widespread speculation and pervasive fraud caused the crash of 1929 gave birth to the Glass Steagall Act of 1933. Although this claim has been thoroughly debunked, scholars continue to repeat it.
Unfortunately, many public officials seem bent on repeating the same mistake. And it is particularly harmful. Laws like Glass Steagall leave markets segmented and less robust, while legislation like Dodd-Frank doubles down on a failed approach, one that relies on the federal government to plan, protect and support the financial system.
If Congress and regulators continue on the current path, they will only ensure that people develop crypto technologies outside of the United States. That would be tragic because all lawmakers need to do is focus on creating laws and regulations that ensure consumers have appropriate disclosures and protections against fraudulent behavior.
Hopefully there’s 118 thereth Congress will focus its energies.
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