The Subcommittee on Capital Markets, Securities, and Investment convened Wednesday, March 14, to discuss the future of cryptocurrencies, digital currencies, ICOs, and Blockchain development in the US.
Throughout the course of the proceedings, it became clear that the panel of four crypto and Blockchain industry experts was more or less in agreement that further regulatory clarification from the US government is necessary. However, the committee members, representing different parties and a wide range of ideologies, displayed a range of positions, from condemnation, to hands-off encouragement.
Following opening remarks, representatives on the committee interviewed the panel of experts on topics ranging from the efficacy of current regulations and regulatory bodies, like the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), to cybersecurity and the nature of Initial Coin Offerings (ICOs). Representatives who were unfamiliar with cryptocurrencies and Blockchain took the opportunity chance to clarify these terms with top experts.
The industry expert panel that appeared before the subcommittee as witnesses consisted of legal professionals from various spheres: Mike Lempres, Chief Legal and Risk Officer at Coinbase, Dr. Chris Brummer, Professor of Law at Georgetown University, and Robert Rosenblum, a partner at Wilson Sonsini Goodrich & Rosati specializing in cryptocurrency and Blockchain companies, and Peter Van Valkenburgh, a self-proclaimed “cryptolawyer” and the Director of Research at CoinCenter.
Per the format of House Committee hearings, each witness was allowed a five minute statement, and then Representatives then proceeded with their own question sessions of five minutes each.
“We have regulation in place, we just need clarity”
While the panel of experts participate differently within the crypto space, they were largely in agreement before the subcommittee that the current state of regulations in the US is insufficient to ensure the success of the industry, that many are willing to comply, but "just need clarity".
Lempres was the first to give his remarks, stating that, “There is no need for Congress to create a new regulator or regulatory scheme, because federal regulators already have sufficient authority to oversee this space effectively.” Lempres added however, that regulatory agencies need to be able to distinguish between different tokens to enable innovation, saying, “this requires regulators to coordinate and provide clear guidance to market participants.”
While Lempres noted the efforts Coinbase has taken to ensure compliance at all levels, including Coinbase’s BitLicense with the state of New York, he added that the unorganized nature of the regulatory structure would ultimately lead to redundancies between state and federal policy.
The panel largely agreed that ICOs were especially in need of regulatory oversight. Dr. Brummer pointed out the lack of standardized disclosure for those running ICOs, noting that whitepapers are entirely unregulated, in the sense that they are neither held up to any standards, nor are they required to provide potential investors with any particular information.
Rosenblum later stated that he has seen people in ICO markets raising money in ways that “any securities lawyer would have told you and truthfully did tell you, you shouldn’t do… No rational securities lawyer would every sell, or advise their client to sell off a whitepaper. We always sell off a private placement memo or disclosure document.”
On the other hand, Lempres noted the potential and inevitability of ICOs to enable entrepreneurs to raise money outside of the traditional VC system, “on a level playing field”:
“Entrepreneurs won’t need to know funders in Silicon Valley or New York to access vibrant sources of capital. At the same time there is a need for responsible regulation to ensure investor protection. We welcome that regulation.”
Congress confused about crypto
The attitudes of the Representatives ranged from cautiously optimistic about new technologies, to outwardly hostile toward the industry as a whole. Representative David Scott of Georgia, also the co-chairman of the Fintech Caucus, asked questions pertaining to the safety of crypto investors, questioning the panel earnestly on how they could create a more streamlined regulatory structure:
“[The SEC and CFTC] have not proposed rules regarding the regulations of cryptocurrency and other digital assets and instead have relied on informal rulemaking or enforcement actions, so I want to ask you in particular Mr. Rosenblum, what in your minds could federal regulators be doing better?[...] to regulate this [sic] emerging and exciting digital assets.”
Rosenblum answered Rep. Scott’s question by first agreeing that regulation by enforcement was not the best path to take, saying:
“I agree with the point that you’re moving towards… regulation by enforcement in an area that is as dynamic as this is not the appropriate way to regulate... I do agree with you entirely, we need clear guidelines, clearer understanding of how the SEC’s registration rules… should apply and do apply, and that not something that you can through regulation by enforcement.”
Representative Sherman of California was far less conciliatory towards the industry as a whole, and condemned the very idea of cryptocurrencies. In his opening remarks he said:
“Cryptocurrencies are a crock…They help terrorists and criminals move money around the world... They help start-up companies commit fraud, take the money, and one percent of the time they actually create a useful business, but then again I daresay that some tiny percent of all larceny and crime helps finance something that turns out to be useful.”
During Rep. Sherman’s question session to the panel, Van Valkenburgh attempted to explain how cryptocurrencies are useful to “underbanked” or “unbanked” individuals.
“Cryptocurrencies are accessible, they’re accessible financial tools only on the basic precondition that someone has a smartphone and an internet connection and I think there are regions of the world where people will sooner have smartphones and internet connections than access to valuable and secure financial services from companies,” said Van Valkenburgh.
Sherman ended his session still convinced of cryptocurrency’s inherent nefariousness, saying “perhaps we’ll have another hearing after some major terrorist event financed by cryptocurrencies.”
Rep. Emmer from Minnesota, who is a member of the Congressional Blockchain Caucus, took a different approach entirely from his colleagues, calling for minimal regulation in the industry. Rep. Emmer insisted that he feared regulation would only stifle innovation in the Blockchain space and give more power to the government, saying almost any regulation would be a “wet blanket” on the industry’s development.
Emmer urged those present not to, "take the policemen we already have and give them more powers to start to invade this space and perhaps frustrate the development."
A coin by any other name...
The lack of defined regulatory guidelines for the crypto space not only creates an environment in which legitimate companies must walk on eggshells for fear of running afoul of regulations. Part of the problems is that, as Lempres pointed out, there’s no unity among US regulators as to what a cryptocurrency actually is. For a given cryptocurrency, the SEC may consider it a security, while the CFTC considers it a commodity, the IRS considers it property, and the FinCEN thinks it’s money.
According to Mr. Lempres, ideally “the SEC and CFTC should be able to draw a line to determine whether a token should be treated as a commodity or as a security.”
Even among the panel of experts, there was some disagreement as to when a cryptocurrency changes from a security into a commodity. Van Valkenburgh, Rosenblum, and Brummer all agree that the Howey Test, a test created by the Supreme Court to determine if an asset is a security, is an appropriate way to evaluate a crypto token, such as those sold during ICOs. However, Rosenblum argued that after a token has been sold during an ICO and is, it was often unclear how the status of the token – often used as a native currency on a given platform while also be traded on exchanges – should be determined.
What everyone agrees on, however, is that the US government’s current inability to provide a regulatory clarity risks losing opportunities to other countries. To this point, Van Valkenburgh stated:
“If policy makers get the line between commodity tokens and securities offerings wrong, and if it isn’t made clear by regulators, it will destroy the viability of these innovations and cede leadership of this technology to the rest of the world.”
Reflecting on the effectiveness of the hearing overall, Dr. Brummer told Cointelegraph that “there was certainly a sense that everyone was engaged and trying to think through some complex issues in serious way. Which is an important prerequisite to sound policymaking."
At press time Mr. Rosenblum as well as representative Ellison had not responded to Cointelegraph’s requests for comments.