Crypto Long & Short: Washington Plays Tennis With Crypto
- February 22, 2023
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Glenn Williams Jr. examines what politicians are saying about crypto regulation this week.
Following that, Jodie Gunzberg, managing director of CoinDesk Indices, discusses the crypto sectors that have thrived despite regulatory crackdowns.
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Digital Assets Can’t Benefit from Partisanship
The Senate hearing on cryptocurrencies, “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets,” was interesting to me last week. A recent industry collapse punctuated the need for more regulation within the digital asset space, backed by Democrats Sherrod Brown and Republicans Tim Scott.
In some cases, I wonder if it’s even necessary to monitor these events. It’s getting to the point where you’ve heard one, you’ve heard them all. The regulation of digital assets has become increasingly partisan, which I think is detrimental to everyone.
A new technology like cryptocurrency deserves better than simplistic discourse. If the discussion over cryptocurrencies deteriorates into a scenario where one’s stance can be accurately predicted by their side of the aisle, it will have sunk to a level of simplistic discourse. Because of this, I often find political discussions around crypto more like political theater.
If you’re going to work in a particular sector, you should know what the regulatory winds are. It certainly makes sense to challenge your own ideas with ones that might be counter to your own. I would encourage everyone to watch it, even at 1.25x speed, which I may or may not have done.
Chairman Brown’s testimony indicated that cryptocurrencies as a whole are susceptible to fraud. From my perspective, it seemed the main focus was on its use in criminal activities and the notion of the “greater fool theory,” which suggests that the only worth of crypto lies in the expectation of selling it to someone else for even more money in the future. Nevertheless, his testimony concluded with an inventory of existing financial regulations, suggesting that crypto may have a place within this framework.
During Scott’s testimony, he emphasized the failure of current regulators, particularly the Chairman of the Securities and Exchange Commission, Gary Gensler. The need for existing regulation to be conducted in an appropriate and timely manner was stressed, as well as the recognition that financial innovation is an engine for growth. I think he’d ask me where Gary Gensler is if I talked to him about cryptocurrencies.
Lee Reiners of Duke Financial Economics Center, Professor Linda Jeng of Georgetown Institute of International Economic Law, and Professor Yesha Yadav of Vanderbilt University Law School spoke at the event. They shared their opinions on cryptocurrencies–focusing on innovation and development of a self-regulatory organization (SRO) and even banning them completely. Some ideas need to be seriously looked into while others appear to be biased against digital assets.
The focus on clear disclosures by crypto exchanges, for example, makes perfect sense to me. An informed investor makes decisions based on a belief that they believe to be true.
It makes sense to prohibit the commingling of funds. I can’t think of a good reason why customer funds and firm funds shouldn’t be separated. It’s been the case for years within traditional finance, and for good reason.
The creation of self-regulatory organizations (SRO) within crypto rang as a viable option to explore as well. SROs exist within traditional finance, so a blueprint for implementing them already exists. They were presented as a practical (though not perfect) way to improve the regulatory framework quickly.
Despite bitcoin’s genesis block being mined in 2009, a significant amount of trading activity has occurred in the past three to four years, making it a “new” asset class.
It strikes me as incongruent to mention bitcoin’s existence since 2009, but just its performance as an asset since 2021. Obviously, the fall from $69,000 to $21,000 must be mentioned, but the rise from less than 10 cents to $21,000 since 2009 should also be mentioned if the objective is to be balanced.
Even so, the most encouraging aspect of the witness testimony was that, agree or disagree, I am not able to determine their political affiliation based on their recommendations. I am not sure if I can say the same for those asking the questions.
During these hearings, a cadence that resembles a tennis match is beginning to emerge – politicians alternate back and forth between pro-crypto and anti-crypto statements, focusing most of their questions on the witness most aligned with the political party’s position.
A climate of extreme partisanship would be detrimental to all parties involved, as it would likely eliminate the nuance necessary to allow for technical innovation while protecting investors from bad actors.
In order for the digital asset sector to grow healthy, investors must be protected, financial inclusion must be ensured, and innovation must be encouraged. I hope U.S. Congress members will view these goals more from the perspective of individuals than from a political party’s perspective as they strive to achieve them.