May 31, 2022

What you need to know about Congress’ hearing on digital assets

Web 3

5 min read

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The committee focused on the following issues:

  • The importance of maintaining US dollar dominance in the global economy. They were split on whether Web 3.0 would help extend dollar dominance or impede US economic power.
  • That the US will maintain its technological and financial dominance by providing the industry with more regulatory clarity and support for Web 3.0.
  • The need for an auditable digital identity system to prevent tax-evasion and financial crimes.
  • That the SEC has severely hampered innovation and investment in Web 3.0, and that this must be rectified.
  • The importance of providing financial services for the poor, particularly as it concerns cross-border remittances.

The committee members were repeatedly caught off guard by the unanimous desire by the witnesses for regulatory oversight and clarity. The witnesses repeatedly stated that regulatory clarity would provide a huge incentive to the overall market and would be a major contribution to the US’s economic power and spur US financial innovation.

Overall, the witnesses providing testimony did a great job of representing the industry, but they forgot to mention a couple important considerations with respect to regulating our industry:

  1. People too often conflate regulation with its intent: security, safety, fairness, and order. Nobody wants regulation–they want to make sure the financial system is secure; that investors are treated fairly; and that people are not getting exploited by information or power asymmetries. These are not the same thing.
  2. While regulation can help ensure the above goals, poor implementation comes with side effects, sometimes worse that the ills they endeavored to cure. Historically there are many examples where draconian or mis-caliberated regulatory requirements have created significant barriers to entry for new entrants while entrenching dominant incumbents (such as those testifying at this very committee) which then stifles competition and ultimately hurts consumers.

Further Comments

The committee members were repeatedly surprised by the response of the witnesses. They had been very poorly served by their staff members and the committee staff. One member held up his briefing file at the end of the session and announced that it was inaccurate to the point of being a joke. They did not seem to realize that everyone present was under US regulatory regimes already and were working very hard to be as compliant with regulations as possible and were, in fact, most upset by the difficulty of this process. They seemed surprised, for instance, to learn that USDC was backed 1-to-1 with US Dollars or short-term Treasuries; that they were audited; and that Circle was trying to become a bank to provide more transparency and openness for oversight. The committee members also repeatedly stated they did not really understand much of what was being discussed.

The committee members seemed to have little to no understanding of the assets they were discussing. Sam Bankman-Fried’s discussion of futures, derivatives and spot markets led one committee member to suggest he was trying to evade regulation. Later, another member clarified that it was an oversight issue and that different agencies oversaw different aspects of the market. Everyone agreed this was problematic.

The overall sentiment of the committee seemed much more concerned with finding a simple, robust regulatory regime that would foster growth and protect US global financial dominance. The witnesses repeatedly stated that stablecoins were denominated in dollars because the dollar is the global currency. Trying to eliminate stablecoins in the US would simply lead to a Euro denominated stablecoin and undermine the dominance of the dollar in global markets.

The notion of a US CBDC was raised a few times, but the members had no clear understanding of cryptocurrencies or stablecoins and thus could not articulate or understand how a central bank-issued stablecoin would function differently. No progress was made on this question.

Overall, the committee seemed generally quite supportive of Web 3.0’s development and was pleased that the witnesses were so cooperative and often the committee members and witnesses voiced the same frustration with the regulatory complexities and lack of transparency.

The members seemed more supportive overall than critical of the industry. Their central struggle seemed to be a lack of understanding about the industry and thus a suspicion that something dangerous or exploitative might be happening which they did not grasp. They seemed quite willing to provide legislative and regulatory clarity but had no clear agenda for what that might mean. There was little mention of concrete regulations or legislation that the witnesses desired or the members of the committee were promoting. The one exception was a clearly articulated desire for stablecoin reserve auditing expressed unanimously by the witnesses and supported by several committee members. Without a clear rule making agenda, the discussion was unfocused and seemed largely unproductive.

The most significant development for the industry was a clear dissatisfaction of many members of the committee with the SEC. The lack of regulatory clarity and the opacity of the SEC’s decision making process was repeatedly criticized. At times it seemed like the witnesses and the committee were more upset with the SEC than with money-laundering and terrorist financing. The industry has a clear opportunity to work with the committee members in framing helpful legislation if they can educate the members and present concrete legislative proposals that members can understand and act on. In particular there was a clear willingness to move the oversight authority for Web 3.0 out of the jurisdiction of the SEC by many members of the committee.

Finally, given the lack of clear proposals, it seems unlikely that anything helpful will be coming any time soon. In the meantime, the regulatory confusion and interdepartmental battles for oversight and regulatory authority will continue. Nonetheless, there was a bipartisan consensus that the industry should be encouraged and supported rather than outlawed or legislated into irrelevance.

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