Federal cryptocurrency regulations in the United States are at least two years behind Europe and countries like Japan and Singapore, which is causing companies to move to other regions while threatening the benefits the sector could provide to the U.S. economy and innovation.
That’s according to Rep. French Hill, R-Ark., vice chairman of the House Financial Services Committee who’s been working on cryptocurrency reform for nearly half a decade.
The committee is set to discuss two crucial pieces of legislation this month. One would support the creation of a stablecoin, a type of cryptocurrency whose value is pegged to a currency or other assets. The other draft bill deals with folding cryptocurrency into the broader American financial system, creating regulations for crypto brokers and crypto exchanges that would protect banks, corporations and individuals dealing with digital assets and related technologies.
A date has not been set for discussions of the draft bills, which could advance for a House vote this fall.
“We’re late here, so Europe and other jurisdictions are definitely ahead of us,” Hill told Arkansas Business. “We would have moved these bills in 2020 and 2021, but this work was terribly set back, like so much of America, by the pandemic.”
The most pressing legislative concern, Hill said, “is to bring regulatory clarity so that investors are protected, innovators can innovate and start new companies and that people will bring their money into the U.S. to invest in Web3 distributed ledger projects.”
Web3 describes a next-generation internet built on distributed ledger technologies.
Cryptocurrency has long been under scrutiny, largely because digital currencies have been used to fund terrorists or illegal activity, like the drug trade.
In addition to federal efforts to crack down on its illicit uses, there’s also been growing mistrust of the sector after the cryptocurrency exchange FTX filed for bankruptcy in November, sending shockwaves across the industry and prompting swift action by financial regulators, particularly the U.S. Securities & Exchange Commission, to stymie additional fallout.
Other crypto failures, including the collapse of cryptocurrency bank Celsius Network last summer, have also drawn negative regulatory attention and numerous SEC investigations.
“Right now, with all of the litigation instituted mostly by the SEC, you have people announcing they are moving their companies to London, to the European Union or Singapore, which are jurisdictions that are real places with real enforcement, real cops on the beat, but that have a good regulatory framework,” Hill said.
Lawmakers are seeking to create a regulatory framework in the U.S. to stop the crypto industry from leaving before more companies, entrepreneurs and, ultimately, money are lost.
In addition, they see regulations as crucial to instilling confidence in digital currencies and prevent the extreme fluctuations in value some currencies have experienced. They also want to stop another FTX-like debacle.
“If our bills were in place, you would not have had a failure of FTX,” Hill said. “It would not have existed if we had regulatory clarity.”
But regulatory clarity has been difficult.
The industry is navigating financial regulations that “were put into place under statutes in the 1930s and interpreted in the 1940s,” said Carol Goforth, a professor at the University of Arkansas School of Law and crypto regulation expert. “Statutes that have not been amended since the advent of crypto, distributed ledgers and the decentralized nature of crypto.”
Goforth has advised Hill as well as Sen. John Boozman, R-Ark., a ranking member of the Senate Agriculture Committee, which also has worked on crypto rules.
“In the U.S., we are in a space where we have plenty of regulation. We have plenty of regulators. What we don’t have is a clear set of guidelines for crypto businesses and decentralized finance,” Goforth said.
“This is an area where the technology is moving so rapidly that it is difficult for regulators to keep up, and it has proven almost impossible for entrepreneurs to figure out to make sure what they are doing complies with the necessary protections for consumers.”
The 165-page draft of the digital asset market structure proposal is dense. Its objective is to modify for the crypto industry financial regulations that were put into place nearly a century ago. It aims to bring transparency to crypto exchanges and crypto brokers.
It also works to define when a cryptocurrency can be classified as a security or a commodity, a point of contention among regulators. And it begins to crystallize the oversight roles of different agencies, mainly the SEC and the Commodities Futures Trading Commission.
There are “enhanced disclosure requirements” including “the nature of the risks surrounding digital assets, including source code, project economics, development plan, related and affiliated persons, and other risk factors.”
A summary of the proposal from the House Committee on Financial Services and the House Committee on Agriculture, which has also been crafting legislation, calls the document a “functional framework [that] would provide digital asset firms with regulatory certainty and fill the gap that exists between the authorities of the CFTC and the SEC.”
“It defines who has an exchange and how it is regulated and how it works,” Hill said. “It defines custody, where these tokens are held. It has anti-fraud rules, anti-commingling rules, and then if you are a promoter, how do you tell the public what your business plan is and how much of it you own.”
“It is not close to being perfect, and it is not close to being fully vetted yet,” Hill said.
Reception has been positive.
“We support smart regulation,” Tom Harford, founder of the Arkansas Blockchain Council, said. “The idea that any industry should be totally unfettered and unregulated is a different type of utopian fantasy land that does not make any rational sense, but neither does the polar opposite.”
A joint statement from law professors Douglas Eakeley and Yuliya Guseva of Rutgers University and Goforth, the UA-Fayetteville law professor, said the draft “makes positive steps to provide more definitional clarity” but “does not confront the issue of what digital assets are properly characterized as investment contracts.”
The professors also raise concerns about whether the proposed bill gives regulators enough oversight of digital commodity exchanges and digital commodity brokers. They raise concerns about regulating “foreign domiciled” firms.
The other draft proposal focuses on regulations for stablecoins.
Hill is adamant that a stablecoin is not a central bank digital currency, or CBDC, which, like the U.S. dollar, would be managed by the Federal Reserve. Some countries, including China, are adopting CBDCs, creating unease that they could be abused by authoritarian regimes to monitor citizens via the transactions they make.
On its website, the Fed says no decisions have been made “on whether to pursue or implement” a CBDC; however, the agency has “been exploring the potential benefits and risks of CBDCs from a variety of angles.”
Stablecoins would, as the name suggests, add more stability to cryptocurrency valuations, and lead to more practical uses for digital currencies for consumers and businesses. They would be issued by the private sector but subject to state and federal regulations.
This bill “would define what is stable and would define what then is a quality stablecoin. This would clean up a lot of aspects of the payment system and payment innovation,” Hill said.
“We want the definition of what is stable for a fiat-based stablecoin that is highly liquid, that is valued on a daily basis and that there is no lack of transparency around it and that is under U.S. law and regulation, which is a better place to be than anywhere else in the world.”
‘Do No Harm’
On June 28, Hill joined a virtual town hall with crypto and Web3 entrepreneurs in northwest Arkansas to discuss policy.
Dylan Stewart of Syscoin, a company focused on blockchain technology innovation, moved to northwest Arkansas from South Korea, where he first started working in cryptocurrency.
Stewart asked Hill how people invested in the new technology “can continue to innovate and thrive here in the U.S. as opposed to going to other, greener pastures if they feel they can’t do their work here?”
Hill compared the emergence of the crypto industry to that of the internet in the 1990s. He said he sees the ecosystem as the “next critically important aspect of technology that will affect all consumption and production in the U.S.”
“The most important thing we can do now is, like a doctor, do no harm,” Hill said.
“I am optimistic about it, but we have to take that first step in the journey, and I feel confident we are somewhere in the right field of that first step.”
A Guide to Cryptocurrency Terms
Distributed ledger: A database of transactions spread across independent computers (or nodes) that record, share and synchronize the transactions. Proponents say distributed ledger technology (DLT) could make the financial sector more efficient, resilient and reliable.
Blockchain: A DLT that allows transparent information sharing within a business network by organizing data into blocks. Almost all cryptocurrencies are secured using blockchain. Proponents say such systems could revolutionize how business is conducted while fighting corruption.
Stablecoin: A private-sector cryptocurrency subject to state and federal regulations. Its value is pegged to a currency or a basket of assets.
Central bank digital currency (CBDC): A cryptocurrency that, like the U.S. dollar, would be managed by the Federal Reserve.
Web3: A next-generation internet built on DLT that could change how information is stored, shared and owned