The U.S. cryptocurrency industry's top CEOs Wednesday pleaded with lawmakers to let their startups flourish without onerous regulations as Washington struggles to figure out how to police a decade-old digital asset market that's approaching $3 trillion.
The crypto leaders appeared at a House Financial Services Committee hearing that revealed an emerging ideological divide between the left and the right over how the government should oversee the industry. It's an increasingly urgent question for federal regulators and Congress with 16 percent of Americans saying they have used cryptocurrencies such as Bitcoin and Ether.
Top Democrats showed a clear skepticism toward the financial risks associated with crypto trading, while Republicans largely called for taking a cautious approach to enacting new laws. The executives, for their part, called for greater clarity and some showed a distaste for the approach the Securities and Exchange Commission has taken toward the industry.
“We need clear standards and the government's support to create a new, more secure, more competitive financial system," said Charles Cascarilla, CEO and co-founder of Paxos Trust Co., which provides financial services to crypto firms. "The benefits of getting this right are enormous — but so are the consequences of getting it wrong."
Here are key takeaways from the hearing.
Executives want a regulatory revamp and new legal definitions with limits
The leaders of the six crypto firms argued that the digital asset trading they facilitate is a global force for good that the U.S. should embrace.
They said it promises not just to speed up and cut the costs of financial transactions, but they also tried to convince lawmakers that the underlying blockchain technology is a revolutionary innovation in decentralization that would help individuals take back control of the Internet from giants like Google. The "Web 3.0" concept is a key part of the crypto lobby's pitch in Washington.
Coinbase, the most prominent U.S.-based crypto exchange, is leading a lobbying effort in support of a complete rewrite of financial regulations touching crypto. Several federal agencies oversee aspects of the industry — in addition to state-by-state regulation — and Coinbase argues that there should be new policies for digital assets and that a single agency should supervise. Coinbase says it's agnostic as to which regulator it should be, including whether it's an existing agency.
One motivation for the industry's proposed regulatory rewrite is that Coinbase and other major crypto firms are clashing with the SEC, where agency chair Gary Gensler has tried to rein in digital asset activities because he says many of the products resemble securities or investment contracts that fall under his jurisdiction. Gensler says the crypto market today is the Wild West and that consumers lack adequate protections.
Coinbase Chief Financial Officer Alesia Haas and other executives showed a definite preference for a future in which the SEC would not be their regulator. Haas said her firm believes that blockchain tokens are not securities but rather digital property or a way to record ownership. She said, "it would benefit all of us in the ecosystem to have agreed-upon definitions."
"We do believe clarity is needed," Haas said.
Bitfury Group CEO Brian Brooks, who served as a top banking regulator during the Trump administration, described the SEC's approach as an impediment to crypto startups.
"What happens in the United States is you have a new crypto project and you walk into the SEC and you describe it in great detail and you ask for guidance and they say, 'We can't tell you,' and you list it at your own peril," he said.
The industry's perspective dominated the hearing testimony because no crypto critics were among the witnesses.
Ideological split means don't expect a new crypto law anytime soon
The hearing underscored a partisan divide over how to approach the industry, with Democrats also internally split over whether cryptocurrencies are good or bad for society. The rifts are a signal that it could take years for Congress to coalesce around major legislation revamping the regulation of digital assets.
Several Democrats focused on what they said are potential risks crypto products pose to the financial system, consumers and the environment, including intense price volatility, effects on the dollar, the fallout from fraud schemes and crypto's use in other financial crimes. Environmental concerns have arisen because of the computing power and energy consumption that crypto protocols require.
"The advocates of crypto represent the powers in our society," said Rep. Brad Sherman (D-Calif.), the industry's most outspoken critic in Congress. "The powers in our society on Wall Street and in Washington have spent millions, and are trying to make billions or trillions in the crypto world."
But many House Republicans — who are poised to control the chamber in 2023 — signaled that they don't want to move quickly on a major revamp of crypto regulations and don't share the same concerns as Democrats about the risks from the industry.
"I'm in favor of what you do," Rep. Pete Sessions (R-Texas) said. "I'm not sure I want to go as far as you do on [the] robustness of how much oversight you really want."
Rep. Patrick McHenry (R-N.C.), who is poised to chair the committee if the GOP wins back the House, said a priority was to ensure that the "cryptocurrency revolution" happens in the U.S. rather than overseas.
"This technology is already regulated," he said. "The regulations may be clunky. They may not be up to date. I ask my policymaker friends here on the Hill this question, do you know enough about this technology to have a serious debate?"
What you didn't see — banks lobbying for crypto rules
Bank lobbyists on the sidelines of the hearing used the opportunity to urge lawmakers to apply the same level of regulatory scrutiny to crypto startups as they do traditional lenders.
Bank Policy Institute President and CEO Greg Baer, who represents the nation's largest banks in Washington, said his group welcomed the hearing and its recognition that more work is needed on the rules for digital assets. The American Bankers Association said in a letter to the committee that firms offering bank-like services should receive bank-like regulation.
"Today, the largest players in the digital assets space operate largely outside the existing U.S. regulatory framework, with resulting risk for consumers and financial stability," Baer said in a statement. "Meanwhile, regulated banks continue to await clear rules from regulators about their authority to engage in digital asset-related activities, leaving the banking industry largely on the sidelines even though banks are best positioned to be the most responsible and trustworthy players in this market."
