Cryptocurrencies: Suited-up dudes at the bar won’t stop talking about them and neither will Congress.
During a Wednesday morning Financial Services Committee hearing focusing on cryptocurrencies and Initial Coin Offerings (scam-prone crowdfunding campaigns where investors purchase digital tokens from a startup), lawmakers peppered experts and industry insiders—including Coinbase chief legal and risk officer Mike Lempres—with questions covering topics ranging from white supremacists to the risks inherent in investing in Initial Coin Offerings.
The hearing was over two hours long and bounced from topic to topic, but there were numerous nuggets worth highlighting. Here’s what you need to know.
Lawmakers are divided on regulation
The overriding theme of the hearing was government regulation and enforcement. Currently, federal agencies in the US and states are policing cryptocurrency markets more or less concurrently while a comprehensive framework is slowly put together.
Lawmakers’ opinions on Wednesday was divided on which direction regulation should take: New laws and powers for regulators, or simply clarification on which existing laws apply to the industry and how.
Congressman David Scott reminded the panel that the heads of the Securities and Exchange Commission and Commodities and Futures Trading Commission stated in a recent Congressional hearing that the US lacks a federal regulation framework for cryptocurrencies. Congressman Tom Emmer, on the other hand, fired shots at “elected officials who don’t have any concept of what we’re dealing with here and how exciting it is talking about, 'Oh my gosh, we’ve got to run in and regulate and create more government infrastructure.'”
Coinbase’s Lempres, meanwhile, stated that the company (which runs one of the largest marketplaces for cryptocurrencies in the world) is “waiting for the dust to settle” between the SEC and CFTC with regards to which agency handles which areas of enforcement.
Cybersecurity standards are an unopened can of worms
In January, Japanese cryptocurrency exchange Coincheck was hacked and the attackers made off with roughly $500 million USD worth of digital tokens. Congressman Randy Hultgren asked Coinbase’s Lempres what federal cybersecurity standards that the exchange conforms to, if any (financial institutions are required to by law).
Lempres responded: None.
However, he added, Coinbase conforms to standards set out in a New York state law known as BitLicense and has never been hacked. Later in question period, Congresswoman Maloney asked the panel what they thought about subjecting exchanges to minimum cybersecurity standards, suggesting that this is a topic important to not just one lawmaker in Congress. Georgetown law professor Chris Brummer, who was on the panel, answered that this would be "extremely helpful."
Congress asked what Coinbase is doing to stop extremists
Cryptocurrencies like Bitcoin and Monero are a new and increasingly popular way for white supremacists and neo-Nazis to receive funding since they’re likely to get kicked off of established platforms like PayPal.
Congresswoman Carolyn Maloney noted that white nationalists have been documented using cryptocurrencies. “As Coinbase is one of the largest cryptocurrency exchanges in the world, what are you doing to prevent these extremists from using your exchange to fund their activities?” Maloney asked Lempres directly.
The banter highlighted an important aspect of the cryptocurrency ecosystem: While the underlying technology is hard to block (short of taking away someone’s computer and internet access, and even then blockchain instructions can be sent via SMS), centralized businesses like exchanges can be bottlenecks for government pressure. This has largely driven the development of so-called “decentralized exchanges,” which operate on a peer-to-peer network rather than a central server operated by a company. Failing that, cryptocurrencies can be purchased for cash in person.
ICOs still make lawmakers mad
Congressman Brad Sherman, said that cryptocurrencies are “popular with guys who want to sit in their pajamas and tell their wives they’re going to be millionaires,” adding that buying digital tokens doesn’t finance anything in the real-world economy, but is “gambling on its value with no social benefit.” On ICOs are a “fixed, fraudulent gambling scheme with no social benefit,” he said.
The question of how they should be regulated, though, remained an open question throughout the hearing. The main issues around regulation in the US now are: Who’s going to do it (i.e. the SEC or CFTC), and which laws apply.
The closest the panel got to an answer was when Coin Center’s Peter Van Valkenburgh said, “A sensible way in dividing these markets is between things that are security-like, and commodity-like” and suggested that the SEC should clarify it’s test for deciding if a token sale is a security. The result of bad or incomplete legislation, he warned, would be that these “truly innovative capital formation opportunities,” as he described the largely unregulated crowdsales, will move their business to other countries.
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