“We are a long way from the peanut fields in Sycamore, Georgia,” said representative Austin Scott as he opened the House Committee on Agriculture’s hearing on cryptocurrency last Wednesday—the first of two hearings where industry representatives, academics and lawmakers spoke on the future of cryptocurrency regulation.
Dubbed “Cryptocurrencies: Oversight of New Assets in the Digital Age”, the topic was a significant departure from the usual discussions of the house, but came under consideration because it involves legislation concerning commodities—which could include cryptocurrencies.
“[We] have a vested interest in shaping and constructing the definition of a security, because it directly impacts the definition of a commodity,” said Chairman Conaway as he opened the hearing, setting the tone for two hours of discussion that showed significant effort on the part of Congress to help create a constructive framework for cryptocurrencies.
Since the March hearing on ICOs, there have been several key regulatory developments in the space, and congress was receptive to the ideas of the panel, creating the impression that a consensus on regulation could soon be reached.
The duck test
The first of the experts to testify was Professor of law Joshua Fairfield, who spoke at length on the value cryptocurrency potentially brings to consumers—allowing collaboration among communities of artists, fast and low-cost cheque settlement, secure international remittance, and the digitizing of securities.
This range of applications, Fairfield suggested, creates the need for a new type of hybrid asset class for tokens that aren’t just used as a security or a commodity, but both of these and more, potentially “as a way to represent our property interests and rights online.”
Such a use calls into question the appropriateness of the SEC’s Howey Test, so Fairfield instead proposes the simple reasoning of the Duck Test to classify cryptocurrencies: “Look to how the communities are using it – then regulate.”
Commodities or Securities?
As the committee grappled with this idea, other speakers came forward—Amber Baldet, CEO of Clovyr, Scott Kupor of Andreessen Horowitz, and CFTC representative Daniel Gorfine, who emphasized the need for adequate education on the issue before classification is determined:
“Given the potential to tokenize a broad range of economic assets,” Gorfine said, “it is important to remind the public that digital assets can also be commodities or derivatives, depending on their term and how they are structured. […] Given its potential and its challenges, [our] Chairman has made clear that the proper response by regulators is not to dismiss the entire movement as misguided and foolish, but rather to take the time to learn and facilitate the promise, and guard against risks and bad actors.”
Closing out her statements at the end of the session, Baldet stressed that lawmakers needed to reframe how they considered the issues. “It should not be an either or conversation,” she said. “We need to be thinking about how, rather than just defensively regulating, how we can proactively make sure that we are frontline innovators in the way that we were for the internet globally.”
A hybrid asset class
These speakers were followed by Gary Gensler, Chairperson of the CFTC and Senior Lecturer at MIT. Gensler spoke of the need for haste in filling current gaps in laws that prevent the expression of blockchain’s transformative potential. He argued that in order to prevent innovators from leaving to more favourable jurisdictions, Congress will have to consider granting the CFTC additional regulatory authority.
An indication of how this regulation might look came from the final speaker Lowell Ness, Managing Partner at Perkins Coie LLP, who explained that as the characteristics of a cryptocurrency can change over time, the current static asset classes are not suitable:
“They exhibit some characteristics of securities during certain phases, and not in others, especially when we get to full functionality, when it’s a truly completed product that is being sold,” he said.
His testimony, which comes with a written counterpart, details how this hybrid asset class might begin to take shape, by allowing cryptocurrencies to be defined as securities (and regulated by the SEC) when they’re being created and developed, and then transitioning to commodity status once the development phase is over.
This would allow the first phase of the ICO lifecycle to satisfy the terms of an investment contract under the Howey Test, and then become a commodity when full-functionality is achieved. This would support the threefold goal of protecting investors, bringing clarity to market participants, and encouraging innovation.
A few hours later on the other side of Capitol Hill the crypto debate continued — at a meeting of Monetary Policy and Trade Subcommittee held to consider cryptocurrencies as money, and their potential effect on domestic and foreign economies. While crypto news around this session was dominated by Congressman Brad Sherman taking the opportunity to again tear into bitcoin, saying that U.S. citizens should be completely prohibited from “buying or mining cryptocurrencies”, Sherman’s suggestion was actually not widely supported on the day. Instead, the overall mood in the room relating to crypto could best be described as ‘cautiously interested’.
“Today, the subcommittee examined the potential impact of digital currency on the future of our financial system,” said subcommittee Chairman Andy Barr. “From its viability as an alternative to traditional currencies, to its potential adoption by central banks, to its possible impact on monetary policy, it is important Congress carefully study every aspect of this new technology.”
While overall it was a net positive day in the U.S. legislature for cryptocurrencies, it is fair to say that there was a distinct lack of urgency in terms of the lawmaker’s view of what their next steps should be — with the Monetary Policy and Trade Subcommittee releasing this list of “Key Takeaways” from the session
As a relatively new technology, the merits of digital currency are heavily debated.
The U.S. must examine the extent to which digital currencies should be considered as money and the potential domestic and global uses for digital currency.
Many Central Banks around the world are considering instituting some form of digital currency – Congress should do its due diligence on the issue too.
If adopted, digital currencies could considerably increase the discretion available to monetary policy makers – the pros and cons of which need to be examined further.
With the U.S Congress and the G20 all dragging their feet with regards to the legal position of cryptocurrencies, it appears that entrepreneurs in the sector will have to continue looking to agencies like the SEC and the CFTC and their international counterparts for regulatory guidance.