The hearing between U.S. lawmakers and crypto officials went surprisingly well.
In a first, the U.S. House of Representatives Financial Services Committee heard
the case for cryptocurrencies from the top officials of six major crypto companies in the world. The objective of the officials was to lay out a case for the current regulatory scenario around crypto and request details on how to move forward. A myriad of issues were covered, as the hearing lasted about five hours.
Officials from FTX
(Sam Bankman-Fried), Circle (
Jeremy Allaire), Coinbase
(Alesia Haas), Bitfury
(Brian P. Brooks), Stellar
(Denelle Dixon) and Paxos
was also summoned to the hearing, but as Brad Sherman highlighted
— Tether "didn't bother to show up at all."
The hearing was conducted by Rep. Maxine Waters.
Several key issues about cryptocurrencies were highlighted by the Representatives — most importantly, the energy-inefficiency of proof-of-work (PoW) based blockchain networks like Bitcoin and Ethereum, the lack of a clear regulatory framework around crypto and the need (or perhaps not anymore) of a separate legal entity to regulate cryptocurrency.
Follow along as we explore each in slightly more detail here.
Perhaps one of the most persisting problems with PoW-based blockchain networks is its energy inefficiency. The process of mining consumes an incredible amount of energy, which was emphasized by Congresswoman Rashida Tlaib. She noted that "Bitcoin mining consumes 121TWh a year...more electricity than what Argentine consumes.”
This issue has been highlighted time and again by different entities. While it is unrealistic to imagine getting rid of crypto mining altogether, some crypto companies have offered to collaborate with the relevant authorities — as Dixon mentioned — in finding "innovative solutions" that can create a "carbon-neutral environment" altogether. She emphasized on the need for research and "constant discussions.”
The second most pertinent issue that the regulators had with crypto was around stablecoins and how they work as a peg to the USD.
For example, Circle has previously come under scrutiny over the amount of their reserves for their USDC stablecoin (although they then released a report
confirming their 1:1 backing).
Tether has come under much more scrutiny
for its stablecoin peg, especially since they have never released a full audit, and updated their website in March 2019 to note that their reserves could also include other assets like notes for loan repayment.
While CEO Jeremy Allaire did not speak directly in response to the overall worries about stablecoin reserves, he was sure to highlight the importance of the cryptocurrency in the broader ecosystem.
Perhaps one of the most interesting points highlighted during the entire hearing was the "stick-it-to-the-man vibe" that Congressman Brad Sherman highlighted that the entire crypto industry reflects. (Even though this "moniker" may not have been the perfect fit for the officials sitting in the hearing yesterday.)
Sherman highlighted another crucial point when he referenced the crypto industry’s aim to rebel against the prevailing centers of authority — when according to Sherman, much of the crypto industry is actually as centralized as the big banks on Wall Street.
This is a crucial point not worth overlooking. There is the persisting argument that large financial institutions have access to a large share of cryptocurrencies in their portfolio and can (potentially) upset the markets as a result. While this argument is well founded, its implication isn't. The decentralized nature of the ecosystem creates a largely equal opportunity for everyone who wishes to participate. Naturally, the one with a larger pool of cash will have the affinity to buy a larger volume of any crypto.
One of the crucial questions that Congressman John Rose asked Sam Bankman-Fried (SBF) was the overall impact that crypto has had on the U.S. economy — and how it has helped in its progression. SBF promptly emphasized the number of jobs that have been created for the population in the U.S., along with the massive number of people who are constantly being trained.
The entire crypto industry has proven to be advantageous to every sector of the broader economy, especially the underbanked and underserved sectors. This was a crucial point highlighted by Congresswoman Sylvia Garcia who (also) represents Latinos who lack fair access to financial services.
To her point of concern around the "cultural barriers" that come in the way, SBF was prompt to respond with how it is irrelevant for the very nature of blockchain to be wary of an individual's culture or geography. This is true for all blockchain networks and applications that exist within the ecosystem.
Culture differences is not a fundamental aspect to blockchain; however, the same cannot be said for the traditional financial system.
Perhaps one of the most interesting discussions was whether there was a need for a separate legal entity specifically for crypto. This is where the entire panel of crypto officials (indirectly representing the industry) were unanimously supportive of whatever action that was taken to facilitate consumer protection. Brooks was quick to highlight that the current regulatory institutions are treating crypto "differently to other assets" and urged to "recognize them for what they are."
Upon being asked about the volatility of crypto, BitFury’s CEO was quick enough to point out that the volatility of crypto is justified and similar to that of the US equities market.
The discussion around the need for a new regulatory framework received a positive response from the crypto officials.
After the broad, vague and non-specific crypto regulations in the latest infrastructure bill, the officials (especially Haas of Coinbase) highlighted that the current attempts at regulating the industry were not aimed at understanding the nitty gritty of how things work, especially around miners, stakers and other stakeholders. This lack of specificity in legal literature was borne by the further lack of understanding of the current legal systems of crypto.
If, however, a new framework is created, then it will help navigate the intricacies of the industry and further align the law with the existing structures within the industry.
The hearing is a major step forward by regulators to better understand how the industry works and how well it can be regulated. The pertinent questions that were raised on both sides of the table shed light on the prevailing problems within the industry and how a workaround could be found.
It was clear that the crypto officials were extremely cooperative and welcoming of any legal framework that could be built that would aid in consumer protection. At the same time, they warned that the non-specific legal literature that has been the prevailing trend until now would only create more problems for the entire industry.
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