The Regulatory Dark Ages of Crypto

I got through the July 16, 2018 hearings in the House. I intended to listen in the night of the hearings but had a head’s up that they would be dramatically disappointing so I took some time to gather myself before slogging through them.

My overall impression listening to the hearings is an overwhelming feeling of déjà vu — it feels very much like we are stuck in a time loop. As it turns out, from a legislative perspective, we have been running in place since the March hearings. Politicians dusted off their diatribes from March (Sherman strikes again) and generally used the opportunity to display little to no growth in their understanding of the space. Nor do they display a willingness to learn. Now I know I am being overly dramatic — there are pro-tech members of Congress, and I have a lot of respect for the members of the Congressional Blockchain Caucus — particularly for Tom Emmer and David Schweikert for attempting to educate their fellow Congressmen — because that must be emotionally exhausting; a black hole of their time and energy. Making it through these hearings alone felt deflating — the whole time, I kept thinking whatever happened to the ideal of “American Ingenuity”? We are letting it stagnate while our elected officials scramble to use every opportunity for self-serving political grandstanding.

First up, the more painful of the two hearings, the House Committee on Agriculture’s hearing on crypto held June 16, 2018 which, per its description, came about from the Committee’s “deep interest in promoting strong markets for commodities of all types, including those emerging through new technology” and through the hearing, the Committee promised to “shed light on the promise of digital assets and the regulatory challenges facing this new asset class.” As is the norm in congressional panels, the panelists were incredibly well qualified to be speaking and, unlike some other panels to date, they seemed to generally be aligned in their views of the promise of the technology:

· Mr. Joshua Fairfield, William Donald Bain Family Professor of Law, Washington and Lee University School of Law, Staunton, VA

· Ms. Amber Baldet, Co-Founder and CEO, Clovyr, New York, NY

· Mr. Scott Kupor, Managing Partner, Andreessen Horowitz, Menlo Park, CA

· Mr. Daniel Gorfine, Director, LabCFTC and Chief Innovation Officer, CFTC, Washington, DC

· The Honorable Gary Gensler, Senior Lecturer, MIT Sloan School of Management, Brooklandville, MD

· Mr. Lowell Ness, Managing Partner, Perkins Coie LLP, Palo Alto, CA.

The opening statement seemed promising, describing the technology as providing a tool that, for “the first time… enables individuals to reliably exchange value in the digital realm, without an intermediary. We can have assets that exist — and can be created, exchanged and consumed — in digital form. The promise of being able to secure property rights in a digital space may fundamentally change how people interact with one another. This technology holds the potential to bring enormous benefits to each of us, if we are willing to give it the space to grow” (emphasis added). The goal of the Committee being to provide “a strong, clear legal and regulatory framework for digital assets” and to discuss “how laws should govern the issuance, trade and utilization of digital assets” in furtherance of that goal.

However, though the Committee espoused a “deep interest” my overall impression was that there almost seems to be a competition amongst the Committee members on who is least equipped to be legislating in this area:

· We are a long way from peanut fields in Sycamore, Georgia

· I am a guy that distrusts the Federal Reserve

· I’m a flip phone guy

· This is something that is really confusing to me… my wife and I watched a documentary on Bitcoins and came out more confused

At the same time, listening to the panelists explain in very basic reductivist plain-English terms the potential of the technology, the present and future use cases, and the need for well-tailored regulation, the feedback from the Committee seemed to range from brick wall: *blink* “I am still skeptical” to an almost militant antagonism. As a self-appointed spokesperson for the second camp, Mr. Soto seemed incredibly uninterested in absorbing any responses to his questions, let alone learning anything. He was generally rude and dismissive of the set of very qualified panelists, but was most aggressively disrespectful to Amber Baldet, engaging in a range of mansplaining to outright cutting her off mid-responses.

Given the Committee’s internal competition on who is most hopeless and unqualified to legislate in this area, it would, at a minimum behoove the Committee to do more listening than speaking. By showing a degree of deference to experts in the area, they might be in danger of displaying some investment in their jobs. Especially, given the espoused goal of preventing the offshoring of this entire space, a threat which the Committee (unlike the SEC in the past) acknowledges as real.

Financial Services Committee

Next up, the Subcommittee on Monetary Policy and Trade held a hearing entitled “The Future of Money: Digital Currency” at 2:00 p.m. on Tuesday, July 18, 2018, which promised to “examine the extent to which the United States government should consider cryptocurrencies as money and the potential domestic and global uses for cryptocurrencies. The Subcommittee will evaluate the merits of any uses by central banks of cryptocurrencies, and discuss the future of both cryptocurrencies and physical cash.”

The hearing had a similarly distinguished panel with the following witnesses, but this time with the inclusion of crypto-skeptics/crumudgens (whats up Dr. Prasad), as is only traditional in the crypo space:

• Dr. Rodney J. Garratt, Maxwell C. and Mary Pellish Chair, Professor of Economics, University of California Santa Barbara
• Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation
• Dr. Eswar S. Prasad, Nandlal P. Tolani Senior Professor of Trade Policy, Cornell University
• Mr. Alex J. Pollock, Distinguished Senior Fellow, R Street Institute

I was more interested in this panel to see if there was legislative movement on issues such as tax treatment, given that Germany recognized Bitcoin as legal tender and the IRS ruling turned in part on Bitcoin not being recognized as legal tender in any jurisdiction. Dr. Michel in particular advocates for removing barriers on digital currency being used as money, including the tax treatment. TL;DR is nope.

The Committee was also more informed and engaged than the Agriculture Committee, though this is a low hurdle.

Sherman gave his (predictable at this point) diatribe, calling for the wholesale banning of cryptocurrency and the mining thereof. The most interesting part of his speech is that, much like reheated leftovers in the microwave, it was dry and unappealing, lacking the vigor and emotion of his first dramatic reading. He gave the impression that he is almost certainly reading off a speech that was scripted in whole by aides, without an ounce of emotional investment in the issue.

Others focus on the use of crypto by different actors for crime, as if it invalidates the space in whole. This similarly rings hollow — you can make countless analogies that render this point absurd. Just because a plunger was once used by a fed up house-wife to beat her husband within an inch of his household-chore- shirking life does not invalidate its noble primary use case. This focus on the fact that crime is facilitated by something that operates as a store of value and we should thereby ban it, is strange to say the least. All stores of value can be used to finance things. It is an intrinsic feature, whether it be a cash, cash equivalent or commodities or whatever else people deem to have value (pogs, magic cards, beanie babies). They can be used to pay for your wedding, they can be used to buy tampons, and they can be used to illegally purchase horse tranquilizers.

Less dramatically, it brings to mind a book in read a long time ago but think of frequently, “The Ambivalence of the Sacred” which examines the dichotomy of “religion’s ability to inspire violence” and how that “is intimately related to its equally impressive power as a force for peace”. Religion is a rallying point, a unifier, and often as a vehicle to accomplish the aims of an individual actor or group of actors (whether that manifests itself into a religious mission to build a well or a school in a remote area to “Jesus wants me to get a private jet”). No is advocating a banning of religion (and in the context of certain religions and today’s political climate, let me qualify that with a *yet*) because it is used by bad actors as a rallying point.

To bring this around, and apologies for the juxtaposition of plungers and religion, my response is “don’t blame the plunger”. Dr. Garrat touched on this point that we don’t make things illegal just because they can be used for illegal purposes. Moreover, we regularly overlook the ambivalence of facilitating instruments, the means to an end, when it is convenient or we are aligned with the end. On one side of the policy spectrum, “guns don’t kill people, people do” has been a decades’ long rallying cry without any deep analysis into the role of guns as a facilitator of violence and death.

Issues around digital currency as a threat to the U.S. dollar’s status as a global reserve currency are real issues to be examined. Sitting through law makers bringing up point after point on cryptocurrency and all the inherent issues with what it has been used to buy, the John McAfee inspired “but — people will buy drugs and prostitutes” argument, and having the panels point out repeatedly that these issues are all inherent in the current monetary scheme, while satisfying in one respect to listen to the rebukes, this should be self-evident.

At this point, there have been numerous reports about how Bitcoin, as a medium of exchange, has actually improved the chances of law enforcement (over cash) to trace transactions by bad actors. Listening to these hearings where we parade these very qualified panelists out to debate topics for which they end up re-debating points that should now be established shows the inherent bias of the law makers raising these same points ad nauseam. Our legislature may have varied notions and positions but appear are preconceived. No one is learning from these hearings or changing their positions — what a waste of everyone’s time.

In the wake of these hearings, there have been a number of articles citing the need for further education but you can lead these guys to water but I am increasingly unconvinced that you can make them drink.

Can we please get out of this partisan nightmare on issues that don’t need to be polarized? How are we ever going to get to coherent policy in the U.S. without any inclination on the part of lawmakers to be engaged enough to understand the issues. The unwillingness (which prevents us from even getting to whether they are capable or able) to understand the mechanics or the potential of the technology, gives little to no hope of a legislative solution.

The space is composed of a multitude of actors, of crypto assets, with diverse goals and use cases. If we are actually concerned about crypto being used in furtherance of crime, we need to acknowledge certain basic facts around the varying properties of crypto assets (ie. cryptocurrency as a crypto asset class and operating from the basic premise that Bitcoin is distinct from privacy coins). And if we are actually worried about forming a coherent legislative scheme, and frankly I don’t think there is a credible argument that our law makers are interested in legislating after sitting through these hearings, we need to tailor coherent regulations around the actual and potential risks in the space. We are a long ways away.