This is the article I published in the technology edition of The Paper in May.
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On April 16, the House Financial Services Committee released a new draft of the Stablecoin Bill. This is the first major draft of cryptocurrency legislation so far in 2023. The bill creates a definition for stablecoin issuers and requires a study of the potential impact of a central bank digital currency (CBDC) issued by the Federal Reserve.
For the Democratic Party, blockchain technology can empower unions and protect workers' rights. By leveraging the transparency and security of blockchain, unions can develop tamper-proof voting systems to ensure that every member's voice is heard and respected. The Republican Party can use blockchain technology to reduce the need for big government and promote innovation and a free economy.
Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), has been a bit disgraced lately. Under his leadership, the SEC has been investigating and prosecuting crypto companies at full capacity, but this aggressive enforcement style is also backfiring on itself.
Some members of Congress introduced a bill to remove Gensler on the grounds of "endangering American competitiveness"; an industry leader said: "My new goal in life is to end Gary Gensler's political career and make him the reason for Biden's failure to be re-elected"; leading industry companies Coinbase, Grayscale, Ripple and others sued the U.S. Securities and Exchange Commission one after another within a month; Gensler went to Congress for questioning and was extremely embarrassed. After that, his image was changed to a clown avatar and widely circulated on social media.
Gensler's situation is a microcosm of U.S. crypto regulation since April. Under the increasing pressure, the U.S. crypto industry, together with the "pro-crypto army", began to fight back against the "anti-crypto forces". As Kristin Smith, CEO of the Blockchain Association, said at an industry conference called "Consensus 2023" on April 28, a pro-crypto "army" fights for the industry in Washington every day. "We are fighting. This war will not go on forever. It may last 18 to 20 months." The 18 to 20 months she mentioned is the time window that many industry insiders expect U.S. crypto legislation to take shape.
The formation of European regulation makes the disorder of regulation in the United States more glaring. Complaints are rising in the industry, and anti-regulatory lawsuits are increasing, pushing regulation in a clearer direction. Crypto legislation has become an important issue in US financial legislation in the past two years. Some members of Congress have already regarded this as their "political achievement project." As the importance of crypto legislation increases, in the context of bipartisan polarization, crypto issues that originally had nothing to do with politics have begun to be involved in the vortex of party disputes. This month, we can sort out the trend of US crypto regulation amid the overwhelming speeches and battles.
Party strife and industry counterattack
The recent disputes over crypto regulation in the United States can be viewed from three dimensions: first, the struggle between the industry and regulators; second, the party struggles between the Democratic and Republican parties in legislative activities; and third, the conflicts between government agencies over regulatory boundaries.
Gensler and the SEC have recently concentrated on these three conflicts, which were highlighted in the "Gensler Hearing" on April 18.
Before the hearing, Gensler was facing pressure from the authorities. A panel of Republican lawmakers sent an open letter to Gensler, saying, "You have not provided a way for digital asset trading platforms to register. Since there are no clear path rules, your promotion of company registration is a deliberate distortion of a non-existent registration process. The only entity that is responsible is the SEC itself." Gensler always said that the regulatory policy is very clear, digital assets are securities, and related companies need to register with the SEC, but in fact, the relevant policies are seriously missing, leaving related companies at a loss. Moreover, his attack on crypto companies is indiscriminate. Coinbase is a company approved by the SEC to go public, and it has received a "Wells Notice" like other institutions without government endorsement. This has also increased the suspicion of Gensler by all parties. Tom Quaadman, executive vice president of the U.S. Chamber of Commerce's Center for Capital Market Competitiveness, recently wrote to the House Financial Services Committee, saying, "A large number of rules set by the SEC are not based on cases and deserve careful review by Congress."
At the hearing of the House Financial Services Committee on April 18, Gensler was not completely isolated, and there were obvious traces of partisanship. Republicans took turns attacking Gensler, while the Democratic Party's attitude was much milder. After all, as part of the current administrative system, Gensler also represents the face of the Democratic government. For example, Joyce Beatty, a Democratic congressman from Ohio, proposed to give Gensler 30 seconds of free time to talk about a self-selected topic at the meeting. Gensler chose the encryption topic and used this opportunity to once again show the Democratic Party's anti-encryption rhetoric and defend himself. However, surprisingly, two Democratic congressmen still questioned Gensler, such as Democratic congressman Ritchie Torres, who turned to representatives of the New York State Department of Financial Services (NYDFS) during the meeting and asked them how New York regulates cryptocurrencies? How is it different from Chairman Gensler's approach? The Democrats of the New York Banking Regulatory Agency replied that we have a different regulatory approach from Gensler. We insist on our own way and disagree with his measures. Another Democratic congressman, Josh Gottheimer, said at the hearing that the specific guidance provided by the SEC to digital asset companies that want to comply is very "limited": "Under your leadership, the SEC has primarily used enforcement actions to promote compliance, and I am concerned that the lack of formal guidance in the normal rule-making process will create more uncertainty in this area." It is rare for one's own people to give a clear denial in such a public setting regardless of party lines.
Partisan differences do not only exist in one hearing, the two parties have shown different attitudes on different issues. Republicans are more active in promoting crypto legislation, among which Patrick McHenry, chairman of the House Financial Services Committee, is the most active. He has regarded crypto legislation as the core "political achievement" of his congressional career. A reporter asked McHenry at the recent "Consensus 2023" event whether there would be a crypto bill signed into law by the president in the next 12 months, and he confidently answered "yes". McHenry has little time left. Since the Republicans took over the House Financial Services Committee, the Republicans have imposed term limits on the leaders of the committee. Since the Democrats controlled the House of Representatives before, Patrick McHenry has been the vice chairman of the committee for the past four years. After the Republicans took control of the House of Representatives, he only has two years left in his chairmanship. So he will inevitably speed up the pace of legislation.
But partisan differences bring a lot of uncertainty to these legislative efforts. Maxine Waters, a Democratic vice chairwoman of the House Financial Services Committee, said at a recent hearing of the committee's digital assets subcommittee, "We don't need to create a brand new special framework for cryptocurrencies - we already have one." Stephen F. Lynch, a Democratic member of the digital assets subcommittee, said at the same meeting, "I'm not sure we're going in the same direction... We don't want to put a stamp of legitimacy on some very high-risk businesses."
But overall, the Democratic leaders of the House Financial Services Committee have not completely ruled out the possibility of working with Republicans to develop crypto legislation. While the Democratic Party prioritizes social equity and environmental protection, the Republican Party advocates limited government intervention in the free market. But the two parties have common interests in the field of crypto. For the Democratic Party, blockchain technology can empower unions and protect workers' rights. By leveraging the transparency and security of blockchain, unions can develop tamper-proof voting systems to ensure that every member's voice is heard and respected. The Republican Party can use blockchain technology to reduce the need for big government and promote innovation and a free economy.
In addition, crypto regulation in the United States is destined to be a multi-faceted situation. How to coordinate disputes between institutions is also a problem that needs to be solved. In March last year, the president signed an executive order requiring federal agencies to develop guidelines for digital assets. The executive order mentioned as many as 12 regulatory agencies, giving them different tasks, but did not explain the power structure. This has also led to a situation where many institutions such as the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission (CFTC), and the Consumer Financial Protection Bureau (CFPB) are competing for this piece of cake.
The Future of Crypto Legislation
Although the game between the parties is quite fierce, the US crypto legislation has made substantial progress in the two directions of stablecoins and market structure. (“Market Structure” refers to two issues in particular: one is whether digital assets such as Bitcoin and Ethereum should be classified as commodities or securities; the other is how the Commodity Futures Trading Commission and the US Securities and Exchange Commission define the boundaries of their regulatory authority over digital assets)
Stablecoin legislation
Stablecoin legislation has been on the congressional agenda very early, and a good foundation has been laid in terms of text and draft. The next step may be the earliest legislation in the field of cryptocurrencies, but the key difficulty lies in the consensus between the two parties on the details.
On April 16, the House Financial Services Committee released a new draft of the Stablecoin Bill. This is the first major draft of cryptocurrency legislation so far in 2023. The bill creates a definition for stablecoin issuers and requires a study of the potential impact of central bank digital currencies (CBDCs) issued by the Federal Reserve. Specifically, many of the contents of this bill already exist in the 2022 Stablecoin Bill of former Pennsylvania Republican Senator Pat Toomey. There are not many innovations, but it has opened a new chapter for the next step.
In addition, the newly established Digital Assets Subcommittee of the House Financial Services Committee also held a meeting to discuss stablecoin regulation. The meeting lasted two hours. Although the Republican chairman of the subcommittee, French Hill, actively promoted the stablecoin draft, the Democratic Party’s response was not positive. The main disagreement between the two party members was the qualifications of stablecoin issuers and customer registration rules.
Market structure legislation
Market structure issues have always existed. As the debate over whether digital currencies are commodities or securities escalates, the battle for "turf" between the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission has become more intense since the beginning of the year. Market structure issues have gradually become a focus of crypto regulation in recent years. How to solve this problem is worth paying attention to in the joint hearing of the two House committees to be held on May 10.
Is Ethereum a security? This question has never been answered. If this question is answered in the United States, then as a first-mover effect, the relevant judgment may affect regulation in other parts of the world.
At the "Ginsler Hearing" on April 18, House Financial Services Committee Chairman McHenry asked Gensler this question at the beginning: Is Ethereum a security? Gensler avoided the question at first, but McHenry did not let him go. After several consecutive questions, Gensler deliberately avoided the question. Interestingly, Gensler has clearly stated on various occasions before that Ethereum is a security.
Why is this issue so sensitive that Gensler dared not repeat what he had said before in Congress? First, there are institutional differences behind this. If Ethereum is a security, then it will be under the jurisdiction of the U.S. Securities and Exchange Commission and managed in accordance with the rules of the commission. If it is not a security, then it is a commodity, and the jurisdiction belongs to the Commodity Futures Trading Commission. Second, there are huge regulatory interests involved. The current market value of Ethereum exceeds 230 billion US dollars. Counting the huge ecosystem behind it, the value involved is very high. Third, as a new thing, Ethereum is different from traditional commodities or securities in many ways, and many of the details are difficult to define.
Policy ambiguity at the federal level has also affected regulatory practices at the state level. According to Cody Carbone, vice president of the Chamber of Digital Commerce, in an interview, a New York attorney general once told him that the regulatory clarity problem at the federal level also appeared in New York State. The New York State Department of Financial Services (NYDFS) believes that Ethereum is a commodity, but some attorneys general believe that it is a security. This top-down transmission effect has led to regulatory boundary conflicts between local institutions.
In addition to Ethereum, stablecoins are also at the center of the battle for jurisdiction between the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission. Commodity Futures Trading Commission Chairman Rostin Behnam said last month that stablecoins fall under the jurisdiction of the Commodity Futures Trading Commission until a new comprehensive regulatory framework is introduced by Congress and the Biden administration, while the U.S. Securities and Exchange Commission also claims jurisdiction over these assets based on an administrative proposal signed by Gensler in 2021.
This problem can only be solved by Congress, and the joint hearing on May 10 may be a good start. The House Financial Services Committee is the regulator of the U.S. Securities and Exchange Commission, and the Agriculture Committee is the regulator of the Commodity Futures Trading Commission. The chairmen of the two committees recently announced that they will hold a joint hearing to discuss how to bridge the regulatory gap. Such cross-committee cooperation between conflicting parties has not been common in history. Hill, chairman of the Financial Services Subcommittee, believes that "it is unprecedented for the two committees to work together to formulate such joint legislation, and I believe this greatly increases our chances of solving the problem correctly." Rep. Dusty Johnson of the Agriculture Committee said, "This is a town where people like to fight for territory very much, and self-awareness sometimes hinders progress... Blockchain and digital assets may not be as revolutionary as some people claim, but I don't believe that every digital asset is a fraud or a waste of time." If the two committees can indeed work together, the results are still worth looking forward to.
(Author Curiousjoe is a cross-border researcher of international politics and cryptocurrency.)