On July 18, 2018, the U.S. House of Representatives’ Committee on Agriculture convened a full hearing to solicit ideas and discuss the regulation of cryptocurrencies and blockchain technology. This was the second House committee hearing on the subject, following the Financial Services Committee’s first hearing in March 2018. In general, committee members voiced support for the development and mass adoption of this new technology. Other committee members, however, expressed concerns over price volatility, initial coin offering scams and the connection between cryptocurrencies and illicit activities — subjects that have been an increasing focus of numerous civil lawsuits over the past few years.
Overall, the committed exhibited an earnest curiosity in blockchain technology and its potential to modernize our digital footprint. In furtherance thereof, the committee heard testimony from leading figures concerning conceivable applications and ongoing developments made possible by blockchain technology.
Below are some notable quotes from the panel, which included former U.S. Commodity Futures Trading Commission Chairman Gary Gensler, Perkins Coie LLP Managing Partner Lowell Ness and Andreessen Horowitz LLC Managing Partner Scott Kupor, among other professionals. A video-recording of the hearing is available here.
In light of the profound representations and insights shared by the panel, the committee signaled that it would take a cautious approach toward crafting regulations, taking time to learn more about blockchain before implementing shortsighted and destructive regulations.
Chairman K. Michael Conway, R-Texas, opened the hearing with positive sentiments:
Digital assets like Bitcoin and Ether, but also like hundreds of other token-based projects that are being developed, represent a new way for people to interact and engage in commerce with one another. While digital assets are often thought of as "payment systems" or "digital gold" I believe the promise that token networks hold is more universal — and more exciting — than that.
For the first time, we have a tool that 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.
Amber Baldet, former head of the blockchain program at JP Morgan Chase, shared a powerful observation for understanding the role of bitcoin in relation to the wider blockchain ecosystem; namely, cryptocurrencies like bitcoin are merely one type of application that runs on blockchain, much like email is one type of application that runs on the internet:
So far, money seems to be the killer app for blockchain, much as the early internet’s killer app, email, continues to be a cornerstone for how we communicate online, peer to peer payments will likely grow into and persist as a ubiquitous part of our personal and professional daily lives. In fact, the ability to spend, trade, rent, or license other sorts of unique digital bearer assets could be applicable to many things we own; mortgages, securities, collectibles, intellectual property rights, personal data, et cetera. Imagining this mature interconnected global ecosystem of such market feels like standing in the 90s and imagining Netflix streaming on your phone.
Joshua Fairfield, a professor of law at Washington and Lee University, expounded on blockchain’s potential “to expand personal property rights online”:
Citizens need and want an expansion of personal property rights online ... [and] cryptocurrency tokens are helping them do that by helping them build markets for digital property.
We should really care about good property rules for intangible, electronic, digital assets ... . [but] we just don’t own that much personal property online. Consider that people used to have record collections, now they have a subscription to Spotify. People used to have bookshelves, now they have a Kindle accounts. This is because early in the history of the internet, intellectual property holders were worried about illegal copying. It took several decades to develop a technology, blockchain, the database technology underneath cryptocurrency tokens, that can be traded, held, bought, and sold, but not duplicated. So far, until now, property institutions haven’t really gotten the benefit of internet technologies, because it’s too costly to record all the transactions. We can’t have a database of ownership for every Barbie doll in the entire country ... . However, token systems can and will reshape all of these ways of owning if they push price points low enough, the way the internet did for basic internet communication.
Kupor discussed a possible paradigm shift, where ownership and stewardship of digital assets is collectively shared by groups of people, amassed together in decentralized networks (e.g., Wikipedia), rather than the typical framework where a central actor calls all the shots:
As investors, we are interested in the broader ecosystem. We use the term cryptonetworks to describe what we think about that ecosystem. Cryptonetworks for us means a new way to build digital services, and by digital services, we mean any internet application that obviously may exist today, so ride-sharing applications, social media applications, and probably a whole host of things that we haven’t thought about, but where those digital services are owned and operated by a community of network participants, rather than by a centralized corporation. ... crypto networks also introduce a very powerful economic incentive ... the presence of what we call a token, which creates direct financial incentive for members of communities to develop and govern the networks appropriately. The token really in a sense is the glue that binds the various players in the ecosystem and provides appropriate economic incentives for all market participants. Understandably, this creates a whole new set of challenges for regulators.
Gensler called himself a “center maximalist,” alluding to the school of thought that recognizes bitcoin as the only viable cryptocurrency. He added, “I am an optimist on the underlying technology.” Gensler said, “Blockchain technology has a real potential to transform the world of finance because it is about money, it is about moving value on the internet. This new technology could lower costs and risk in the financial sector.”
Daniel Gorfine, the CFTC’s chief innovation officer, advocated for regulators to take a careful and cautious approach, rather than impede and potentially smother progress:
Moving forward, one thing is certain: none of us are able to predict exactly where this innovation is heading. It is accordingly incumbent upon us, as a 21st-century regulator to continue studying, learning, and keeping pace with change ... . [we] need to be sure that we are thoughtful in our approach and do not steer or impede the development of this innovation. While some may seek the immediate establishment of bright lines, the reality is that hasty regulatory pronouncements are likely to miss the mark, have unintended consequences, or fail to capture important nuance regarding the structure of new products.
However, Ness countered that there is also a growing need to provide clarity before innovators leave the United States for jurisdictions with greater certainty on how to avoid criminal and civil liability:
The threat of people going offshore for a lack of clarity is a very real one. I will say in my 25 years in Silicon Valley I have not seen circumstances where you go to a meet up in places like Palo Alto or even San Jose and you see regulators from places like Zug, Switzerland, and Singapore, and Hong Kong, and Bermuda, and, and, and and. To avoid any kind of race to the bottom, I do think there is a serious imperative about getting something done before we have a situation where we’re trying to entice people back into the country.
Chairman Conway concluded the hearing, stating that it would be the first of many more conversations because “we want this action going on in the United States.”
The full committee hearing signaled the continuation of a measured approach toward regulating digital assets. On one hand, the committee welcomed the development of this potentially groundbreaking technology, recognizing that inartful regulation could smother progress, lead to unintended consequences and drive innovators to foreign jurisdictions, as in the case of New York, whose BitLicense has sent innovators and startups fleeing. Several comments focused on the importance of exercising restraint, and instead, encouraged the expenditure of resourced on cultivating a meaningful understanding of the appeal and application of distributed ledger technology.
On the other hand, several committee members recognized the pressing need for action. For lawful actors, the digital-asset market is in desperate need of greater certainty. And for unlawful actors, who have orchestrated billions of dollars’ worth of scams in ponzi schemes and money laundering operations, exploited weaknesses in exchanges, and attempted to avoid regulators by selling unregistered securities via initial coin offerings, and developed assassination markets, the need for greater law enforcement is indisputable.
While it is certain that the federal government will craft more federal regulation, the question is one of degree. In all likelihood, any forthcoming regulation will be limited in scope, but nevertheless, another pivotal step toward a comprehensive regulatory scheme.
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Todd R. Friedman is of counsel at Silver Miller.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.