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Joint Economic Committee Crypto Hearing

Joint Economic Committee

Demystifying Crypto: Digital Assets and the Role of Government

Wednesday, November 17, 2021

Witnesses

 

Opening Statements
Chairman Don Beyer (D-Va.)
In his opening statement, Beyer described the rapid proliferation of digital assets and growth of the cryptocurrency market, emphasizing risk in the industry, including digital bank runs, consumer protection issues, and scam tokens like Squid. He said we must update regulations around digital assets to reduce destabilization in the broader economy.

Ranking Member Mike Lee (R-Utah)
In his opening statement, Lee explained the benefits of the cryptocurrency industry and decried rigid, one-size-fits-all regulation that would push cryptocurrency market innovation abroad. He added that Congress’ approach should be tailored, employed with restraint, and flexible.

Testimony
Alexis Goldstein, Director of Financial Policy, Open Markets Institute
In her testimony, Goldstein said today’s digital asset marketplace reminds her of the unregulated derivates market during the 2008 financial crisis. She said decentralized finance (DeFi) makes it easy for malicious actors to design tokens that can be bought but never sold. She cited several concerning items including leverage, opacity in market data, and poorly understood linkages between market participants. She added that Congress should look for regulatory gaps and ensure regulators have the market data needed to examine systemic risk.

Tim Massad, Research Fellow, Harvard Kennedy School
In his testimony, Massad said digital asset innovation is important but regulation for them is long overdue. He said stablecoins are one of the most urgent challenges, pose significant risks, and should be regulated because DeFi has created a liability-free and regulatory-free environment. Massad said bitcoin is highly volatile and speculative, and its continued growth poses risks to society from ransomware and illicit activity. He said the evolution of digital assets has made it clear we need to modernize our payment system, like with a central bank digital currency (CBDC) and worries the U.S. is not moving fast enough.

Kevin Werbach, Professor of Legal Studies & Business Ethics, The Wharton School
In his testimony, Werbach said blockchain technology has the potential to make markets more fair, inclusive, and dynamic, but there is no doubt it is being used by bad actors for illicit activity. He said DeFi could remove intermediaries and improve access to capital, but it also poses significant danger and is difficult to regulate. Werbach said Congress should take a three-pronged approach: (1) where possible, provide breathing space and help policy makers gain greater understanding of market dynamics, (2) quickly address the low hanging fruit – there are laws and regulations with language that inadvertently fails to accommodate digital assets, and too many bad actors have not faced legal consequences, and (3) outdated legal frameworks are no longer technology neutral effective, so we need to reconsider the basic foundation of financial regulation.

Peter Van Valkenburgh, Director of Research, Coin Center
In his testimony, Van Valkenburgh said digital assets are a tool to make money work without banks and make organizations work without corporations. He said this “uniquely American ideal” is about opportunity, not anarchy. He argued that bitcoin and other cryptocurrencies are not unregulated, and that sensible technology neutral regulations have prevented money laundering and illicit finance. He said the gaps in crypto policy are mundane, but that securities and commodities futures laws could be improved. Van Valkenburgh added that we should not follow China’s treatment of digital assets. On taxes, he said the recently passed infrastructure package (BIF) included rushed language that can stifle innovation and invade personal privacy.

Question & Answer
Self-Regulation
Lee said the industry is already regulated and asked if cryptocurrency and blockchain technology contain mechanisms for self-regulation and protections against fraud and abuse. Van Valkenburgh said it prevents double-spending because it is policed for by a publicly transparent ledger that anyone can audit and check. Lee said for these reasons, crypto markets are always improving consumer safety and reducing financial risk. Van Valkenburgh said “always” improving is a strong statement, but he is very optimistic for the long-term future of this technology.

Legal Implications for Everyday Americans
Lee asked how Congress could make it easier for Americans owning small amounts of bitcoin to comply with legal implications. Van Valkenburgh said Congress could regularize our tax policies by providing a de minimis exemption from capital gains taxation for small cryptocurrency transactions, pointing to the same exemption for foreign currency transactions. He said the limit should be equal to the foreign currency exemption.

Crypto Reporting and Taxes
Sen. Ted Cruz (R-Texas) asked about the impact of the crypto provisions in the BIF. Van Valkenburgh said the 6050I reporting requirement represents a threat to personal privacy. The provision would require people who receive more than $10,000 in digital assets to verify the sender’s personal information and Social Security number with the IRS or potentially face felony charges. Van Valkenburgh said the provision does not go into effect until 2024 and there are strong arguments to invalidate it. Rep. Scott Peters (D-Calif.) asked if requiring brokers to report crypto gains in a 1099b form would be sufficient to curb tax evasion. Goldstein said she would be supportive of that legislative language.

Digital Asset Risks
Beyer asked how to protect investors from a run on stablecoin. Massad said there should be requirements that digital assets are backed by real assets to lower risk from sudden spikes in demand or the need to liquidate assets. Rep. Mark Pocan (D-Wis.) asked about the risks to digital assets in non-traditional investments and what the areas are that regulators should be investigating to protect consumers. Goldstein said individual users need to manage the counterparty risk themselves and are subject to scams and market manipulation. Pocan asked if there are systemic risks to the economy from crypto and what needs to be done. Goldstein said she is worried about contagion, alluding to Archegos.

Preventing Illicit Activity
Sen. Maggie Hassan (D-N.H.) asked what agencies can do to prevent illicit activity such as the conversion of funds into digital currency. Goldstein recommended applying existing securities laws to digital asset brokers, that Treasury enforce its October guidance requiring digital asset users to comply with sanctions, anything the agencies can do with Congress when needed to promote more information sharing, and strong enforcement of FinCEN rules. Hassan asked how stronger Know-Your-Customer (KYC) requirements could help authorities prevent and prosecute criminal use of cryptocurrency. Massad said KYC is critical, but we need to have a structure of regulation around digital asset exchanges.

Bipartisan Regulation Suggestions
Rep. Jodey Arrington (R-Texas) asked what could be agreed on to close regulatory gaps and ensure basic safeguards. Van Valkenburgh discussed tax related issues and mentioned the third-party reporting provisions in the BIF and said the language is vague and needs to be fixed. He added that a de minimis exemption from capital gains taxation for small transactions is a sensible tax policy. Werbach said everyone should agree that stablecoins need some investigation and action. Massad discussed gaps with spot market exchange regulation, arguing if there is a third-party exchange then there needs to be some oversight for market integrity. Goldstein said market data needs to be better since we currently rely on exchanges to self-report.

FSOC
Peters asked what the public would gain from an FSOC report on crypto. Massad said the growth of stablecoin meets the test requiring FSOC to develop risk management standards, which could address issues like making sure the reserves are invested in cash, making sure there is liquidity and operational resilience, and dealing with KYC.

Stablecoin Regulation and PWG Report
Rep. David Schweikert (R-Ariz.) asked about regulating stablecoins. Massad said we need to create a regulatory framework to regulate issuers and that the President’s Working Group (PWG) report lays out a lot of the issue, but his main concern is that it recommends Congress to adopt legislation only for insured depository institutions, which limits competition.

Blockchain Applications
Rep. Ron Estes (R-Kans.) asked what other technologies and applications could come from blockchain. Van Valkenburgh said identity transactional data is one major implication outside of financial transactions. Estes asked about cybersecurity implications. Van Valkenburgh said ransomware is not a cryptocurrency problem but that cryptocurrency technologies are ultimately the solution and explained that if you decentralize control over data, you lose that single point of failure.

For more information on this hearing, please click here.