Americans are excited about crypto. Who can blame them? Digital currencies promise to eliminate the middleman in all value transfers, starting with financial markets. But no good deed goes unpunished, and federal regulators are growing panicked that their control might be diminished.
The recently passed infrastructure bill in Congress, President Biden’s Working Group report on stablecoins, the Securities and Exchange Commission’s “regulation by enforcement” policy, and the Federal Reserve’s flirtation with a Central Bank Digital Currency (CBDCs) all reveal Washington’s intent to scale back or even kill this blossoming industry.
Government crypto foes warn of systemic risks, insufficient consumer and investor protection, and inadequate reporting. Regulators can supposedly fix these maladies by forcing Americans to bypass wealth opportunities and surrender financial privacy. Instead of private digital currency, they’re eying central bank digital currencies, whereby a public ledger records and monitors all financial transactions. China is already implementing such a system. We’re assured a U.S. version would come with appropriate protections, but Tea Party activists and others who’ve had their taxes leaked over the past few years have cause to disagree.
Infrastructure Bill is a Crypto Nightmare
The recently passed Infrastructure Investment and Jobs Act (P.L. 117-58) is a step toward plenary crypto control. It would potentially force crypto miners and coders into service as government agents supplying Big Brother with transaction information they don’t currently have. The bill would bring new rules that could lump in as “brokers” too many professionals who provide crypto services but do not interact directly with cryptocurrency customers, as Competitive Enterprise Institute senior fellow John Berlau warned in a Forbes commentary.
Treasury Secretary Janet Yellen, chief proponent of the reporting requirements, exhibits scant understanding of how crypto works. Her priority is closing a $7 trillion “tax gap,” and she sees the mostly unorganized, anti-establishment crypto industry as easy pickings. Treasury officials defining and writing crypto rules under this provision could produce disastrous consequences, especially when China’s ban provides the United States a chance to become the world’s leader.
Congress needs to be more crypto friendly
Ideally, Congress’s job is to the check the ambitions of these runaway bureaucrats and constrain public power over the lives of citizens. One bill that would aid those causes is the bipartisan Keep Innovation in America Act, introduced by House Financial Services Committee Ranking Member Patrick McHenry (R-NC) and co-sponsored by House members of both parties. The bill would correct the worst crypto provisions of the infrastructure legislation.
Rep. McHenry and his colleagues should also prioritize reigning in Gary Gensler’s SEC. Despite Gensler’s crypto knowledge, he aligns with Yellen and the rest of the bureaucratic establishment. His singular focus on meting out regulatory punishments fails the moment. He has asked Congress for “plenary authority” over crypto and for budget increases so he can hire more regulators to bring endless lawsuits — supposedly to protect the little guy.
McHenry should also lead Congress in pulling regulators back from attacking Stablecoins pegged 1:1 to assets, mostly the U.S. dollar. The relatively tiny $145 billion market has proven resilient as its growth has exploded despite some well-publicized issuer accounting disputes. The Working Group wants to push these issuers into a suffocating federal framework that leaves little room for innovation.
Congress succeeded with the JOBS Act
Congress previously displayed admirable foresight. In 2012 it passed the bipartisan Jumpstart Our Business Startups (JOBS Act), signed into law by President Obama, which opened previously restricted investment opportunities in private markets. The equity crowdfunding provision of the JOBS Act, Title III (championed by McHenry), allowed ordinary people to invest in startups and local businesses.
Back then, as today, bureaucratic worrywarts warned of impending doom. Then SEC chairwoman Mary Schapiro wrote the Senate Banking committee stating equity crowdfunding would subject Americans to “fraudulent schemes designed as investment opportunities.” Fellow commissioner Luis Aguilar insisted he could not “sit idly by when I see potential legislation that could harm investors. This bill seems to impose tremendous costs and potential harm on investors with little or no corresponding benefit.”
The SEC so opposed Title III it took four years to write the rules. The results are in: Equity crowdfunding has produced over $1 billion in investment to 4,5000 companies in 450 industries. It created tens of thousands of jobs the bureaucrats would have thwarted. Globally, the crowdfunding industry will double by 2027., the US would have lost a significant part of this growth.
In the same way equity crowdfunding decentralized startup capital and investing, resulting in a boon for startups and local economies start-up companies, crypto and its applications known loosely as Web3 will decentralize all information and value transfer. But this can’t happen if financial regulators dictate policies focused solely on risk. Congress must take a broader view and lead the way forward.
By Jossey PLLC
A version of this article originally appeared in National Review on December 20, 2021.https://www.nationalreview.com/2021/12/dont-let-regulators-kill-crypto/.