On February 8th, the House Financial Services Committee held a hearing to discuss whether the “accredited investor” definition unfairly limits access to investments for the non-wealthy. Objectively, the hearing was full of substantive debate between advocates and opponents of the current definition. (My colleague Jennifer Schulp testified that the definition does unfairly limit access.)
Unfortunately, the debate in the House contrasts sharply with what occurred one week later in the Senate, when the Banking Committee held a hearing titled Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets. For the most part, the hearing was politics as usual, and pretty much everyone did their best to connect the FTX calamity with the need for new regulation.
One of the biggest problems with this theme is that fraud is already illegal. While it is true that the United States needs to get its regulatory act together, it’s not because it hasn’t outlawed fraud. You’d never know it from the hearing, but fraud is even illegal for anyone dealing in crypto.
It simply isn’t true that, for instance, centralized crypto exchanges have a green light to commit fraud or engage in illicit finance. They do not have a pass from all the anti-money laundering rules that–thanks largely to the United States–are pervasive throughout the developed world.
What’s just as disappointing is the only person who came close to discussing an actual regulatory proposal was Yesha Yadav, a witness who argued for a self-regulatory organization (SRO) in crypto. Give both Chairman Sherrod Brown (D-OH) and Ranking Member Tim Scott (R-SC) credit for exploring the issue, but that discussion didn’t exactly dominate the hearing, and fraud is still illegal without an SRO.
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For the most part, the hearing did little more than demonstrate federal regulators, particularly the Securities and Exchange Commission (SEC), have failed to provide any sort of regulatory clarity, or even useful guidance, during the last fifteen years. But that’s hardly news.
And it’s disappointing because there are more than enough substantive proposals into which the hearing could have delved.
For instance, my Cato colleagues and I have developed detailed legislative proposals for regulating stablecoins and for applying existing securities laws to cryptocurrencies. Others have proposed similar ideas. In 2020, SEC Commissioner Hester Peirce introduced a sensible safe harbor proposal that would have, at the very least, helped provide some balance between crypto innovation and regulation. (House Financial Services Chair Patrick McHenry (R-NC) introduced legislation based on Peirce’s idea.)
That balance was much needed back then, and the situation is worse now.
The committee should grill SEC Chairman Gary Gensler on what problems he has with these approaches and, more importantly, what approaches would be better in those cases where legislation is needed. Crypto has been around for more than a decade and it has steadily grown, so there is no longer any excuse for inaction. (Ranking Member Scott was right to single out Chair Gensler for this very reason.)
And I should give credit to Duke’s Lee Reiner for including, in his written testimony, a few concrete ideas on regulating stablecoins. Some discussion of stablecoins did make it into the hearing, but they’re only one type of crypto. Regardless, there is no good reason to find ourselves in 2023 without regulatory clarity on stablecoins.
The most popular kind of stablecoin is one backed by cash and Treasuries. These narrow stablecoins are a no brainer. At the very least, the SEC and the federal banking regulators could have given a greenlight for these kinds of stablecoins–they’re essentially tokenized versions of the very safest securities and assets that exist. They’re close cousins to money market mutual funds, but they really don’t have an investment component.
Other than the SEC, the main stumbling block has been the banking regulators and the U.S. Treasury. The Biden administration released a report that punted most of the decisions to Congress and, worse, used some of the most twisted logic imaginable.
The report argued stablecoins were so dangerous that only federally insured banks should be allowed to issue them, and that limiting their issue to banks would prevent the excessive concentration of economic power.
Shortly after they released the report, Treasury sent Under Secretary for Domestic Finance, Nellie Liang, to testify in the House. Liang proceeded to agree that stablecoin issuers who back tokens with ultra-low risk securities (such as short-term Treasuries) and cash do not need to be heavily regulated as if they are commercial banks.
That was a bold sequence, even by Washington standards.
Aside from all these details, too many public officials are losing sight of the actual problems and what caused them, creating a major hurdle to doing something more sensible and useful.
Members and witnesses make their speeches at hearings, and that’s politics. But in the blink of an eye, everyone is confusing sound bites with what actually caused problems in the markets. As a result, they ignore what financial regulation should target and what it can accomplish.
The process is eerily reminiscent of what happened in the wake of the 2008 financial crisis and in the wake of the 1929 stock market crash.
In the former case, Congress convinced the public that deregulation caused the 2008 crisis. Congress relied on this myth–in truth, there was no substantive financial deregulation prior to 2008–to enact the sweeping Dodd-Frank Act, and the false account of what happened remains part of the conventional wisdom.
Similarly, the myth that rampant speculation and pervasive fraud caused the 1929 crash gave birth to the 1933 Glass Steagall Act. Although this claim has been thoroughly debunked, scholars still repeat it.
Sadly, it seems that many public officials are bent on repeating the same mistake. And that’s particularly harmful. Laws such as Glass Steagall leave markets segmented and less robust, while legislation such as Dodd-Frank doubles down on a failed approach, one that that relies on the federal government to plan, protect, and prop up the financial system.
If Congress and the regulators continue on the current path, they will merely ensure that people develop crypto technologies outside of the United States. That would be tragic because all legislators have to do is focus on crafting laws and regulations that ensure consumers have appropriate disclosures and protections from fraudulent behavior.
Hopefully, that’s where the 118th Congress will focus its energy.
