Any big city dweller will be familiar with the following scene: Scaffolding obscures a building for such a protracted period that its accoutrements of construction become part of its façade. Should this framework ever be removed, at first blush the building is unrecognizable — so much that those who frequent the area might overshoot the place.
This is a problem US cryptocurrency companies would love to have. Two of my colleagues represented BX3 Capital yesterday before a Congressional roundtable called “Legislating Certainty for Cryptocurrencies.” Helmed by Ohio Rep. Warren Davidson, the bipartisan group heard testimony from some 50 companies and organizations with interests in the cryptocurrency sector, including Blockchain and ConsenSys. A commonality emerged from the four-odd hours of hearings: The industry needs some guidance. Yet while plenty of problems were presented, solutions were harder to come by.
Spouting the “big ideas”, “disrupt the world” sort of bonhomie that tends to characterize the crypto conversation gives the industry a sense of comfort. Yet now that cryptocurrency is nearing its 10th birthday, such navel gazing is turning counterproductive at best and at worst, obfuscating the salient issue at yesterday’s roundtable: If cryptocurrency is to evolve beyond the topic of knee-jerk contrarian Internet think pieces into a tool to effect concrete innovation, the cryptocurrency is going to need some scaffolding in the form of regulatory certainty to build out its architecture. Otherwise, the lack of a framework will mean more obfuscation. And companies are going to pass up the US as a cryptocurrency investment destination.
Kiran Raj, among the presenters at the roundtable, has a few thoughts on that latter front. The chief strategy officer at Seattle–based Bittrex, among the world’s largest cryptocurrency trading platforms by volume, Raj is a former deputy general counsel at the US Department of Homeland Security. For starters, when it comes to crypto offshoring, there are more security implications that what meets the eye. Foreign-domiciled actors could try to exact takeovers such as a 51 percent attack, in which they could wield full control of a blockchain, essentially holding financial transactions hostage. (Hit TV series Silicon Valley has a more comedic take on this phenomenon.) While the decentralization of blockchain technology lends itself to superior cybersecurity, it would behoove governmental agencies to get ahead of cryptocurrency security as industries continue to onboard blockchain-based systems, he argues.
A lack of security goes hand in hand with a lack of certainty. A tenuous business climate is not quite the sort to foster investment. A major Boston–based asset management firm voiced tentative plans at the roundtable to launch a crypto-based product, though the company is reticent to proceed failing clear regulatory signals from Washington. Mike Lempres, chief legal and risk officer at crypto trading platform Coinbase, pointed out that there are financial penalties for missteps. Yet the present regulatory murkiness, which he called “chilling,” means exactly what constitutes a misstep remains unclear. “Regulation shouldn’t be done by enforcement,” said a representative from an asset management firm.
Other roundtable participants echoed feeling in the dark. Kraken CEO Jesse Powell noted that recent coin offerings have gone so far as to leave out US–based players; with international fundraises outpacing US–domiciled ones. A clear US regulatory framework would not only take out the guesswork; the country could become a haven for security token activity, as it could position itself as a haven for cryptocurrency integrity and trust.
Given the novel nature of cryptocurrency and the glacial pace at which US governmental entities often operate, the federal government has done what it can with the tools at its disposal. Nonetheless; the resounding sentiment stemming from the roundtable is that the time has come for the US government to deepen its crypto bench.
The key here, will be collaboration and education. Kate Prochaska, vice president and regulatory counsel at the US Chamber of Commerce, called for collaboration among federal regulatory enforcement entities such as the SEC, IRS, Commodity Futures Trading Commission, and the Consumer Financial Protection Bureau, and for these groups to come up with codified cryptocurrency-sector definitions to apply across the board. To effect change on this front, the cryptocurrency knowledge base needs to be in place.
Lawmakers on both sides of the aisle agree that cryptocurrency regulation shouldn’t be ignored. Yet this bipartisan agreement may be part of the reason that policymaking keeps getting put on the backburner. If an issue isn’t burning constituent phone lines and spurring social media campaigns, Congressional staffers will focus their energies elsewhere. Moreover, only a handful of members of Congress have a grasp of cryptocurrency’s growing relevance; the rest simply don’t know, at the risk of appearing hostile to change. While events such as this roundtable are useful, cryptocurrency’s good actors will need to continue to campaign on Capitol Hill to educate government stakeholders.
Part of the answer to the issues surrounding cryptocurrency regulatory guidance can to be come with a regulatory framework in hand. To take an example, multiple roundtable participants mentioned cryptocurrency taxation uncertainty as a reason for not taking a deeper dive into such products. Mike Minihan, partner at BX3 and longtime tax professional, has noted that out of the roughly 70,000 pages of the US tax code, only six pages pertain to cryptocurrency. The greater the regulatory ambiguity, the greater berth for exploitation. As a template to bolster cryptocurrency and economic development as a whole, Minihan has drafted a framework for cryptocurrency taxation, which was presented as a reference during his testimony during the Congressional roundtable. We, as participants in this nascent industry, need to be proactive thought leaders and flesh out concrete, actionable ideas for those in power who may need additional counsel and explanation on the ins and outs of crypto securitization.
Cryptocurrency in the US is getting built from the ground up. Those of us in the industry who want to see positive change come about need to form a strong foundation. If we can come up with frameworks in hand, eventually the scaffolding that’s obscuring the US as a crypto investment destination can come down.
Otherwise, economic and national security might just keep walking on by.