Clearly, cryptocurrencies are causing concern on Capitol Hill and, as a result, within U.S. financial regulatory agencies.
Last week, the House Science Committee held a hearing titled “Beyond Bitcoin: Emerging Applications for Blockchain Technology.” The week before, at a Senate Banking Committee hearing on cryptocurrencies, the heads of the Commodity Futures Trading Commission and the Securities and Exchange Commission, J. Christopher Giancarlo and Jay Clayton, respectively, testified about their regulatory approach in this area. Most of their testimony focused on fraud in the initial coin offering marketplace.
The Senate hearing was not about protecting the public: It was about turf. Both agency heads appeared to be using the attention on ICOs and potential — in some cases, actual — fraud to get additional budget resources they can’t otherwise obtain.
They both missed an opportunity to describe how they would use a new and potentially very effective technology — blockchain — to protect the public. Blockchain, which is used to structure cryptocurrencies like bitcoin, is expected to have applicability across a wide number of industries. We recently completed a survey to collect opinions on the most appropriate applications for blockchain technology. It turns out that most blockchain developers and aficionados do not believe cryptocurrency is the “killer app” for blockchain — respondents instead pointed to “establishing and safeguarding digital identity” and “establishing ownership rights” as the two top uses.
Yet these findings most clearly link to the mission of a treasury department, not a securities regulator.
It is important to note that, as of today, the SEC does not have direct authority over cryptocurrencies or ICOs. When blockchain is used for currency — or in the case of other emerging applications for the technology — I would argue that the Department of the Treasury, given its clear and historical role in the area of the U.S. currency, has primary regulatory responsibility over this new marketplace. For a number of reasons, this should remain the operational structure used, with Treasury as the lead regulator.
Cryptocurrencies and blockchain are simply too potentially important and impactful for the SEC’s smaller, narrower regulatory footprint. The SEC might be given some limited ability to regulate blockchain applications, such as in the case of ICOs, that pass the so-called Howey Test — a standard created by the Supreme Court to determine which transactions qualify as “investment contracts.” In cases where a transaction is considered a security, the SEC may have a role to play.
If Treasury adopted oversight of cryptocurrency and blockchain technologies, it may want to create a new office or division to manage this emerging financial marketplace. In this way, the regulatory structure would not be tied to old institutional frameworks, frameworks that are notoriously inappropriate for innovative technologies.
This division should also be freed from traditional civil servant pay restrictions, allowing Treasury to scour the country in search of talent.
Of course, it is more likely that Congress will give the SEC direct authority to regulate cryptocurrency exchanges. This is the easy thing to do, but it would also be a mistake. With an entirely new, fast moving, impactful market to regulate, the SEC has already shown signs that it will impose a heavy-handed regulatory approach, one that favors large financial institutions and discourages small innovators. This approach is entirely unsuited for the growing cryptocurrency marketplace.
Regulators in other parts of the world are eager to take advantage of our mistakes. As we noted back in 2006: "Competitive advantage with respect to capital access is available to any country with significant economic potential and a modest communications infrastructure."
Blockchain technology’s potential is simply too positive and large to risk on a regulatory agency with a spotty track record of protecting the public. We think it better to upgrade our regulatory infrastructure in order to be able to fully capture the large anticipated social benefits from this new, exciting technology.