Regulation
Deeply Flawed Cryptocurrency Bill Makes Its Way Through Congress
Last month, a bipartisan majority of the House of Representatives past a bill to deregulate the cryptocurrency industry. The Financial Innovation and Technology for the 21st Century or “FIT 21” Act passed with 71 Democratic votes and now moves to the Senate, where appears be a bipartisan interest considering the measure. And while the White House released a statement opposition, did not threaten to veto the legislation. But even if the bill dies in the Senate or on the president’s desk, its progress is still troubling because it could portend the arrival of an inadequate regulatory regime for the burgeoning cryptocurrency economy.
Having spent two years working on financial regulatory and consumer protection issues at the Treasury Department, I find the bipartisan support for deregulation of the cryptocurrency industry troubling, if not entirely surprising. A complicated and poorly regulated financial instrument: when has this ever gotten us into trouble? Instead of joining a political and financial race to the bottom, Congress should work with the White House to protect Americans from predatory financial companies.
In September 2022, I supervised a team from the Treasury Department, taking a hard look to the risks that cryptocurrencies pose for consumers and investors. We’ve found that some technologies in the crypto ecosystem may be new, but the risks they pose are painfully familiar. We have documented frequent cases of operational failures, market manipulation, fraud, theft and scams, including schemes with mind-blowing names, such as “carpet throwsand “pig slaughter.” Our relationship, presented at the White House, noted how some cryptocurrency companies deceptively market their products as safe and stable, with guaranteed returns. Sometimes, even compare transfer them to federally insured bank deposits. But as we have seen in the failures piled up In the “crypto winter” of 2022, cryptocurrency companies take big risks, sometimes using their customers’ money. Investors often don’t appreciate the potential for loss or what happens when a cryptocurrency company fails.
While the supporters complaint that cryptocurrencies will revolutionize payments, they have not been widely used for consumer purchases or money transfers because they are too volatile, the fees are high and the technology is clunky. It has been a useful tool for money laundry, evasion of sanctionsand cybercrime. Last November, the CEO of the world’s largest cryptocurrency exchange, Binance, found guilty to criminal violations of anti-money laundering laws. He was once one of the Democratic supporters of the FIT 21 Act She saidthe most obvious use case for cryptocurrencies seems to be “a strange combination of libertarian fantasies, drug dealers and terrorists.”
Financial regulators can partly address the problem gaps. But as is often the case, there are others that only Congress can resolve. Common sense examples include by providing the Commodity Futures Trading Commission (CFTC) with regulatory authority over spot markets for cryptocurrencies such as Bitcoin and improving the Treasury Department’s authority to address crypto money laundering.
Unfortunately, the FIT 21 law creates a special and light regulatory framework for companies and products that use cryptocurrency-based technologies. Would be exempt Investments using “blockchain” technology provide important protections for investors and allow self-certified “decentralized” technology systems to circumvent the authority of the Securities and Exchange Commission (SEC). While the legislation is presented as a boon for small businesses taking on big banks, others will benefit from this fragile framework. Unpredictable cryptocurrency groups, big tech companies and Wall Street banks could all benefit from the loopholes created by FIT 21 in protection laws as long as they use blockchain or decentralized platforms.
By undermining critical consumer and investor protections for crypto products, Congress would do so chop up the 90-year-old laws that ensure investors have adequate information to make sound investment decisions. After the 1929 stock market crash, caused by Wall Street banks and other unregulated speculators selling inaccurate financial products to unwitting investors, President Franklin Roosevelt priority enact new securities laws as an essential part of the New Deal. Even FDR required regulating stock exchanges riddled with conflicts of interest and protecting the profits of Wall Street trading firms at the expense of ordinary investors. The exchanges had their own version of Sam Bankman-Fried, or SBF, the former CEO of bankrupt cryptocurrency exchange FTX, who was recently condemned of several cases of fraud and conspiracy to misappropriate FTX customers’ money. In the midst of a lobbying blitz against the newly created SEC was the president of the New York Stock Exchange, Dick Whitney condemned to steal from investors in the funds he managed. The FIT 21 Act would exempt cryptocurrency exchanges like FTX from conflict-of-interest protections for customers that apply to other exchanges.
There are other historical parallels to this misguided effort. Many of the risks of cryptocurrencies mirror the excesses that led to the 2008 financial crisis. How subprime mortgages, cryptocurrency exposes low-income and minority communities to scams and predatory financial products that can strip them of their wealth. As Done When the CFTC sought to regulate the complex financial derivatives that contributed to the financial crisis, Congress once again proposes to clip the wings of a financial watchdog, this time the SEC, which is trying to enforce the law and protect the public from risky financial products. . And how TodayCryptocurrency critics, pre-crisis skeptics of financial engineering, were mocked as “Luddites” or naives who would have seen the best financial markets migrate to London. If we don’t learn from our nation’s financial crisis, we will be doomed to repeat our mistakes.
It is unclear why Congress is prepared to grant the cryptocurrency industry this special dispensation since it is not a politically relevant issue in any meaningful sense. Most Americans have shown little interest in using cryptocurrencies and have thus far derived very little benefit from them. He argues that cryptocurrencies can promote financial inclusion they did not materialize. Surveys show that domestic use of cryptocurrencies has declined by more than 40% in the last two years and that they are overwhelmingly used for investment and speculation, not for making everyday payments. Americans who are familiar with cryptocurrencies are sceptical of its legitimacy. All of this suggests that the cryptocurrency industry’s enormous influence may have more to do with the tens of millions of dollars that cryptocurrency-affiliated groups are making committing to spend during this year’s elections and the sector is substantial politician and lobbyist operation.
Do not get me wrong. It would be good for Congress to spend more time on financial policy. More needs to be done to address the legacy of predatory and discriminatory lending that has occurred caused many Americans distrust financial institutions and turn to shady actors. For example, right now, hundreds of thousands of people have done this access lost their money in the failure of a poorly managed financial technology company. To its credit, the Biden administration has racked up a strong record on consumer and investor protection, helping Americans save millions of dollars through eliminating unfair “junk taxes”.These issues far deserve Congressional attention rather than giving special treatment to speculative products and technologies.