Joseph Colleman, General Counsel, Bitcoin.com
It is now clear that we will enter 2023 with a divided Congress. Despite the approaching stalemate, the results of these midterm elections will affect America’s trajectory politically, economically, and socially. However, when it comes to crypto, the outcome of these elections doesn’t really matter. Blockchain politics, as seen in a recent survey, is a rare issue that transcends political polarization. Because bipartisanship is a prerequisite for sound politics—at least in today’s divided political environment—this cross-party consensus represents an opportunity.
With the shadow of the FTX scam hanging over the industry, policy makers clearly need to refocus their priorities in the crypto industry. Moving forward, the primary goal of all financial regulators should be to combat fraud, theft and other misconduct. To best facilitate this reprioritization, policy makers need to bring clarity and provide space for crypto companies to innovate and grow.
If crypto advocates want the kind of clarity and government policies that help rather than hinder cryptocurrency adoption, now is the time to act. In the midst of this rare moment of political consensus, Republicans and Democrats in the 118th Congress should focus on three areas of improved regulation: establishing clear regulatory jurisdiction over digital assets, preventing abuse by the national security apparatus, and building a crypto payment system through common sense tax reform.
Define Regulatory Jurisdiction
A major source of regulatory uncertainty relates to the debate over which entity in the alphabet soup government bureaucracy has primary jurisdiction over digital assets, with much of the power struggle taking place between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission. (SEC).
While the CFTC is taking a more subtle, but by no means laissez-faire approach to digital asset regulation, the SEC is taking a more aggressive stance, contradicting its predecessors and using an expanded interpretation of the Howey test to require oversight of all sorts of digital assets. These alternative views on cryptocurrency regulation have created a dual regulatory regime that has created major compliance issues. For cryptocurrency to gain the clarity it demands and deserves, the government’s jurisdictional struggle needs to end.
Fortunately, a potential solution to this problem may be in the works. Three major cryptocurrency bills presented to Congress — the Digital Commodity Exchanges Act of 2022, the Lummis-Gillibrand Responsible Financial Innovation Act, and the Digital Goods Consumer Protection Act — make the CFTC the primary regulator for most types of digital assets. It is the clear bipartisan consensus of this Congress that the CFTC should take the lead. Crypto-friendly legislators on both sides should act on this consensus and empower the CTFC to take the lead regulatory role.
Impose common sense limits on the national security state
When the Office of Foreign Assets Control of the Department of the Treasury (OFAC) sanctioned the Tornado Cash cryptocurrency mixer, a service designed to hide the nature of cryptocurrency transactions, they committed a serious violation of the First Amendment.
Ultimately, Tornado Cash is just code, an open source creation not controlled by any organization. As such, it is considered free speech and is protected by the First Amendment. This classification dates back to Bernstein v. DOJ, in which Judge Marilyn Patel stated that the court “could not find a significant difference between computer language … and German or French.”
Moreover, the effectiveness of this sanction is clearly doubtful. Eun Yong Choi, director of the Department of Justice’s National Cryptocurrency Law Enforcement Group, acknowledged that cryptocurrency mixers do not prevent the government from investigating illegal behavior.
Here we have a clear example that the sanctions policy is both ineffective and unconstitutional. In this case, politicians on both sides, who are responsible for strengthening national security while preserving civil liberties, should take steps to limit these types of sanctions, which serve neither purpose.
Create a payment-friendly tax structure
Finally, it is imperative – in this pivotal Congress for cryptocurrency regulation – that a bipartisan majority adopt policies that are consistent with the core message and fundamental use cases for cryptocurrencies, in particular the role of cryptocurrencies as a means of payment.
Currently outdated tax policies mean that practical crypto payments are too expensive to work in practice. Under the current regulatory regime, cryptocurrencies – when converted to fiat currency – are taxed in the same way as real estate and other types of investment instruments. For payments in crypto to be realistic, small crypto transactions need to be reconciled with the tax regime of traditional currency exchanges.
Fortunately, the bill prepared by Senators Lummis and Gillibrand makes such an amendment. Under this bill, cryptocurrencies with a value of less than $200 can be sent and received without tax sanctions (SEC. 139J), which will create new incentives for the use of cryptocurrencies as a medium of exchange. If Lummis and Gillibrand, two loyal party members on opposite sides of the aisle, can come together to create a sound regulatory framework for cryptocurrencies, then surely their innovative-minded colleagues can do the same. Passing this bill will be an amazing first step in testing cryptocurrency use cases and creating an innovative growth-enhancing payment system.
Need for Speed
With these three steps, Congress will be able to fundamentally change the regulatory environment in favor of blockchain innovation. However, advocates of a robust blockchain economy should not take this unbiased support for granted. In light of the FTX scandal, we can see a lukewarm attitude towards necessary innovation. For the crypto community. failure to support voices of common sense in both parties could strengthen skeptics on both sides of the aisle or result in one side monopolizing the issue. If this bipartisan moment passes without action, then the likelihood of regulatory clarity will slip away. Legislative action cannot wait.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.