On Tuesday, July 27, 2021, senators on the Committee on Banking, Housing, and Urban Affairs held a hearing to question a panel of Cryptocurrency experts. In this hearing, titled “Cryptocurrencies, What are they good for?” the senators focused their inquiries on the realities of a decentralized system and the past failures of the crypto market. While a few senators seemed in favor of cryptocurrencies, highlighting that transparent and open-source finances can promote financial inclusion, many of the committee members seemed skeptical.
Panelist Angela Walch, a professor at St. Mary’s University School of Law and a research associate at the UCL Centre for Blockchain Technologies, cautioned that crypto is not a “miracle get-out-of-the-financial-system-free card” and emphasized the risk of concentrated pockets of power within crypto systems and the threat of exploitation. As an example, Walch discussed how cryptocurrency miners hold “meaningful power” and need “greater scrutiny.” Walch further urged the senators to “acknowledge the power concentrations within it and make thoughtful policy and risk decisions about how to address that power.”
Panelist Jerry Brito, the executive director at the research and advocacy organization Coin Center, acknowledged that problems in developing crypto markets can spill over into conventional financial systems, but urged the senators not to shy away from cryptocurrencies. Instead, Brito noted that the U.S. should address these risks with appropriate guardrails and regulations. Brito remarked that while there are risks inherent with crypto, these risks can be controlled just like any other financial system because “cryptocurrencies ultimately are commodities.”
The full senate hearing can be watched here.
The main takeaway from this hearing is that cryptocurrency is not going away, and regulations are coming for the crypto markets. It is still unclear what the United States crypto regulations may look like, however, social and political trends, along with recent regulations in other countries, may provide some insight.
On July 26, in advance of the Banking Committee hearing, Senator Elizabeth Warren wrote a letter to Treasury Secretary Janet Yellen urging the Financial Stability Oversight Council to “act with urgency and use its statutory authority to address cryptocurrencies’ risks and ensure the safety and stability of our financial system.” In her letter, Senator Warren identified the five following risks posed by the unregulated crypto market: exposure to hedge funds and other investment vehicles that lack transparency; risks to banks; unique threats posed by stablecoins; use in cyberattacks that can disrupt the financial system; and risks from decentralized finance. (Senator Warren’s full letter can be read here.)
While Senator Warren’s letter does not make any concrete suggestions about what crypto regulations should include, her letter makes two things clear: she believes that regulations are urgently needed, and she believes that the Financial Stability Oversight Council has the authority and resources to regulate these crypto markets.
Additionally, in the U.S. and across the world, there has been growing attention paid to the environmental impact of mining cryptocurrencies. Mining cryptocurrency is an intensive process that utilizes a tremendous amount of energy and has a substantial negative environmental impact. In response, China has been cracking down on cryptocurrency mining, putting hard caps on emissions, and shutting down cryptocurrency mining operations across the country. (Read more about China’s ban on crypto mining here.
While future regulations in the U.S. will likely not be as strict as those in China, it is safe to assume that forthcoming U.S. regulations will address the environmental impact of crypto mining in some capacity.
Finally, on August 2, Germany embraced cryptocurrency by enacting a new law that permits institutional investors, including investment funds and pension funds, to hold cryptocurrency. The law will enable German institutional funds to hold up to 20% of their assets in crypto. (Read more about Germany’s new crypto law here. Given the skepticism of the U.S. Senate Banking Committee, similar regulation in the U.S. may be a way off. However, the impact of Germany’s new law will likely have far-reaching implications in the cryptocurrency markets and future U.S. regulations alike.
It is clear that broad cryptocurrency regulations in the United States are forthcoming. At Friedman & Nemecek, LLC, our attorneys have years of experience dealing with ever-changing technology-based procedures and policies, court decisions, and novel regulations. As new cryptocurrency regulations are enacted, our experienced federal defense attorneys are prepared and ready to help you with any issues.
If you have questions regarding cryptocurrency regulations, please call Friedman & Nemecek, L.L.C., in Cleveland, Ohio at 216-928-7700 for a free initial consultation.