Running out of Crypto
If people aren’t talking about inflation or recession, they’re talking about crypto. And if they’re talking crypto, the conversation inevitably turns to regulation. What is crypto, who should regulate it, who should be subject to regulation, and who should write the crypto rules? There has been a lot of “activity” aimed at answering these questions. As Thomas Wade puts it in his new summary of the situation: “The Biden administration issued an executive order that embarks on a holistic, comprehensive approach to regulating cryptocurrencies and other digital assets. This was soon followed by discussion drafts, white papers, bipartisan bills and even a comprehensive proposal that sought to establish a complete regulatory framework for cryptocurrencies.”
Despite all this, Congress has left Washington to campaign for the midterm elections without legislating a regulation. In fact, the area with the highest chance was perceived as stable coins. But after months of negotiations between House Financial Services Committee Chair Maxine Waters, Ranking Member Patrick McHenry and Treasury Secretary Janet Yellen, even this did not materialize.
Stablecoins, especially those pegged to the dollar, seem relatively simple. It is already more than $100 billion in circulation and has become the preferred medium of exchange for the entire digital asset economy. As stablecoins become more widespread, they are likely to facilitate traditional commerce as well. Unlike other cryptos, stablecoins do not look like securities (at least to me), so it will be easier to determine who is doing the regulation. (In an earlier piece, Wade noted: “The SEC defines a security as an ‘investment contract’ and relies on the Howey test, established by a Supreme Court decision nearly a century old. Any financial instrument (including potentially a cryptocurrency) is considered a security if that is: an investment of money; in a joint enterprise; with a reasonable expectation of profit; and derived from the entrepreneurial or managerial efforts of others.”)
Congress also has a blank slate and should not attach stablecoin regulation to the existing banking regulations. Provided the stablecoin market is transparent and there is sufficient security and solvency regulation, it shouldn’t really matter who issues the stablecoin. The regulations should create innovation and new entry for competitors and products.
It is important to clarify the ground rules of crypto and stablecoins are a promising place to start.
