Executives said Bitcoin and cryptocurrencies are fundamentally different from the traditional system and need new rules.
Chief executives of large cryptocurrency firms appeared before Congress Wednesday to testify and answer questions about their products and services and the Bitcoin market in general as lawmakers struggle to bring the market within public policy and regulatory frameworks.
“Several questions remain as to how traditional rules apply and whether regulators have sufficient authority to protect investors and consumers while maintaining market integrity and encouraging innovation,” Rep. Maxine Waters, a Democrat from California, said in her opening statement.
Waters led the House Financial Services Committee in navigating the hearing, which was called on to enhance regulators’ understanding of Bitcoin and cryptocurrency and how the market fits into existing legislation. She also raised concerns about mining’s energy usage, weighing it against the benefits of Bitcoin that the committee is exploring, including remittances and instant settlement of value.
“The topic is an important one for anyone who cares about American competitiveness in the financial services sector; a financial ecosystem that empowers users over banks, CEOs, and other powerful central decision makers,” Bitfury CEO and former acting controller of the Office of the Comptroller of the Currency (OCC), Brian Brooks, said in his testimony.
While Bitcoin does aim to bring power back to individuals instead of further enriching large corporations, centralized custodians pose a threat to that value proposition, as they deprive the user of holding the keys to spending their funds.
Chief financial officer of Coinbase Global and CEO of U.S. subsidiary Coinbase Inc., Alesia Haas, said the exchange currently secures about 12% of the world’s cryptocurrency, explaining how Coinbase employs “extensive controls to protect customer assets.”
Although top-tier security is a must-have feature of bitcoin exchanges, having one centralized entity control a significant portion of the total bitcoin and cryptocurrency coins globally is problematic.
Having customers leverage big, centralized tech companies to hold their funds represents a backward movement towards the traditional financial system’s model rather than one that “empowers users over banks,” as mentioned by Brooks. Bitcoin can only achieve that goal of decentralizing power and enabling financial freedom to individuals if they hold their own keys.
Brooks touched on the sovereignty enabled by self-custody, highlighting how critical of an aspect it is in Bitcoin. However, the topic didn’t get enough attention in the hearing. The CEO of Bitfury also shared his thoughts on the dollar as the world’s reserve currency when asked whether Bitcoin could pose a threat to the U.S. fiat currency’s status, something the House is worried about.
“In the future, with the rise of China and other major economies, the U.S. dollar can’t take its primacy for granted,” Brooks said, adding that he supports the idea of a digital U.S. dollar. “We need to start thinking about competing on utility, on features, not just based on a post WWII monetary system that we could take for granted for the last two generations.”
Brooks also said that the Federal Reserve’s loose monetary policies prominent since the financial crisis of 2008, which have recently caused a steep rise in inflation rates in the U.S., risk the dollar’s attractiveness relative to other currencies. The executive explained he sees Bitcoin and cryptocurrency as a way to encourage the Fed to stop quantitative easing policies through market competition, ultimately enabling the dollar to stay as the dominant reserve currency, a place Brooks believes is the “right” one.
The idea of Bitcoin being a competitor to the U.S. financial system is shared by at least one prominent figure in the American regulatory body. Securities and Exchange Commission (SEC) Chairman Gary Gensler spoke on the topic last week, saying that Bitcoin was created “as a reaction, an off-the-grid type of approach” to the U.S. banking system – a competition he doesn’t support.
Even though most of those present in the House hearing treated “cryptocurrency” or “digital assets” as an asset class that encompasses Bitcoin, some key differences exist between the only decentralized monetary network and the thousands of tokens and projects of such asset class.
Bitcoin is the only form of money that does not depend on the House of Representatives’ favorable outlook to function, nor does it rely on a regulatory framework to empower millions worldwide. Cryptocurrencies, however, don’t enjoy the same antifragility properties, and their functionality is subject to the approval or disapproval of government regulators.
Gensler seems to understand that, as the watchdog chief drew a dividing line between Bitcoin and digital assets last week.
“The innovations around DeFi could be real, but they won’t persist if they stay outside of the public policy frameworks,” he said.
While Gensler and most lawmakers push for stricter regulatory oversight on Bitcoin and cryptocurrencies, arguments were raised in the hearing regarding the possibility of the tactic to backfire.
“We don’t need knee-jerk reactions by lawmakers to regulate out of fear of the unknown rather than seeking to understand,” Rep. Patrick McHenry of North Carolina said. “That fear of the unknown and the move to regulate before understanding will only stifle American ingenuity and put us at a competitive disadvantage.”
The SEC itself has pushed part of new developments in the Bitcoin market up North in the past year, as the commission refuses to approve a spot BTC exchange-traded fund (ETF) in the U.S. Canada’s financial authorities’ leniency on the matter led financial services giant Fidelity Investments to launch its “physically” backed offering in the neighboring country earlier this month.
Fidelity had filed with the SEC for a spot bitcoin ETF in March, but with no prospects of approval in the short to medium term, the institution resorted to the Toronto Stock Exchange. After the move, Fidelity has become the largest firm to offer a bitcoin ETF. The SEC still has plenty of similar filings on its desk awaiting approval.
Part of the battle lies in the SEC’s requirements for enabling such a product in the U.S., which the executives argue doesn’t fit Bitcoin. They suggested that lawmakers should consider writing specific legislation for the industry, something they said would ensure American competitiveness worldwide and foster innovation in the country, instead of pushing new developments to other nations.