By Joseph Collement, General Counsel at Bitcoin.com
It is now clear that we will enter 2023 with a divided Congress. In spite of the coming gridlock, the results of this midterm election will affect America’s trajectory politically, economically, and socially. However, when it comes to crypto, the outcome of this election doesn’t really matter. Blockchain policy, as evident in recent polling, is a rare issue that transcends political polarization. Since bipartisanship is a prerequisite for lasting policy – at least in today’s divided political environment – this cross-party consensus is an opportunity.
With the shadow of the FTX fraud looming over the industry, it is clearly necessary for policy makers to refocus their priorities within the crypto industry. Moving forward, the primary goal of all financial regulators must be on combating fraud, theft, and otherwise abusive behavior. To best facilitate this reprioritization, policy makers need to offer clarity and give compliant crypto companies room to innovate and grow.
If crypto advocates want such clarity and government policies which help, rather than hinder, crypto’s adoption – now is the time to act. In the midst of this rare moment of policy consensus, Republicans and Democrats in the 118th Congress must focus on three areas for regulatory improvement: Defining clear regulatory jurisdiction over digital assets, preventing overreach by the national security apparatus, and enabling a crypto payments system through common sense tax reform.
Define Regulatory Jurisdiction
The primary source of regulatory uncertainty pertains to the debate over which organization within the government’s alphabet-soup bureaucracy has primary jurisdiction over digital assets, with the majority of the power struggle occurring between the Commodity Futures Trading Commission (CFTC) and the Security and Exchange Commission (SEC).
While the CFTC has taken a more nuanced – but by no means a hands-off approach – to regulating digital assets, the SEC has taken a more aggressive tack, contradicting its predecessors, and using an expansive interpretation of the Howey Test to claim oversight over all manner of digital assets. These alternative visions of crypto regulation have created a dual track regulatory regime which created daunting compliance concerns. For crypto to get the clarity it requires and deserves, the government’s jurisdictional infighting needs to end.
Thankfully, a potential resolution to this issue may be in the works. Three primary crypto bills before Congress – the Digital Commodity Exchange Act of 2022, the Lummis-Gillibrand Responsible Financial Innovation Act, and the Digital Commodities Consumer Protection Act – all make the CFTC the main regulator for most types of digital assets. It is the clear bipartisan consensus of this Congress that the CFTC must take the lead. Crypto-friendly legislators of both parties should act on this consensus and empower the CTFC to take the leading regulatory role.
Place Common Sense Limits on the National Security State
When the Treasury Department’s Office of Foreign Asset Control (OFAC) placed sanctions on cryptocurrency mixer Tornado Cash – a service designed to obscure the nature of cryptocurrency transactions, they committed a grave violation of the First Amendment.
Ultimately, Tornado Cash is just code, an open-source creation controlled by no entity. As such, it is considered free speech and protected by the First Amendment. This classification dates back to the case Bernstein v. Department of Justice, in which Justice Marilyn Patel stated that the court could “find no meaningful difference between computer language… and German or French”.
Moreover, the efficacy of this sanction is clearly doubtful. Eun Young Choi, the director of the Department of Justice’s national crypto enforcement team, admitted that cryptocurrency mixers don’t hinder the government’s investigation of illicit behavior.
What we have here is a clear case of a sanction policy being both ineffectual and unconstitutional. In this case policy makers – of both parties – who have a responsibility to improve national security while preserving civil liberties, should act to place restraints on these types of sanctions, which advance neither objective.
Create a Payments Friendly Taxation Structure
Finally, it is imperative – in this decisive Congress for crypto-regulation – that bipartisan majorities pass policies that align with the core ethos and fundamental use cases for cryptocurrencies, specifically crypto’s role as a means of payment.
Currently, out-of-date tax policies mean that practical crypto payments are too expensive to work in practice. Under the current regulatory regime, crypto – when converted to fiat currency – is taxed like property and other types of investment vehicles. To make crypto payments realistic, aligning small crypto transactions with the tax regime of traditional currency exchanges is a requirement.
Thankfully, the bill drafted by Senators Lummis and Gillibrand makes such a modification. In this bill, cryptocurrencies – under $200 of value – can be sent and received without a tax penalty (SEC. 139J), which will create new incentives for cryptocurrency to be used as a medium of exchange. If Lummis and Gillibrand, two loyal party members on opposite sides of the aisle, are able to come together to create a sensible crypto regulatory framework, surely their other innovation minded colleagues can do the same. Passing this bill would be an amazing first step in validating crypto’s use cases and creating an innovative – and growth enhancing – payments system.
The Need for Speed
With these three steps, Congress would be able to dramatically alter the regulatory environment in favor of blockchain innovation. However, advocates for a robust blockchain economy should not take this non-partisan support for granted. In light of the FTX scandal, we may begin to see tepid attitudes towards necessary innovation. For the crypto community. failure to support the common sense voices in both parties may empower the skeptics on both sides of the aisle, or lead to one side monopolizing this 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 the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.