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Senate Banking members take skeptical look at cryptocurrencies

Blockchain firms have tried selling lawmakers on the potential for dramatically reduced transaction costs.

Senate Banking Chairman Mike Crapo, R-Idaho, sees data privacy as one of the primary risks. (Bill Clark/CQ Roll Call file photo)
Senate Banking Chairman Mike Crapo, R-Idaho, sees data privacy as one of the primary risks. (Bill Clark/CQ Roll Call file photo)

Concerns over data privacy and skepticism about just how unique and beneficial cryptocurrencies and other blockchain-based digital assets could be dominated Tuesday’s Senate Banking Committee hearing on regulating the new technology.

“This new digital currency and blockchain technology is a very real — and potentially helpful — innovation,” said Chairman Michael D. Crapo, R-Idaho. “It’s also potentially harmful as there can be some serious risk involved in it.”

[Lawmakers hint at regulatory models for Facebook cryptocurrency]

Crapo, who sees data privacy is one of the primary risks, is working on a data privacy bill and has held two hearings this year on the topic. News on Monday that Capital One suffered a data breach affecting 106 million credit card customers and applicants only heightened that concern.

Speaking with reporters after the hearing, Crapo said cryptocurrency and data privacy issues “were all interwoven,” but that he hadn’t determined whether he would try to tackle them separately or in the same bill. Crapo did, however, outline his three goals for the data privacy legislation he is working on.

“One is that individuals should have rights to their data, and data collectors and managers and users should have obligations in terms of how they collect and use that,” Crapo said. “And then we should have a system — and this, I don’t know the substance of this yet — a system of dealing with breaches of data that is held by them.”

Blockchain firms have tried selling financial regulators and lawmakers on the potential for the technology to dramatically reduce transaction costs for online payments and financial products and thereby help millions of unbanked Americans get access to financial services. Blockchain is a digital ledger technology.

Crapo appeared to accept that premise without fully endorsing it. “It seems to me that digital technology innovations are inevitable and could be beneficial,” he said.

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Democratic skeptics

But his cautious optimism around the new technology’s promised benefits for consumers was met with more outright hostility by some Democrats on the panel, led by ranking member Sherrod Brown of Ohio. “They want to innovate Americans right out of their hard-earned paychecks,” he said.

Mehrsa Baradaran, a law professor at the University of California, Irvine, who testified to the committee, likened blockchain to the dramatic rise in new financial derivatives in the lead-up to the 2007 financial crisis.

“It doesn’t matter what technology undergirds it. What matters [are] the risks presented by this, and there is nothing [about] the blockchain that diminishes these risks,” she said. “That is not something that fundamentally changes the things that regulations are meant to combat.”

Baradaran said Congress and regulators should clear up the confusion of how or when digital assets are regulated as securities, currencies, commodities, or something else, rather than creating a new regulatory regime just for blockchain-backed financial products.

“I think it’s important to have clarity,” she said. “I don’t think we need to reinvent the wheel.”

The nascent industry tends to see conflicts in the nature of blockchain-backed financial products and the ability of the existing regulatory system to oversee them.

Jeremy Allaire, CEO of Circle, a platform for holding, selling, and trading cryptocurrencies, said digital assets are fundamentally different.

“Many of these digital assets do not easily fit classifications we’ve had in our financial system. We’d like to say this is like a currency, or this is like a commodity, that you’d use or utilize in some way, or that this has some feature that makes it look like an investment contract,” Allaire said. “Many digital assets have features of all three. It’s what makes digital assets, I think, very innovative.”

Financial technology and blockchain industry backers have called for more regulatory clarity, but often in ways that translate to fewer regulations. When David Marcus, the Facebook executive overseeing the development of the Libra digital currency, testified before Congress earlier this month, he objected to comparing Libra to an exchange-traded fund.

Allaire argued that some existing regulations should be imposed, saying that firms that hold cryptocurrencies for others should face the same custody rules as other firms that hold more traditional financial assets and likening digital currencies to bearer assets like gold or diamonds.

Many crypto companies, including Allaire’s Circle, have threatened to move their startups to foreign jurisdictions with more permissive laws. Circle is moving a subsidiary to Bermuda. Concerns that the U.S. might cede to other nations market share of a potentially transformative new industry — and the ability to set rules for that industry — animated the hearing.

“I believe that the United States should be in the lead in terms of setting the rules of the road in terms of how this new innovation is implemented,” Crapo said. “And not just in the financial world: This gets back at the big data issue that goes far beyond just financial transactions.”

Democrats also looked skeptically at the promises by Facebook in its Libra proposal and other cryptocurrencies that they will help provide financial services to the unbanked. 

“I don’t doubt the potential for this technology,” said Sen. Brian Schatz of Hawaii. “I just don’t think it will bank underserved communities.”

Tuesday’s hearing was yet another Senate Banking Committee panel that attracted much more interest from Democrats than members of Crapo’s own party. The only other Republican to attend was Sen. Patrick J. Toomey of Pennsylvania, who left before asking any questions. Last week, no other Republicans attended a hearing on cannabis banking. Crapo’s hearings on digital privacy were also lightly attended by Republicans while most Democrats attended.