With Washington recommitted to innovation, cryptocurrencies need a congressional fix
Congress just achieved a rare bipartisan feat in passing the “Endless Frontier Act” through the Senate. This bold legislative package recommits the U.S. to technological innovation and global leadership in the race against Chinese domination. At the very least, Republicans and Democrats understand that the U.S. must do more to win this fight. However, unless the Biden administration and Congress change their current attention deficit on cryptocurrencies, America’s efforts may be in vain.
Beneath the headlines and outside of the halls of Congress, federal bureaucrats are actively circumventing Congress and using the courts to regulate the U.S. cryptocurrency industry. The total lack of regulatory clarity in the Securities Act is the main culprit and consensus is building. This is especially evident to observers of the Securities and Exchange Commission’s (SEC) December 2020 lawsuit against San Francisco-based enterprise software company Ripple over its distribution of the cryptocurrency XRP.
The SEC’s case has stood on questionable grounds since day one, coming as an 11th-hour announcement from the now-former SEC Chairman Jay Clayton. He’d spent much of his tenure insisting that the SEC not provide regulatory clarity to this rapidly evolving tech space, allowing the agency to take arbitrary, often contradictory stances from one day to the next on different digital tokens. This put companies in a confusing morass of uncertainty, which Clayton ultimately exploited when the lawsuit was filed on his last day in office.
The SEC based its lawsuit on the same outdated principle that has plagued much of the cryptocurrency space over the last decade: the Howey Test. It is the byproduct of a 1946 Supreme Court decision centered on two Florida citrus groves, and it has been used to define what is and is not a security based on standards set almost a century ago. The suit alleges that sales of XRP over seven years were one long unregistered securities trade, which the company and its executives should have known from the beginning. But the agency itself had publicly said for years it wasn’t able to draw that conclusion as billions of tokens were being traded all over the world by investors who had no connection the company. The basic premise of the lawsuit, on its face, is a stretch that challenges logic.
Businesses develop innovative solutions on blockchain ledgers that become decentralized through wide token distributions. They can’t get out of the gate if the SEC is going to swing its sledgehammer for distributions that happened seven years ago. This is what makes it such a glaring example of regulatory overreach.
Recent calls to establish a more appropriate standard for technologically complex digital assets have turned into a firestorm since the Ripple case was filed. Some tech policy experts closely following the case have called for a “Ripple Test” to replace Howey, but that shouldn’t be left up to courts. Congress has to get off the sidelines once and for all, and urgently.
The new SEC Chairman, Gary Gensler, acknowledged in recent testimony before the House that it is “only Congress that could really address” the regulatory clarity question. “Right now, the exchanges trading in these crypto assets do not have a regulatory framework, either at the SEC or our sister agency, the Commodity Futures Trading Commission,” he pointed out.
This comes against the backdrop of China rolling out its own sovereign digital currency, the Digital Yuan, that copies all the features of a cryptocurrency (cheap, fast, reliable) but with the usual Chinese characteristics — a closed ledger that allows the Chinese state to monitor every aspect of a user’s daily life. With Chinese tech giants looking to dominate the fintech space ahead of western crypto industry disrupters, any more congressional foot-dragging only kneecaps our best and brightest firms as they try to pull ahead.
At a time when both the White House and Congress are aligned to use the government’s power to protect American interests, Congress needs to get the SEC and the rest of the regulatory agencies in line on cryptocurrencies. Bipartisan action is quite possible, as consensus is emerging that protecting both investors and innovators are urgent concerns.
George Nethercutt Jr. is the former Republican Congressman from the 5th District of Washington, and founder and chairman of The George Nethercutt Civics Foundation. He served on the House Appropriations Committee and House Committee on Science, Subcommittee on Space and Aeronautics.