Michael J. Casey is the chairman of CoinDesk's advisory board and a senior advisor for blockchain research at MIT's Digital Currency Initiative.
Judging from the most eye-catching headlines from two separate hearings on Capitol Hill Wednesday, it’s tempting to conclude there has been little of it from U.S. regulators and legislators in their comprehension of cryptocurrencies these past five years.
In fact, Rep. Brad Sherman’s laughable suggestion during a House Financial Services Committee hearing in the house that the U.S. ban mining and purchases of bitcoin could suggest we’ve gone backwards since bitcoin was first discussed in Congress in the fall of 2013.
At that time, the sight of Jennifer Shasky Calvery, then director of the Financial Crimes Enforcement Network, telling bitcoin exchanges and wallets they needed to register with FinCEN, was ultimately viewed positively by crypto enthusiasts. In showing that regulators like her weren’t inherently hostile to cryptocurrencies, Calvery’s comments led to a doubling in bitcoin’s price over the following two weeks to more than $1,100 in early December.
Now, five years on, some officials do sound a bit hostile.
At the same hearing that Sherman attended, Federal Reserve Chairman Jerome Powell said cryptocurrencies are “great if you're trying to hide or launder money.” Had he noticed how the FBI had traced the bitcoin transactions of the 12 Russians indicted last week for trying to tamper with U.S. elections?
The folly of his position was indirectly identified over at the other hearing, where Chairman of the House Agriculture Committee Michael Conaway — who presumably did not intend to take a dig at the Fed Chairman — joked, “As long as the stupid criminals keep using bitcoin, it'll be great."
It’s best to look beyond the eye-catching headlines, however. In the wider context, it’s clear that we have actually come some way forward in regulatory comprehension of this technology. And that’s a good thing.
The sheer frequency with which governments, both here and in the rest of the world, are engaging on the topic is itself acknowledgement that it’s an important development that’s here to stay. It’s hard to keep track of how many hearings, symposiums, workshops and conferences are either sponsored by governments or attended by their officials. Consider also how dozens of law firms, a community that’s constantly interacting with both regulators and legislators, either have crypto practices or are doing research and education into how the law should deal with this issue.
The folks at Coin Center and others in the crypto space who’ve been engaging with regulators since 2013 remark that non-political staff members from the Securities and Exchange Commission, the Commodity Futures Exchange Commission and various other agencies are now much more comfortable using the language of this industry than back then.
This is the gradual way that change occurs within the creaking bureaucracy of Washington.
The influence of a parallel market
Part of this shifting tide reflects the unavoidable reality of crypto markets, which have grown massively since 2013.
Skeptics who cite a lack of clear real-world applications for cryptocurrencies and blockchain technology fail to see that the trading in bitcoin and tokens they dismiss as hollow speculation represents such an application. It marks a major shift in how money is gathered, exchanged and allocated.
Notwithstanding problems of measurement, the almost $300 billion that coinmarketcap.com says is the crypto market’s total market capitalization is a historically significant figure. Even after its correction from a high above $800 billion in early January, the number belies the presence of an emerging, parallel capital market.
Much of that market will get shaken out and hundreds of coins will die, but others will emerge and, amid a mix of earnest offerings, scams, game-changing business models, big dreams and total flops, a unique new, gatekeeper-less market for ideas will arise.
It’s much like the Wild West, perhaps, but the Wild West gave rise to the vibrant, innovative economy of Northern California. Is something similar happening here in a more geography-agnostic way?
And, over time, there has been real human growth, too. Worldwide usage and trading, despite the market correction since January, remain many times larger than they were in 2013. Coinbase and Blockchain.com alone are now running more than 20 million wallets each. There are more than 200 crypto exchanges, where more than $16 billion is changing hands daily in dozens of countries. The dollar amounts are still small compared with the trillions traded in traditional fiat capital markets, but they are by no means insignificant.
These numbers mean that governments are compelled to pay attention to this sector. Powell might be currently saying that crypto markets are too small to threaten financial stability, and therefore for the Fed to regulate them, but he will keep being pestered by lawmakers and their staff, as well as those of other government agencies, for his opinion on them.
Why? Because too many people and too much money is engaged in this industry for anyone in politics and policymaking to ignore.
Adding to this is the matter of global competition.
Various jurisdictions are taking stances that proactively encourage crypto and blockchain development, in part because they’re eager to attract some of that capital flow and in part because they want to promote innovation.
Singapore, Switzerland, Malta and Bermuda are all emerging as important new domiciles for ICOs. In recognizing concepts such as utility tokens, they are leading what I described two weeks ago as a global policymaker awakening to the innovative possibilities for new forms of economic design and value exchange.
Meanwhile, Japan has encouraged cryptocurrency transactions with some clear and fair regulations around them. And South Korea has just offered new tax perks to blockchain startups.
This is the backdrop to Wednesday’s testimony from former CFTC Chairman Gary Gensler – now a lecturer at MIT’s Sloan School of Management and, with me, an advisor to the Digital Currency Initiative at MIT Media Lab – in which he urged legislators to enact clear rules for ICOs and cypto-tokens to instill confidence in the sector and avoid an innovation exodus.
When a respected former regulator says an industry like this matters, it resonates with the Washington crowd.
Yes, it’s baffling that Rep. Sherman and his ilk can still, after all this time, believe it would be a good idea to ban bitcoin, a decentralized, authority-less system for communicating information. Perhaps he was doing the bidding of his campaign donors, the top three of which in 2018 are from traditional finance and payments companies.
In any case, he’s irrelevant to the evolution of this industry. In the end, people like him will be overwhelmed by the many more who get it.
– Michael J. Casey