Update (5/2/22): Bill has passed without crypto provision.
Jerry Brito raised alarm on Twitter over a new provision in the America Competes Act Bill. He stated that the provision, proposed by Representative Jim Hines, would allow the US Secretary of the Treasury unilateral and unchecked power to ban financial institutions engaged in crypto transactions. This includes exchanges. According to the executive director of Coin Center, a non-profit crypto policy advocacy group, this provision would be disastrous for crypto users. Brito pointed out that the provision was a violation of the right to privacy and went against due process.
However, the banning of exchanges and financial institutions in the crypto industry isn’t the biggest problem. It is how the Bill provision proposes that this banning take place. Brito points out that the provision gives the Treasury Secretary the power to apply the Bank Secrecy Act and thus requires financial institutions in the crypto industry to report information about their transactions that are suspected to be money laundering. The Treasury Secretary also has the power to prohibit these financial institutions from serving account holders that are suspected to have ties with any illicit funds.
According to Brito, this provision bypasses the checks and balances that have already been established on the authority of the Treasury Secretary in this area. The executive director points out that the law already requires the Treasury to engage in public rule making prior to requiring a prohibition. However, the new provision gives the Treasury the power to act without this public rule making. It even allows the Treasury to act without providing a prior warning to the customers whose accounts have been closed for alleged involvement with illicit funds.
Brito further points out that the Secretary is allowed by law to impose surveillance as a special measure through a simple order. However, current legislation limits surveillance to a period of 120 days. In addition, surveillance must be accompanied by public rule making. However, the proposed provision does not require public rule making nor does it impose a limit on surveillance by the Treasury.
An attempt to cripple crypto?
The Bill provision comes only a few days after US regulators stated that they were working on ways to allow banks to hold crypto. The regulators stated that they were looking for ways through which banks could introduce crypto on their balance sheets. This would allow clients to trade crypto through their banks. According to the regulators, encouraging banks to adapt to digital currencies would help to regulate the industry better.
This move by US legislators was greeted with a lot of support from the crypto industry. However, the Bill provision in the America Compete Act reflects an opposite attitude by legislators. The Bill cites cryptocurrencies as being widely used for payments in ransomware attacks on companies based in the US. The removal of restrictions from the Treasury Department has been fronted as a move to protect these companies and track down those behind ransomware attacks.
However, according to Brito as well as Peter Van Valkenburgh, a research director at Coin Center, the removal of these restrictions will likely have a significant impact on individuals and companies operating in the cryptosphere. This move will give the Treasury unchecked authority to forbid cryptocurrency exchanges and other financial institutions from offering services to their customers. While the Treasury Secretary may not use this discretion right away, this power may be misused later. Simply put, this is power that the department should not have.
The need for cryptocurrency regulation
The US was one of the first countries to adopt cryptocurrencies. However, it still doesn’t have clear regulations when it comes to crypto. The crypto industry currently relies on guidelines provided by the Securities and Exchange Commission (SEC), the Federal Reserve, and other financial regulatory authorities. However, these are only guidelines on how digital assets ought to be regulated. They are not laws.
The call for federal regulations has become more urgent as crypto continues to be more widely adopted. More investors are acquiring digital assets and moving away from traditional assets. US legislators are taking notice and are seeking to develop regulations to govern the crypto industry. However, it is becoming more evident that legislators may not be in the best position to craft regulatory crypto policies as they are not informed enough to do so. Many legislators do not have a clear enough understanding of the technology to write policies that will govern its use.
Another concern that players in the crypto industry have when it comes to legislation is that crypto is still not recognised as a security by existing laws. There is no clear definition of what a digital asset is or how one can record the ownership of these digital assets. Proponents of cryptocurrencies state that these currencies shouldn’t be viewed as a radical and separate commerce system. They should instead be viewed as an expansion of the current financial system. The crypto industry should therefore be treated with an approach similar to that of the rest of the current financial system. Others are pushing for cryptocurrencies to be integrated with the traditional systems to create a hybrid system.
Too many variables make it hard to establish clear legislation
Many state the volatility of crypto as the main reason for the lack of regulations for the industry. Some legislators believe the crypto market will require constant changes to regulations. This will in turn make it hard for regulations to keep up.
Another challenge that legislators faced was the decentralisation of cryptocurrencies. While this is one of the big selling points of blockchain technology and digital currencies, it presents a challenge in regulating the industry. Digital currencies put more ownership into the hands of the user. This prevents monopolisation of the industry by big tech companies. However, legislators are hesitant to embrace this decentralisation as it would make it difficult to hold any entities responsible for mishaps in the industry.
What does the future hold for cryptocurrency legislation?
Many are waiting to see what happens next with regulations in the crypto space. Advocates for crypto agree that balance needs to be sought between regulating the crypto industry and working the technology into existing financial systems. However, this will be a delicate operation. There are many concerns being brought forward by both legislators as well as players in the crypto industry. For example, the America Competes Act presents potential privacy concerns that need to be addressed.
The crypto community is also concerned about how the Bill defines brokers saying the description is too broad. According to many players in the crypto community, the definition could encompass a wide variety of people including software developers, stakers, miners, and other users that may not have customers. Traders won’t, therefore, have access to their customers’ information. This means they won’t have what they need to report to the IRS. As a result, many of the smaller crypto companies may end up leaving the country in search of countries with friendlier provisions.
It should also be noted that, unlike traditional bank accounts that require users to use their personal information including their names, only addresses are used in blockchain. Individuals are not tied to transactions. Anyone can view the ledger for transactions. However, they will not find personal details about the person transacting. Legislators who are pushing for reporting will have a hard time forcing miners, hardware developers, and crypto software developers to adhere to these rules. If anything, these groups will more than likely move their operations to other, more crypto-friendly, countries.
Crypto advocates and activists are encouraging crypto users and supporters to reach out to legislators. Supporters are being encouraged to express their displeasure to their senators and other lawmakers in their jurisdiction in a bid to get them to reject the current Bill and instead sit down to consider the concerns of the players in the industry.
Conclusion
Crypto regulation is proving to be more complex and confusing with time. On one hand, legislators are encouraging banks and other financial institutions to participate in the industry. However, in the same breath, legislators are tying the hands of these institutions by introducing legislation that breaches the privacy and rights of their customers.
One thing is certain, any legislation concerning cryptocurrencies will be changed and continue to change in order to adapt to the changes of the crypto industry. As more countries accept cryptocurrencies, these digital assets will become an integral part of the international economic market. It is therefore important for the US to get a head start and institute clear crypto regulations.
