Congress Looks Beyond Cryptocurrency Risks to Consider Economic Benefits

WASHINGTON — Financial experts told a congressional subcommittee Wednesday that cryptocurrency is ready to be incorporated into traditional markets and industries through pending federal legislation.

If the proposals to expand use of cryptocurrency are approved by Congress, it could become a cornerstone of transactions for real estate, the stock market, international trade and other industries.

“We need to ensure our regulators are welcoming this kind of innovation to modernize our markets,” said Rep. French Hill, R-Ark.

Currently, the greatest use of Bitcoin, Ethereum and other cryptocurrencies is for trading these forms of digital money before finally converting them to cash.

Traditional currencies, such as American dollars, have value because they are backed up by the combined assets of the U.S. government.

Cryptocurrencies have value only because persons who own and trade them agree they should have value. Ownership is recorded on databases known as blockchains.

“We already live in a digital world, so we should embrace blockchain as a tool to provide for more digital capabilities,” Lilya Tessler, an attorney for the law firm of Sidley Austin LLP who advises clients on cryptocurrencies, said at the congressional hearing.

Proposals in Congress would allow payment of major transactions through cryptocurrencies, thereby giving them some of the equity they lack now. 

Equity refers to an ownership interest in property, which in the case of cryptocurrency transactions could refer to the property exchanged, just like with traditional currencies.

In addition, the cryptocurrencies could be “tokenized,” which refers to assigning them value on digital ledgers of financial institutions. The value assignment would give them legitimacy similar to a traditional currency.

A primary concern during the House Financial Services subcommittee hearing was the lack of regulatory control that could disrupt markets and economies if cryptocurrencies fall victim to fraud or money laundering.

The technology “suffers from significant governance and operational fragilities,” said Hilary Allen, an American University law professor.

Large cryptocurrency transactions reaching into millions of dollars could be done quickly between private entities while bypassing the need for fees and additional time to process them through banks. 

Although the transactions would be a more efficient way of doing business, they “also allow for anonymity that can facilitate money laundering and sanctions evasion,” Allen said.

In addition, the volatility of cryptocurrency markets would make it difficult to assess whether buyers and sellers are getting the proper value for their money. The result could be significant financial losses, the financial experts said.

Most lawmakers on the Subcommittee on Digital Assets, Financial Technology, and Inclusion said the benefits for the U.S. economy outweigh the risks.

“This technology has the opportunity to truly advance our financial markets,” said Rep. Wiley Nickel, D-N.C.

The subcommittee played a significant role in winning House approval last month of the Financial Innovation and Technology for the 21st Century Act. It would classify cryptocurrencies and other digital assets as commodities regulated by the Commodity Futures Trading Commission, assuming they are “decentralized.”

Decentralized means transactions are processed through computer systems but not banks or other financial institutions.

If they are not decentralized, they would be considered securities regulated by the Securities and Exchange Commission.

FIT 21 awaits Senate action. Other bills that seek to legitimize cryptocurrency transactions are pending.

Nearly all of them come with warnings from the Securities and Exchange Commission.

“The crypto industry’s record of failures, frauds, and bankruptcies is not because we don’t have rules or because the rules are unclear,” SEC Chairman Gary Gensler said before the House vote on FIT 21. “It’s because many players in the crypto industry don’t play by the rules.”  

He recommended that Congress “protect the investing public” rather than making “facilitating business models” with cryptocurrencies a top priority.

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