JEC, ETA explore cryptoassets oversight

In response to escalating cryptocurrency adoption, which has reportedly grown from a market of $200 billion in January 2020 to an estimated $3 trillion in November 2021, the Joint Economic Committee held a Nov. 17, 2021, hearing to explore regulatory approaches to bitcoin and various other cryptocurrencies. Noting that combined digital assets have lost $400 billion in the last seven days, JEC Chair Don Beyer, D-Va., expressed concerns about price volatility.

"The mainstreaming of digital assets is laying the foundation for huge swaths of the economy to invest in this market," JEC Chair Beyer said. "Increased crypto market volatility or a digital bank-run could disrupt more mainstream financial institutions like pension funds or mutual funds. And the underlying assets can create significant consumer protection issues given existing patterns of financial fraud, hacks, and market manipulation."

Balancing innovation, oversight

In a statement released in conjunction with the hearing, the JEC acknowledged the need for modern policies that balance innovation with government oversight, noting the rapid rise of digital assets has exposed gaps in the current regulatory framework.

Alexis Goldstein, director of financial policy at the Open Markets Institute, concurred, urging Congress to protect consumers and investors by addressing existing regulatory gaps. "Congress should ensure there are mechanisms for the regulators to have a complete picture of systemic risk in the space," she said. "Regulators should continue to monitor digital asset markets and ensure compliance with existing regulations."

Kevin Werbach, professor of legal studies and business ethics and director of the Blockchain and Digital Asset Project at the Wharton School, pointed out that regulation and innovation are not always at odds. "In many cases, regulatory action to address abuses and provide clarity to market participants is an important, or even necessary, condition for long-lasting, productive or transformative innovation," he said. "This is not to say that all regulation is well-designed or well-implemented. But we have centuries of evidence that unregulated financial markets produce catastrophic boom-and-bust cycles and severe abuses that undermine their welfare-maximizing potential."

ETA proposes guidelines

In a Nov. 17 letter to the JEC, the Electronic Transactions Association submitted a set of foundational principles designed to drive inclusive policymaking that addresses the needs of a diverse constituency, stated Jodie Kelley, CEO at ETA.

"As policymakers consider new laws and regulations for cryptoassets, they should carefully consider the following principles and ensure that any proposal best serves the needs of consumers and businesses, furthers financial inclusion, preserves and strengthens the financial system, minimizes fraud and money laundering, and ensures that consumers and businesses continue to have access to a robust and innovative array of secure banking and payment options," Kelley wrote, while outlining the following five principles:

1. Properly defining cryptoassets: Creating appropriate, functional definitions of cryptoassets is a critical first step in aligning regulatory requirements with technology, especially because technologies can be deployed in many different ways, constantly creating new use cases.

2. Tailoring regulations to risk participant/activity risk profile: Creating appropriate regulations for cryptoassets is key to unlocking their potential while ensuring safety. Tailoring regulations according to their related risks would ensure safety and financial stability.

3. Ensuring consumer protection: Governing cryptoassets should include a framework of standards and rules that safeguard transaction privacy and security by reducing fraud and protecting consumers' interests, both in person and online. Policymakers should also explain how those protections may differ from those offered by other payment methods.

4. Harmonizing with existing regulatory frameworks: New laws or regulations governing cryptoassets should complement, and not conflict with, the payments industry's established, robust, regulatory framework. This framework includes federal and state laws relevant to anti-money laundering, economic sanctions, and other anti-fraud and consumer protection requirements.

5. Encouraging Responsible Innovation: Continual investment in innovation is at the heart of past, present, and future improvements to the financial ecosystem. Accordingly, any regulation of cryptoassets should consider the technology's promise to improve existing capabilities while serving as a catalyst and platform for continued innovation.

Kelley concluded by stating the ETA looks forward to participating in further discussions with the JEC about cryptoassets while helping policymakers craft meaningful regulations that drive financial inclusion and economic well-being.

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