As cryptocurrency becomes more popular, some lawmakers are calling for increased regulation of these digital assets. However, the unique aspects of cryptocurrency have even the most supportive industry stakeholders warning that any new rules must be created thoughtfully and with a light touch rather than leaning on existing banking rules.
The use of cryptocurrency, a form of digital currency, has grown rapidly. By the end of 2021, the crypto market nearly surpassed $3 trillion, up from $14 billion five years before. Roughly 16% of Americans also report having invested in, traded or used this type of currency, according to a Pew Research Center survey. Seeing an opportunity to set an example for the world, President Joe Biden issued an executive order this spring that sets a path to overseeing cryptocurrency.
The order asks federal agencies to come up with a plan to regulate digital currency across six priority areas: consumer and investor protection, financial stability, illicit finance, U.S. leadership in the global financial system, financial inclusion and responsible innovation. In a statement, the administration said the rise of digital assets has the potential to reinforce American financial leadership but “also has substantial implications for consumer protection, financial stability, national security and climate risk.” The White House added that the executive order would support innovation “while mitigating the risks for consumers, businesses, the broader financial system and the climate.”
The Biden administration furthered its aim to regulate cryptocurrency in its proposed 2023 budget, which would increase Internal Revenue Service reporting requirements for digital assets. The budget would also change tax laws for crypto traders, allowing the government to generate roughly $11 billion in tax revenue between 2023 and 2032. This came after the Biden administration’s $1 trillion infrastructure bill, passed in fall 2021, that also placed more reporting regulations on cryptocurrency traders. Congress has not passed that budget language.
“Our regulatory frameworks should be designed to support responsible innovation while managing risks, especially those that could disrupt the financial system and economy,” Treasury Secretary Janet Yellen said in April during a speech on digital assets. “As banks and other traditional financial firms become more involved in digital asset markets, regulatory frameworks will need to appropriately reflect the risks of these new activities and new types of intermediaries, such as digital asset exchanges and other digital native intermediaries, should be subject to appropriate forms of oversight.”
While crypto industry leaders are generally in agreement that there needs to be more regulation within the market, many argue that market stakeholders should have a say in developing those regulations.
“We need clear standards and the government’s support to create a new, more secure, more competitive financial system,” Charles Cascarilla, CEO and co-founder of Paxos Trust Co., which provides financial services to crypto firms, said at a House Financial Services Committee hearing in December last year.
Other executives at the hearing also acknowledged a need for greater clarity within the industry — including specific definitions of various components like blockchain tokens — to create appropriate regulations. Others said that consolidating regulatory efforts under one federal agency could be a boon to making the market more secure and stable. The executives also warned against extending existing financial-industry regulations into the crypto market — a move that many banking industry leaders support.
“Ultimately, a level regulatory playing field in digital assets means a simple proposition: offer bank-like services, receive bank-like oversight,” the American Bankers Association said in a statement submitted to the Financial Services Committee before the hearing.
Opponents of that approach, including Sen. Pat Toomey (R-Pa.), argue that that method could hinder the growth of an industry that has been largely driven by consumers. “This technology empowers individuals, and they deserve to have a say in crafting thoughtful legislation,” Toomey said in a statement. “The administration should resist the urge to stretch existing laws in an effort to expand its regulatory authority.”
With no signs that the digital asset market is cooling off, at least in the near future, the issue of how to regulate it is likely to continue, especially if Republicans, who largely oppose regulatory overreach, take control of Congress in November’s midterm elections.
For more background, see the January 2010 issue of Congressional Digest on “Consumer Financial Protection.”
