Most agree that cryptocurrencies need a new regulatory structure, but advocates stand against the tide of government critics—saying the structure has the potential to be useful if it is regulated responsibly.
- David Zell is the co-executive director of the Bitcoin Policy Institute and co-authored a June 2022 congressional letter encouraging responsible Bitcoin policy.
- Speaking with Leaders Media, he says Bitcoin has more benefits than risks and that the SEC needs to provide a more transparent regulatory framework.
- Bitcoin has become a more popular investment tool in the U.S. However, its future as an investment is clouded by regulatory uncertainty, given that the SEC may change its policy.
- This uncertainty has pushed many crypto exchanges to set up outside the U.S. in countries like The Bahamas, an essential signal to policymakers that the industry can’t operate within the current regulatory framework.
- Zell recommends that individual currencies be regulated on a case-by-case basis, but a clear structure from the SEC is necessary.
Why It’s Important
The federal government’s crypto crackdown has been coming for a long time following the precipitous collapses of Terraform Labs, Celsius, Voyager, Three Arrows Capital, and FTX added urgency to the reaction. However, the critique of crypto goes back further than FTX’s cataclysmic collapse.
In the past few months, the White House, the Department of Justice, the SEC, the Federal Reserve, and Congress have all advocated cracking down on crypto. Most recently, the Securities and Exchange Commission (SEC) began filing lawsuits on the ground that crypto counted as a security, when its stance on whether individual currencies qualify as commodities or securities has been vague.
Bitcoin was launched in 2009 and started to popularize after 2012. Its critics have laid numerous criticisms against the currency in the decade since—namely, it is highly damaging to the environment due to the amount of energy Bitcoin mining draws and is tied very closely to money laundering and crime.
The World Economic Forum (WEF) reports that the global energy usage of crypto miners was more significant than the individual power consumption of 159 nations and offsets clean energy gains. Forbes claims that “more than half of all reported [crypto] trading volume is likely to be fake” or otherwise illegal or fraudulent. Bitcoin first came to notoriety due to the rise of Silk Road, a dark-web drug-trafficking website taken down in 2013 that only accepted payments in crypto.
In Defense of Bitcoin
Zell notes that critiques of Bitcoin are generally accurate but overstated and that many of the more catastrophizing arguments from the WEF against crypto have circled through Washington, D.C., without much scrutiny or consideration. These critiques overlook the stated benefits of Bitcoin and exaggerate the environmental impact of Bitcoin mining, according to advocates. He expects “ESG-style” attacks on Bitcoin will continue to mount over the coming months as the federal government lays out its critique.
“The term ‘digital asset’ is so broad. Since Bitcoin was invented, 13,000 to 16,000 cryptocurrencies have been created, and the majority have lost most of their value. The overwhelming majority have been blatant Ponzi schemes. When we talk about policy, it’s hard to talk about Bitcoin and Dogecoin similarly. They’re so different. The message we at the Bitcoin Policy Institute prioritize is reinforcing the notion that Bitcoin is different than most cryptocurrencies. Its benefits outweigh its risks, more so than most of crypto,” says Zell.
Zell notes that a growing bipartisan consensus in favor of Bitcoin and crypto has increased in the nation’s capital. Center-right organizations in D.C., like the Club for Growth, the Cato Institute, and the Heritage Foundation, are opposing anti-crypto policies and seeing some support from left-of-center groups worried about privacy and freedom.
He says there are many uses for Bitcoin that have ethical and even humanitarian uses. As he notes in his congressional letter, it is used worldwide in countries with unstable currencies or oppressive cultures as a way of protecting people’s money, problems that Western countries without military dictatorships, extreme corruption, and hyperinflation cannot fully appreciate.
Securities vs. Commodities
“There’s a broad consensus among market participants and advocacy groups that the SEC has done a poor job resolving uncertainty and providing regulatory clarity. We’ve seen SEC Chair Gary Genslers’s attitude in interviews telling crypto companies to register without providing a way for companies that don’t know if they’re securities or commodities and the government won’t tell them. That’s a bad environment generally,” says Zell.
The Bitcoin Policy Institute isn’t advocating that all cryptocurrencies be regulated similarly. As Zell notes, many currencies, like Ethereum, have a top-down organizational structure and could qualify them as securities. Bitcoin, being fully decentralized with no controlling organizational structures, more readily qualifies as a commodity. Thus far, it has been very vague as to whether the SEC ought to concern various currencies as securities of commodities and regulate them respectively as such.
“Much of the debate surrounds the Howey Test,” referring to the Supreme Court’s standard for determining if an item counts as a security based on whether it qualifies as an investment contract, “there’s so much back and forth about individual tokens and if they pass the Howey Test, but I assume a large amount of crypto do qualify as securities,” says Zell.
“It speaks to the utility of these rules in the modern day that we’re using 70-year-old court cases to determine the fate of these new businesses and tokens. The regulatory framework is insufficient to meet the needs of entirely new business models. ”