How could the issuance of a US government-backed digital coin impact issues such as monetary policy, crypto regulation, and civil liberties?
NEW YORK — Noting the “complete explosion” in digital currencies, the opening panel of this week’s Digital Currency Forum plunged into an in-depth discussion of the benefits and pitfalls of cryptocurrency and how what governments and regulators can do about its popularity.
The panel, which is part of the two-day Thomson Reuters Institute forum, Manifest Destiny: Risk, opportunity and reward around digital currencies, comes amid high levels of investor excitement around all things crypto. Last year, investors invested a record $9.3 billion in financial products that feature crypto assets, with funds buying Bitcoin or Ethereum accounting for nearly 80% of total investments, data shows. from CoinShares.
“It’s an exciting place,” said David Cass, senior partner at Law & Forensics and co-chair of the conference. That turned out to be an understatement.
The American Digital Coin
Panelist Bradford Newman, partner at Baker & McKenzie and co-chair of the conference, kicked off by suggesting that the US government will eventually mint its own digital coin, which will have big implications for monetary policy, risk and government regulation, and civil liberties.
Newman suggested that if the US government issues its own fiat digital coin, it could dramatically change the way US regulators and policymakers think about digital currencies. “There could be a decision to regulate the disappearance of private rooms and move everyone to the public room,” he added.
Another panelist, Jeff Lewis, Director of Capital Formation at Pantera, pointed out that the creation of an American digital coin could be a good development for the industry as it would encourage the widespread adoption and use of digital currencies, which is lacking in the current environment. “Most people don’t use digital currencies, but if the United States were to bless that with their own digital coin, I think that would serve as a catalyst for people to adopt them.”
What could then happen, according to several panelists, is a kind of global turf war between the governments that create these fiat digital coins and the hundreds of privately created coins, not all of which have the cachet of Bitcoin. (Yes, we see you Dogecoin.) Indeed, large-scale government forays into the digital currency space go to the very DNA of these currencies – the fact that they use blockchain to remain decentralized and anonymous.
Which left more than one panel pondering what has become the billion-dollar question around cryptocurrencies – Is regulation coming, and if so, what will it look like?
Newman said he fears the industry is falling into what has been the common innovation/adoption/regulation cycle of the past, which could hurt the future of the industry. “We have seen how sovereign currencies can crash in a crisis,” he added, noting the situation with Russia’s invasion of Ukraine. “Yet we have seen the good that digital currency can do with the help that people have been able to give to Ukraine through donations that have been transferred through digital currencies.”
Panelist Rayhaneh Sharif-Askary, managing director of investor relations for Grayscale Investments, the world’s largest crypto asset manager, agreed, adding that digital currencies should be promoted as a way to increase financial inclusion. citizens who have been excluded from traditional banking systems. “Not everyone has access to banks,” said “The use of digital currencies allows people to leapfrog the established banking system that may not have served them well.”
The coming regulatory wave
John D’Agostino, Senior Advisor at Coinbase Institutional, said the clear message the industry should send to the US Congress would be one that highlights the function and usefulness of digital currencies as a positive force. “The investor class, especially large institutional investors, are calling for regulation because they want clarity on how these investments will be considered,” D’Agostino explained. Coinbase operates a cryptocurrency exchange platform.
Indeed, in the United States, where a clear federal regulatory plan has been slow to develop, individual states weigh in with their own rules, which has created a patchwork of regulatory regimes. “It shouldn’t take that long,” agreed Lewis of Pantera. “Bitcoin has been around for years. This uncertainty is not helpful.
The second panel, which focused exclusively on the regulatory angle, suggested that a cohesive global approach to digital currencies has some way to go. “Globally, crypto regulation is all over the map,” said Todd Ehret, senior regulatory intelligence expert for Thomson Reuters. “Any future regulation will need to consider all jurisdictions and players, including exchanges – but little by little we are getting there.”
Womble Bond Dickinson partner Britt Biles discussed how digital currency creates an almost existential dilemma for the United States Securities and Exchange Commission, which has been rumored about cryptocurrencies under its jurisdiction. “In the view of the SEC, cryptocurrencies are becoming a major issue for the agency because it believes its overall regulatory regime should be able to adapt to any new technology.”
In short, the SEC believes that with the anti-fraud and anti-manipulation laws already in place, it can regulate this area as part of its current way of doing business. Of course, this raises the crux of the regulatory question – Should cryptocurrency securities, like stocks and bonds, then be regulated by the SEC? A requirement of the SEC to registration for crypto issuers and asset managers to fly in a digital world where anonymity and lack of central control now prevailed?
And what about the famous Howey test, a shortcut cited by the Supreme Court to determine if a product is a title or something else? Would digital currencies – with their lack of an issuer, sponsor, or joint venture in which all investors pool their funds – even qualify as securities?
“I think many cryptos would fail the Howey test,” Ehret said. “But does that mean there has to be a new test for this technology?” As with so much in the world of digital currency, time will tell, but things are changing fast.