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 the area of digital currencies, the opening panel of this week’s digital currency forum dove deep into a wide-ranging discussion of the benefits and pitfalls of cryptocurrency and what governments and regulators may do in the face of its popularity.
The panel, part of the Thomson Reuters Institute’s two-day forum, Manifest Destiny: Risk, Opportunity & Reward Around Digital Currencies, comes amid high levels of investor excitement around anything crypto. Last year, investors poured a record $9.3 billion into financial products that feature crypto assets, with funds that buy either Bitcoin or Ethereum representing almost 80% of total investments, according to data from CoinShares.
“It’s an exciting place to be,” said David Cass, Senior Partner at Law & Forensics and conference co-chair. This proved to be an understatement.
The US digital coin
Panelist Bradford Newman, a Partner at Baker & McKenzie and co-chair of the conference, kicked things off by suggesting that the US government eventually will mint its own digital coin, which will have big implications for government monetary policy, risk and regulation, and civil liberties.
Newman suggested that should the US government issues its own fiat digital coin, it could dramatically alter the way US regulators and policy makers look at digital currencies. “There could be a move to regulate private coins out of existence and move everyone to the public coin,” he added.
Another panelist, Jeff Lewis, Director of Capital Formation at Pantera, pointed out that the creation of a US digital coin could be a good development for the industry because it would encourage large-scale adoption and use of digital currencies, something that is missing in the current environment. “Most people do not use digital currencies, but if the US were to bless this with its own digital coin, I think it would serve as a catalyst for people to adopt them.”
What could happen then, several panelists argued, is a global turf war of sorts between governments that create these fiat digital coins and the hundreds of privately created coins, not all of which has the caché of Bitcoin. (Yes, we see you Dogecoin.) Indeed, large-scale government forays into the digital currency space goes to the very DNA of such 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 worries that the industry could fall into what has been the common innovation/adoption/regulation cycle of the past, and that could be damaging to the future of the industry. “We’ve seen how sovereign currencies can break down in a crisis,” he added, noting the situation with Russia’s invasion of Ukraine. “Yet, we’ve seen the good that digital currency can do with the help people were able to provide to Ukraine through donations that were transferred by digital currencies.”
Panelist Rayhaneh Sharif-Askary, Managing Director in 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 for citizens who have been left out of traditional banking systems. “Not everyone has access to banks,” said “Using digital currencies allows people to leapfrog over the incumbent 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 be sending to the US Congress would be one that highlights digital currencies’ function and utility as a positive force. “The investor class, especially large institutional investors, are crying out for regulation because they want clarity into how these investments will be regarded,” D’Agostino explained. Coinbase operates a cryptocurrency exchange platform.
Indeed, in the US, where a clear federal regulatory plan has been slow to develop, individual states are weighing in with their own rules, which has created a patchwork of regulatory schemes. “It shouldn’t take this long,” Pantera’s Lewis agreed. “Bitcoin has been around for years. This uncertainty is not helpful.”
The second panel, which focused exclusively on the regulatory angle, suggested that a consistent global approach to digital currencies had some distance to go. “Globally, crypto regulation is all over the map,” said Todd Ehret, Senior Regulatory Intelligence Expert for Thomson Reuters. “Any future regulation will have to consider all jurisdictions and players, including the exchanges — but inch by inch, we’re getting there.”
Panelist Britt Biles, Partner at Womble Bond Dickinson, explained how digital currency creates an almost existential dilemma for the US Securities and Exchange Commission, which has made rumbles about cryptocurrencies falling under its purview. “In the SEC’s view, cryptocurrencies become a major issue for the agency because it feels that its overall regulatory regime should be able to fit any new technology.”
In short, the SEC feels that with anti-fraud and anti-manipulation laws already on the books, they can regulate this area under its current way of doing business. Of course, this brings up the crux of the regulatory matter — Are cryptocurrencies securities, likes stocks and bonds, that then should be regulated by the SEC? Would an SEC requirement of registration for crypto-issuers and asset managers fly in a digital world were anonymity and lack of central control now hold sway?
And what about the famed Howey Test, a Supreme Court-cited shorthand to determine if a product is a security or something else? Would digital currencies — with their lack of issuer, promoter, or common enterprise in which all investors are pooling their funds — even be considered securities?
“I think many cryptos would fail the Howey Test,” Ehret said. “But does that mean there needs to be a new test for this technology?” Like with so much in the digital currency world, time will tell, but things are moving fast.
