The winds of change were blowing in a clearer direction, and with a distinctly spring-like feeling for U.S. crypto and digital assets regulation in Washington last week.
After months of the industry anticipating decisive action from the Hill, notable bi-partisan progress was made with the Financial Innovation and Technology for the 21st Century Act (FIT21), the U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin 121 (SAB121), and the CBDC Anti-Surveillance Act.
This watershed week marks a new era for the U.S. crypto and digital assets industry in Washington.
Last week’s progress on the Hill is on the back of the SEC bitcoin ETF approvals earlier this year. Blackrock’s bitcoin ETF is the fastest growing ETF in history, demonstrating if anything, the pent-up demand for bitcoin from a trusted brand. The market is now waiting for the final SEC approval of the ETH ETF, expected imminently.
The subsequent release of Blackrock’s digital money market fund on Ethereum and Larry Fink’s very vocal mission to tokenize the financial markets has also captured Washington’s attention.
The U.S. appears now to be rapidly bringing itself in line with other jurisdictions in Europe, the Emirates and Asia to better equip the crypto and digital assets industry to compete globally in the next era of digital financial innovation.
Back to the Future
The Financial Innovation and Technology for the 21st Century Act (FIT21), passed in the House of Representatives last week, was an important show of bi-partisan support for the crypto and digital assets industry.
Commenting on FIT21 in a public statement, House Financial Services Committee chair, Chairman Patrick McHenry (NC-10) said, “FIT21 provides the regulatory clarity and robust consumer protections necessary for the digital asset ecosystem to thrive in the United States. The bill also ensures America leads the financial system of the future and remains a hub for technological innovation.
“The overwhelming support for FIT21 in the House should serve as a wakeup call to the Senate and this Administration. They must come to the table to ensure the Americans who engage with digital assets can do so safely.”
Sheila Warren, ceo of the Crypto Council for Innovation (CCI) says, “FIT 21 is about investor protection, preventing market manipulation, allowing for much needed regulatory clarity, fostering financial inclusion, protecting national security, and much more.
“This vote represents years of tireless effort from policymakers, their staff, and the industry to safeguard consumers and keep the US at the forefront of digital innovation. It’s proof that innovation and consumer protection can coexist in the digital assets space.”
J. Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC) commented, “I welcome this Act, which will provide regulatory clarity, consumer protection, and support both U.S. based innovation and financial inclusion, and I was pleased to see it supported by legislators from across the political aisle.”
Notably, FIT21 will also rein in the SEC’s role in overseeing digital assets while simultaneously expanding the CFTC’s.
Warren adds, “Without FIT 21, the SEC’s regulatory overreach and regulation by enforcement approach will continue and the lack of regulatory clarity will only push responsible actors and innovation overseas instead of allowing the US to lead when it comes to financial innovation.”
Elise Soucie, global director of policy and regulation at Global Digital Finance (GDF) says, “This Act, is similar to the E.U.’s MiCA requirements in providing federal level rules for the U.S. crypto industry.
“It now moves to the Senate, and while there is still much work ahead for both HJ Res 109 and FIT 21, this type of bi-partisan support for crypto and digital assets regulation could spur regulators like the CFTC and SEC to re-evaluate their approaches.”
Too Costly to Custody
SAB121 proposes to direct companies to mark all digital assets as liabilities on their balance sheets. For regulated banks and custodians, the proposal would mean holding a dollar of reserves for every dollar of crypto and digital assets they hold.
This is concerning from an industry perspective as it means risk-based capital is needed to support on-balance sheet assets, essentially making it too costly for the financial services industry to participate in the crypto and digital assets markets and creating an unlevel and uncompetitive playing field for crypto and digital assets in the financial services sector.
Linda Jeng, founder and ceo at Digital Self Labs explains, “SAB 121 is also problematic as the requirement for balance sheet recognition deviates from current accounting treatment for traditional assets held in custody, which are not required to be recorded on a firm’s balance sheet. The bulletin disincentivizes banks and major institutions from providing custodial services for digital assets.”
This matters more than just for the banks, as it will have an impact on fintechs as well, who may need institutional players to bridge gaps with traditional financial markets.
The issue finally saw movement last week in an astonishing show of bi-partisan support when Senate Majority Leader Chuck Schumer joined ten other Democrats in defying Joe Biden and passing HJ Res 109 sending it to the White House for signature or veto.
Despite industry clearly setting out their concerns with the bulletin, the President issued a statement that he would veto HJ Rest 109 which would force a Congressional rollback of SAB121.
Another important piece of legislation also passed the House of Representatives last week. The Central Bank Digital Currency (CBDC) Anti-Surveillance Act moved to the Senate and would prevent the Federal Reserve from issuing a “retail CBDC” and aims to protect the rights to financial privacy of U.S. citizens.
Giancarlo comments, “Without question, the Federal Government should not deploy a U.S. CBDC, at least and until key design elements of privacy, security, distribution, and economic stability are properly understood, democratically addressed and constitutionally aligned, especially in prohibiting unwarranted surveillance.
“The CBDC Anti-Surveillance Act rightfully asserts both the primacy of financial privacy and the essential role of Congress in authorizing a sovereign US digital currency. Yet, in the context of FIT21 which champions innovation, the CBDC Act would appear to prohibit the Federal reserve from not only issuing or offering CBDC services, but also from testing the practicality of issuing a CBDC, including by partnering or coordinating with the private sector.
Jeng agrees, adding “The CBDC Anti-Surveillance Act, although laudable for tackling privacy concerns, could harm US competitiveness as other countries move forward with issuing CBDCs.”
Adds Giancarlo, “This is a striking limit on innovation at a time when the America’s economic adversaries and economic competitors are using CBDC roll outs and the absence of the U.S. from standard setting assemblies to set global protocols for digital currencies that allow for surveillance, censorship and control – exactly what we wish to oppose. I fear an adverse consequence of this legislation is to mute America’s ability to enshrine its enduring virtues of financial freedom and economic liberty in the digital future of money and finance.”
The Road Ahead
While the outcomes of the past week show a productive and reasonably balanced approach has been taken to crupto and digital assets policy and regulation, uncertainty still lingers.
Overall, many in industry will be encouraged to see movement on the Hill after long months of visible stagnation. The work has only begun, there is much more to do. American policymakers may now place trust, albeit only a bit more, in crypto and digital assets.
The public private sector collaboration over the past months has been critical in driving this innovation and legislation forward in the U.S. and many policymakers and their staffers, and industry and trade associations teams across traditional financial services and crypto and digital assets must be applauded.
Industry will continue to work with regulators and policymakers to develop proportionate and comprehensive regulatory frameworks for crypto and digital assets that will support responsible innovation for the benefit of citizens and business in the U.S. and across borderless global digital ecosystems.
© forbes
