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Don't Let the Crypto Circus in Congress Fool You

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


Progress?

Judging from the most eye-catching headlines from two separate hearings on Capitol Hill Wednesday, it’s tempting to conclude there has been little of it from U.S. regulators and legislators in their comprehension of cryptocurrencies these past five years.

In fact, Rep. Brad Sherman’s laughable suggestion during a House Financial Services Committee hearing in the house that the U.S. ban mining and purchases of bitcoin could suggest we’ve gone backward since bitcoin was first discussed in Congress in the fall of 2013.

At that time, the sight of Jennifer Shasky Calvery, then-director of the Financial Crimes Enforcement Network (FinCEN), telling bitcoin exchanges and wallets they needed to register with FinCEN, was ultimately viewed positively by crypto enthusiasts. In showing that regulators like her weren’t inherently hostile to cryptocurrencies, Calvery’s comments led to a doubling in bitcoin’s price over the following two weeks to more than $1,100 in early December.

Now, five years on, some officials do sound a bit hostile.

At the same hearing that Sherman attended, Federal Reserve Chairman Jerome Powell said cryptocurrencies are “great if you’re trying to hide or launder money.” Had he noticed how the FBI had traced the bitcoin transactions of the 12 Russians indicted last week for trying to tamper with U.S. elections?

The folly of his position was indirectly identified over at the other hearing, where Chairman of the House Agriculture Committee Michael Conaway — who presumably did not intend to take a dig at the Fed Chairman — joked, “As long as the stupid criminals keep using bitcoin, it’ll be great.”

It’s best to look beyond the eye-catching headlines, however. In the wider context, it’s clear that we have actually come some way forward in regulatory comprehension of this technology. And that’s a good thing.

The sheer frequency with which governments, both here and in the rest of the world, are engaging on the topic is itself acknowledgment that it’s an important development that’s here to stay. It’s hard to keep track of how many hearings, symposiums, workshops and conferences are either sponsored by governments or attended by their officials. Consider also how dozens of law firms, a community that’s constantly interacting with both regulators and legislators, either have crypto practices or are doing research and education into how the law should deal with this issue.

The folks at Coin Center and others in the crypto space who’ve been engaging with regulators since 2013 remark that non-political staff members from the Securities and Exchange Commission, the Commodity Futures Exchange Commission and various other agencies are now much more comfortable using the language of this industry than back then.

This is the gradual way that change occurs within the creaking bureaucracy of Washington.

The influence of a parallel market

Part of this shifting tide reflects the unavoidable reality of crypto markets, which have grown massively since 2013.

Skeptics who cite a lack of clear real-world applications for cryptocurrencies and blockchain technology fail to see that the trading in bitcoin and tokens they dismiss as hollow speculation represents such an application. It marks a major shift in how money is gathered, exchanged and allocated.

Notwithstanding problems of measurement, the almost $300 billion that CoinMarketCap says is the crypto market’s total market capitalization is a historically significant figure. Even after its correction from a high above $800 billion in early January, the number belies the presence of an emerging, parallel capital market.

Much of that market will get shaken out and hundreds of coins will die, but others will emerge and, amid a mix of earnest offerings, scams, game-changing business models, big dreams and total flops, a unique new, gatekeeper-less market for ideas will arise.

It’s much like the Wild West, perhaps, but the Wild West gave rise to the vibrant, innovative economy of Northern California. Is something similar happening here in a more geography-agnostic way?

And, over time, there has been real human growth, too. Worldwide usage and trading, despite the market correction since January, remain many times larger than they were in 2013. Coinbase and Blockchain.com alone are now running more than 20 million wallets each. There are more than 200 crypto exchanges, where more than $16 billion is changing hands daily in dozens of countries. The dollar amounts are still small compared with the trillions traded in traditional fiat capital markets, but they are by no means insignificant.

These numbers mean that governments are compelled to pay attention to this sector. Powell might be currently saying that crypto markets are too small to threaten financial stability, and therefore for the Fed to regulate them, but he will keep being pestered by lawmakers and their staff, as well as those of other government agencies, for his opinion on them.

Why? Because too many people and too much money is engaged in this industry for anyone in politics and policymaking to ignore.

International competition

Adding to this is the matter of global competition.

Various jurisdictions are taking stances that proactively encourage crypto and blockchain development, in part because they’re eager to attract some of that capital flow and in part because they want to promote innovation.

Singapore, Switzerland, Malta and Bermuda are all emerging as important new domiciles for ICOs. In recognizing concepts such as utility tokens, they are leading what I described two weeks ago as a global policymaker awakening to the innovative possibilities for new forms of economic design and value exchange.

Meanwhile, Japan has encouraged cryptocurrency transactions with some clear and fair regulations around them. And South Korea has just offered new tax perks to blockchain startups.

This is the backdrop to Wednesday’s testimony from former CFTC chairman Gary Gensler – now a lecturer at MIT’s Sloan School of Management and, with me, an advisor to the Digital Currency Initiative at MIT Media Lab – in which he urged legislators to enact clear rules for ICOs and cypto-tokens to instill confidence in the sector and avoid an innovation exodus.

When a respected former regulator says an industry like this matters, it resonates with the Washington crowd.

Yes, it’s baffling that Rep. Sherman and his ilk can still, after all this time, believe it would be a good idea to ban bitcoin, a decentralized, authority-less system for communicating information. Perhaps he was doing the bidding of his campaign donors, the top three of which in 2018 are from traditional finance and payments companies.

In any case, he’s irrelevant to the evolution of this industry. In the end, people like him will be overwhelmed by the many more who get it.

Image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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House Rules Politicians Must Disclose Crypto Investments Above $1K

Members of the House of Representatives, the lower chamber of the U.S. Congress, must begin disclosing cryptocurrency investments that exceed $1,000.

The guidance was laid out in a June 18 memo drafted by the House Ethics Committee. According to the memo, the committee determined that cryptocurrencies are “other forms of securities for purposes of the EIGA (Ethics in Government Act) and financial disclosure with respect to individuals who are subject to financial disclosure requirements and who file their reports with the Clerk of the House.”

It’s a notable determination and one that was issued on the same day that the Office of Government Ethics (OGE) – the ethical watchdog of the federal government – said in its own guidance release that public officials must disclose their crypto-holdings. The House memo was first reported by Bloomberg.

Whether this policy will extend to the Senate, the upper chamber of Congress, remains unclear. A representative for the Senate Ethics Committee was unavailable for comment.

Notably, the document also touches on initial coin offerings (ICOs) or token sales. As it stands, the committee said that “it is unclear which ICOs, if any, may be considered to be ‘the subject of an initial public offering’ for purposes of the IPO prohibition.”

As a result of the STOCK Act, members of Congress are prohibited from taking part in any kind of special-access security offerings that aren’t extended to the general public.

“Accordingly, any House Member, officer, or employee who is considering participating in an ICO is strongly encouraged to contact the Committee for guidance before doing so,” the memo states.

Capitol Hill image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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US Lawmakers Seek Tax Exemption for Bitcoin Transactions Below $600

Two members of the US House of Representatives have filed a bill seeking to create a tax exemption for purchases made with cryptocurrencies.

Back in 2014, the Internal Revenue Service declared that it would consider bitcoin (and other cryptocurrencies) as a kind of property for tax purposes. Any profits made when selling or exchanging a cryptocurrency triggers a capital gains requirement. Yet due to the wording of the IRS decision, that covers any transaction involving bitcoin, including an oft-mentioned purchase of a cup of coffee – essentially meaning that if you bought some bitcoin at $1, and spent it on a $2 cup of coffee, you would owe tax on the difference.

Reps. Jared Polis and David Schweikert, who co-lead the Congressional Blockchain Caucus, are hoping to alleviate some of the issues resulting from that ruling with the Cryptocurrency Tax Fairness Act.

Unveiled today, the measure, if passed, would create a de minimis exemption for cryptocurrency payments below $600 after December 31 of this year. Put more simply, transactions involving a cryptocurrency below that threshold wouldn’t trigger a capital gains liability.

As the text of the bill states:

“Gross income shall not include gain from the sale or exchange of virtual currency for 5 other than cash or cash equivalents….[if the amount of gain excluded from gross income under subsection (a) with respect to a sale or exchange shall not exceed $600.”

In an interview with CoinDesk, Jerry Brito, executive director of the DC-based nonprofit Coin Center – which helped advocate for and organize the bill – compared the move to one taken previously by Congress to create an exemption for purchases made using foreign currency.

“What we have done with this bill is do something very similar, to create a de minimis exemption for small purchases.”

As for the prospects of the bill in a Congress beset by Republican infighting and looming fights over the federal government’s funding and ability to borrow, Brito struck a cautiously optimistic tone, pointing to the ongoing effort to reform the US tax system as aligning with the goals of the new bill.

“This should be unobjectionable to members of the Congress,” he said.

The full text of the bill can be found below:

CTFA by CoinDesk on Scribd

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