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Brookings Panelists Debate the Future of Crypto

Some crypto skeptics say that regulating the digital coin is a mistake since it would provide legitimacy to the industry.

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Screenshot of Peter Conti-Brown, professor at the Wharton School at the University of Pennsylvania

December 20, 2022 – Academics discussed the potential usefulness of crypto-related technologies and how they should be regulated at a web event hosted Tuesday by The Brookings Institution.

The prices of digital assets have fluctuated wildly in the last year, driving calls for the institution of a crypto-specific regulatory framework. The price of Bitcoin, for instance, plummeted from $64,400 in November 2021 to less than $17,000 early Tuesday afternoon. The downfall of prominent Crypto exchange FTX, allegedly due to massive fraud, has provided further rhetorical fodder to would-be regulators.

Some crypto skeptics say that regulating crypto is a mistake, however, since it would provide legitimacy to the industry. “Legitimizing [crypto] is simply going to drain creative resources from productive activities,” argued Stephen Cecchetti, Rosen Family Chair in International Finance at the Brandeis International Business School. “In economic terms, this would be like subsidizing a dead-weight loss.”

Cecchetti argued that a new regulatory regime would push crypto into the traditional financial world. “Imagine where we would be if leveraged financial intermediaries had been holding crypto in November of 2021, before the plunge in value,” Cecchetti. “So if we need any new rules, they’re rules to prohibit exposure of traditional leveraged intermediaries – prohibit banks, dealers, insurers, pension funds ­– from holding this stuff and from accepting it as collateral.”

Peter Conti-Brown, professor at the Wharton School at the University of Pennsylvania and nonresident fellow at The Brookings Institution, argued that crypto, even without a dedicated regulatory framework, has already been established a significant foothold. Policymakers should clarify how crypto assets fit into existing regulatory structures, Conti-Brown argued. Due to similarities of various types of crypto to elements of traditional finance, he said, the absence of crypto regulation is a “declaration of a prosecutorial non-enforcement of existing laws.”

Regulators should make clear that “if you’re going to act and smell and quack like a bank, you need to charter, and if you’re going to hawk securities, you need to register,” Conti-Brown argued later in the conversation.

Crypto: Useful or useless?

While crypto’s biggest proponents argue that it, along with its underlying technology, blockchain, are revolutionary innovations, many don’t agree. At a recent Senate hearing held Wednesday on the FTX collapse, a law professor from the American University Washington College of Law advocated banning crypto outright. One senator advocated instituting a “pause” on crypto at a hearing held two weeks prior.

Cecchetti voice skepticism as well. “I don’t think crypto is the future of anything” he said, adding that it is, in his opinion, “utterly without redeeming social value.”

Conti-Brown said some crypto-related innovations may prove useful. He further argued that the very possibility of blockchain-driven innovations threatens incumbent industry – e.g., traditional financial technology firms – and will likely drive innovation.

“Every major payments player is…following blockchain developments, and thinking about where this might represent both opportunity and challenge,” Conti-Brown said. Crypto solutions may be “inchoate, (but) are not non sequiturs,” he added.

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Cryptocurrency Has Promise But ‘Screams for Regulation,’ Says Miami Mayor Francis Suarez

The mayor has been an enthusiastic proponent of MiamiCoin, a privately-owned cryptocurrency.

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Screenshot of Francis Suarez, mayor of the City of Miami, at the Wilson Center event

WASHINGTON, January 19, 2023 — Embracing emerging technologies such as cryptocurrency will have long-term benefits for the general public, but the industry needs much stronger regulation, City of Miami Mayor Francis Suarez said at an event hosted Tuesday by the Wilson Center.

Suarez, who is president of the U.S. Conference of Mayors, spoke in advance of the mayors’ 91st annual meeting from Tuesday until this Friday.

Suarez has long been an advocate for cryptocurrency adoption; after winning reelection in 2021, he announced that his own salary would be paid in bitcoin. He has also been an enthusiastic proponent of MiamiCoin, a privately-owned cryptocurrency meant to benefit the city — even after the currency’s value dropped by more than 95 percent.

However, when discussing the recent collapse of crypto exchange FTX, Suarez acknowledged that the technology “screams for regulation.” U.S. legislation tends to be reactive instead of proactive, but the latter approach might have been able to stop the FTX crash, he added.

“I think there should have been regulation on what some of these custodial entities could do with custody assets,” he said. “They’re like banks — the kind of assets that they had were enormous — and what they were doing when you when you peel back the layers of the onion is frightening… there’s a reason why some level of regulation exists already in the banking industry.”

Suarez said that the first step for lawmakers taking on cryptocurrency regulation should be to recognize the significance of the technology. Issues such as the national debt ceiling and rate of inflation demonstrate the value of having currency “outside of the mainstream fiat system,” he said.

In addition to cryptocurrency, Suarez expressed his opinion on a variety of other timely technology issues.

“I think AI is going to be our generation’s arms race,” he said, noting the growing potential for cyberwarfare as weapons systems come to rely on encrypted technology.

Suarez also discussed the impacts that an increasingly digital world may have on childhood development. “My daughter one shocked me when she was two years old — she’s four now — by taking a pretend selfie with her pacifier of me,” he said. “And I was like, wow, this is really crazy.”

Despite having initial concerns about technology’s impact on children, Suarez said that watching his own children’s online interactions had assuaged his fears.

“I’m actually going to take it a step further — I’m starting to see socialization opportunities… they’re actually virtually online with a friend, and they’re playing and talking and socializing,” he said.

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CES 2023: Crypto Protects Privacy and Civil Liberties

The ability to coordinate outside of government control could be a massive boon for oppressed or dissident groups.

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Photo of Kurt Opsahl, Mike Wawszczak, Anna Stone, and Sandy Carter (left to right)

LAS VEGAS, January 5, 2023 – Despite the crypto industry’s recent stumbles, a panel of experts at the Consumer Electronics Show remained bullish on its potential – as well as that of its underlying technology, the blockchain – to protect individuals’ data privacy and civil liberties.

Many blockchains, although residing in the digital world, largely fall into the category of “public goods,” which traditionally includes shared infrastructure such as roads, argued Anna Stone, director of impact at eToro. Stone cited the Ethereum network, which is open source and allows many individuals to build on it. “What makes Ethereum exist is not any one company that’s doing anything, it’s actually that there are thousands of different contributors,” she said. 

Mike Wawszczak, general counsel at Alliance, argued that the traditional funders of public goods – governments – make serious mistakes that stem from being insulated from market forces. “[Crypto] offers an alternative method of managing and governing these protocols – that we’re only now starting to see massive amounts of experimentation in – might not be subject to the same failure[s]…that we see in states,” Wawszczak said.

Later in the panel, Wawszczak argued that decentralized autonomous organizations empower individuals and communities to further and protect their own interests, even in opposition to state authority. “If you can imagine a lot of the more disparate groups that exist around particular social-justice causes or identity groups that are far flung or spread out, but now they have a new means of coordinating their behiavior and of generating economic wealth,” Wawszczak explained. He argued that the ability to coordinate outside of government control could be a massive boon for oppressed or dissident groups.

Panelists further said blockchain technologies can ensure that consumers maintain control over their own data. “Giving [users] that choice…to pick a place that is built and verifiable to be secure, to be private, to be a place that fits with their values, that can really enhance things for the users,” said Kurt Opsahl, general counsel at the Electronic Frontier Foundation.

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GOP Senator Pushes Back Against Crypto Skeptics, Calls for Consumer Protections

Toomey advocated instituting consumer protections and disclosure requirements in the crypto industry.

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Screenshot of Sen. Pat Toomey, R-Penn.

WASHINGTON, December 14, 2022 – As legislators’ animosity toward digital assets builds following the FTX meltdown, Sen. Pat Toomey, R-Penn., on Wednesday defended the industry during a Senate Banking Committee hearing.

FTX, until recently a highly regarded crypto exchange, suffered an acute liquidity crisis and subsequently filed for bankruptcy in November. The crunch was triggered by reports that the FTX-linked investment firm, Alameda Research, relied heavily on FTX’s in-house token, FTT.

Since the collapse, intense scrutiny has revealed that FTX improperly financed Alameda’s ventures with billions of customers’ investment dollars. Bahaman authorities arrested FTX founder and former-CEO Sam Bankman-Fried on Monday, and he may face extradition to the United States.

Toomey, the committee’s ranking member, rejected proposals to “pause” cryptocurrency trading until a comprehensive regulatory scheme becomes law or eschew regulating of digital assets entirely to prevent their further legitimization. Toomey advocated instituting consumer protections and disclosure requirements that would still allow for healthy innovation in the crypto industry.

“With FTX, the problem is not the instruments that were used (digital assets), the problem was the misuse of customer funds, gross mismanagement, and likely illegal behavior,” Toomey said.

“The 2008 financial crisis involved obvious misuse of products related to mortgages,” Toomey analogized. “Did we decide to ban mortgages? Of course not.”

While several senators decried the losses the FTX collapse inflected on investors, Sen. Elizabeth Warren, D-Mass., raised concerns that cryptocurrency is a favorite tool of terrorists, rogue states, and other nefarious actors. With Roger Marshall, R-Kan., Warren on Wednesday sponsored a bill that would target money laundering in the crypto space.

Jennifer Schulp, director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives and a witness at the hearing, told Broadband Breakfast that Warren ignored the small relative scale of crypto-related money laundering. Illicit activity accounts for only 0.15 percent of crypto transaction volume, Schulp said.

Hearing witnesses clash on banks and crypto

Testifying before the committee, Hilary J. Allen, professor at the American University Washington College of Law, advocated banning crypto outright. In lieu of such a ban, she urged policymakers to bar banks from investing in crypto, which, she said, would protect the traditional financial system from crypto’s volatility. “We have little to lose from limiting the growth of the crypto industry,” Allen argued, labeling blockchain technology “not very good.”

Kevin O’Leary, an investor of Shark Tank fame, later told the committee that preventing banks from holding crypto could cripple American financial institutions. If such a ban were enacted, O’Leary said, “As an investor, I would short every American bank stock because it would make it the most uncompetitive financial services sector in the world.”

Sam Bankman-Fried indicted, new CEO testifies

The U.S. attorney’s office for the Southern District of New York filed an indictment, unsealed Tuesday, charging Bankman-Fried with eight counts of fraud. The Securities and Exchange Commission and the Commodity Futures Trading Commission on Tuesday filed suits against the FTX founder as well.

FTX’s new CEO, John J. Ray III, appeared before the House Financial Services Committee on Tuesday for a hearing at which Bankman-Fried was scheduled to testify before his arrest. 

“This is really just old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose,” Ray testified. “Sophisticated, perhaps, in the way they were able to sort of hide it from people, frankly, right in front of their eyes.”

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