Taking a Hard Look at Crypto
Newly minted NYSBA President Sherry Levin Wallach has announced the formation of a cutting-edge Task Force on Emerging Digital Finance and Currency. The task force is charged with studying and evaluating the legal issues and questions surrounding the expansion and regulation of the digital finance and digital currency industries in New York State. Included in its review will be an examination of current and pending laws and regulations impacting the industry. There are many questions raised in this new area of law including the proper role for government.
Let’s start with clearing up a common confusion between the words bitcoin and blockchain. Bitcoin is a digital token or currency that can be sent electronically from one person to another. Blockchain is the decentralized database where digital information is stored. Cryptocurrency, or crypto, as it is often called, is a term to describe the thousands of virtual currencies, in addition to bitcoin, including ether and dogecoin. Stablecoins are a type of cryptocurrency which, unlike bitcoin, is tied to another currency, like the dollar, or a commodity, like gold.
Who in government is looking at this new technology? The Federal Reserve is considering issuing a central bank digital currency, or CBDC. Treasury Secretary Janet Yellen said at a May congressional hearing on stablecoins that a comprehensive regulatory framework established by federal legislation is needed so that “there are no gaps in the regulation.” The Securities and Exchange Commission and the Commodity Futures Trading Commission are divided over broader jurisdictional questions and the nature of these new currencies, with the SEC arguing its stricter investor protection rules should apply. President Biden waded into the regulation question in March when he issued an executive order to create a coordinated oversight plan for crypto. Far from being an explicit plan, it is instead a charge for federal agencies, including the Department of Justice, to research a variety of issues including creating a digital U.S. dollar, providing consumer protection, prosecuting crypto crimes and establishing financial stability. Will one agency ultimately have oversight of this industry, or will it continue to be governed by an alphabet soup of federal agencies resulting in jurisdictional turf wars?
Congress is also looking at the myriad crypto public policy issues impacting this $2 trillion market. Several bills have been introduced by tech-savvy representatives and senators, and a few high-profile hearings have elevated the issue in Washington. As of the writing of this article, crypto enthusiasts were awaiting a draft bill by Sen. Cynthia Lummis of Wyoming, home to a robust crypto industry. New York Sen. Kirsten Gillibrand is an early supporter of the measure. The bill is expected to include provisions to determine the nature of a crypto product. Is it a security or a commodity? The answer will determine if it is regulated by the SEC or the Commodity Futures Trading Commission. It is also expected to address consumer protections, taxation and a framework for stablecoins. If this bill becomes the vehicle for all crypto legislative issues, other pending related bills may be folded into this measure.
To fill the void in regulation at the federal level, crypto companies have set their sights on the states to enact legislation. This seems an atypical move. Usually, if an industry desires regulation, the industry pursues it at the federal level rather than the state level, preferring a uniform national standard rather than a patchwork of state regulation. According to the National Conference of State Legislatures, there are 153 proposed laws pending in 40 states and Puerto Rico.
While many support crypto-friendly bills, believing a favorable regulatory environment will bring jobs to a state, not all legislation is beneficial to the industry. In New York, where the electorate and the elected are generally eco-friendly, there is a growing concern about the impact of the crypto industry to the environment. For example, crypto mining is a process that is essential for the functioning of trading in cryptocurrencies. The act of “mining” does not involve drills, subterranean caves or canaries, but rather is the process of creating and verifying currency creation. The amount of energy required for these processes is not insignificant. One estimate puts the amount of energy necessary for a single bitcoin transaction at 2,000 kilowatt-hours of electricity, or enough energy to power the average American household for 73 days. While the number of daily bitcoin transactions varies from day to day, during the last week in May 2022, the daily average was around 210,000.
This amount of energy usage puts a strain on the local energy plant and can cause an increase in rates for residents. In response, legislation to limit this nascent industry has been introduced in the state Legislature. Additionally, at the time of the writing of this article, there were over a dozen crypto-related bills pending in the Legislature on topics such as fraud, payments, investments and state-issued cryptocurrency.
So who is utilizing this new technology for payments in the United States? New York City Mayor Eric Adams has been an outspoken advocate for cryptocurrency. He has made good on his campaign promise to receive his first three paychecks as mayor in crypto – specifically bitcoin and ethereum. Consumers in the luxury space can now use digital currencies to purchase watches from the Swiss luxury maker Tag Heuer, which is owned by international conglomerate LVMH. Will others follow suit? Perhaps additional companies under LVMH’s luxury umbrella will begin to accept this form of payment. Will crypto payments be democratized and accepted by more mainstream mass retailers in the U.S.?
When could we see new regulations for this trillion-dollar industry that so few engage in or even understand? Biden’s executive order set deadlines for agencies to comply, and first actions could be released by this summer with the rest in 2023.After the midterm elections, the House and Senate could flip to a Republican majority. Crypto-currency is not a strictly partisan issue, so it is unclear how a switch in party control could impact legislation. But what will most likely remain is a body of elected representatives who have limited understanding of these new cutting-edge financial instruments. They will continue to look to the leadership of their colleagues who are well-versed in these issues, as well as to industry leaders for guidance and input.
A final thought to keep in mind when considering a timeline for action is: what happens if there is a catastrophe? There is a popular old Washington phrase: legislating by crisis. The idea is that legislation is often enacted in the wake of a crisis – particularly a high-profile crisis – rather than after careful deliberation. If there is some financial crisis that is linked to crypto, which results in a harm to elected official’s constituents, I would not be surprised to see a bill signed into law very quickly. We should be wary of this process because sometimes haste results in bills with unintended consequences – the implications of which can be felt for years and even decades.