Consider This from NPR - A First Step To Crypto Regulation, Or A Step Backwards?

Episode Date: June 8, 2022

Nearly everyone agrees the cryptocurrency industry needs regulation, but there are huge disagreements about what that should look like.A Senate bill proposes a new regulatory framework for the industry. Cosponsors Cynthia Lummis (R-Wyoming) and Kirsten Gillibrand (D-N.Y.) argue that their bill hits the "sweet spot" between allowing innovation and protecting consumers.Software engineer Molly White, who runs the blog Web3 is going just great, says that the bill is too industry-friendly, and puts into legislation the "foggy regulatory space" that crypto companies have taken advantage of. Help NPR improve podcasts by completing a short, anonymous survey at npr.org/podcastsurvey.In participating regions, you'll also hear a local news segment to help you make sense of what's going on in your community.Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Okay, so things change fast in the world of crypto. Let's go back all of seven months ago to November 2021. Bitcoin breaking out to an all-time high on Tuesday as the red-hot asset gains momentum with more investors buying into the rally. Bitcoin surged during the pandemic. So did other cryptocurrencies like Ethereum. And in February, a small army of celebrities packed Super Bowl ads promoting cryptocurrency exchanges from Tom Brady. It's the safest and easiest way to buy and sell crypto.

It's the best way to get in the game. To Matt Damon. Fortune favors the brave. But if you were brave enough to put some skin in the game back in February after those Super Bowl ads, well, at this point, you might be having some regrets. Well, I don't need to tell anyone this, but it's been a rough year for crypto. And in our chart of the day, I just want to walk you through all of the craziness that's been going on in the markets. Over just a couple weeks in May, cryptocurrencies lost more than half a trillion dollars in market value. The most spectacular implosion was a cryptocurrency called TerraUSD. It was a stablecoin, meaning its value was supposed to be pegged to the U.S. dollar through a complicated algorithm.

Instead, it tanked. Today, it is virtually worthless. And that crash reignited calls for new rules to govern a cryptocurrency market that's still something of a wild frontier. And just this week, we've had a real life demonstration of the risks. That's Treasury Secretary Janet Yellen in a congressional hearing in May. She called on Congress to pass comprehensive regulations on stablecoins in particular. And one of the sharpest crypto critics has been the chair of the Securities and Exchange Commission, Gary Gensler, who said the crypto industry is, quote,

rife with fraud, scams and abuse. I mean, these are highly speculative, volatile, and I would dare say often the public is not protected. So after the crash, he asked Congress for more money to devote to his crypto enforcement team, which he said was out-personed. And this week, we saw perhaps the biggest step yet towards new crypto regulation. Two senators unveiled a bill with bipartisan support. One of them is Democrat Kirsten Gillibrand of New York. Basically to create safety and soundness, consumer protection, and transparency and accountability. Consider this. Regulators, consumer advocates, and financial executives are closely following Congress's first steps towards crypto regulation.

We'll hear from the senators trying to push that legislation through, and from a skeptic who calls it a step backward. From NPR, I'm Elsa Chang. It's Wednesday, June 8th. This message comes from WISE, the app for doing things in other currencies. Send, spend, or receive money internationally, and always get the real-time mid-market exchange rate

with no hidden fees. Download the WISE app today, or visit WISE.com. T's and C's apply. It's Consider This from NPR. Now, nearly everyone out there believes the crypto industry needs some sort of regulation. New cryptocurrencies are born by the hour, and along with them, plenty of scams and fraud. The SEC has brought dozens of crypto-related enforcement actions in the past few years, and the industry is currently overseen by a patchwork of federal and state regulations, which haven't always evolved as quickly as technology has.

The collection of technologies around cryptocurrencies is known as Web3. Democratic Senator Kirsten Gillibrand of New York says we can learn a lesson from what happened during the last iteration of the internet, basically Web 2, which was the rise of social media. Congress failed to regulate Web 2. We failed to look at the internet and define what a privacy harm is. We failed to create a regulatory agency over various platforms that are now doing extreme harm to our youth and dividing this country. We are not going to make the same mistake with Web3. So she and Senator Cynthia Lummis, a Republican from Wyoming, introduced a bill this week laying out proposed regulation for the industry. They're both optimistic about the future of crypto. Lummis

says she bought her first Bitcoin back in 2013. And she says now they're trying optimistic about the future of crypto. Lama says she bought her first Bitcoin back in 2013. And she says now they're trying to find the sweet spot when it comes to regulation. So people who are innovating in this space know the rules of the road. And people who are consuming the ultimate products know that the consumer protection elements are there that exist in the regulatory structure for other assets. But at almost the very minute the bill came out, critics started claiming it was too friendly to the crypto industry. Specifically, they zeroed in on the part of the bill that lays out which agency is in charge of policing cryptocurrencies. The bill places the regulatory responsibility over most cryptocurrencies in the hands of the Commodity Futures Trading Commission, or CFTC, instead of in the hands of the much bigger Securities and Exchange Commission, or SEC.

Remember, the SEC is headed by Gary Gensler, That voice you heard at the top who had warned crypto is rife with fraud, scams, and abuse. He is not a favorite of crypto boosters. I asked the senators about that. How do you respond to concerns out there that maybe lawmakers are folding to some industry pressure by placing regulatory power for larger cryptocurrencies, mainly with the CFTC, the smaller agency. So it just makes more sense. It would be inappropriate for the SEC to regulate some of these markets because they don't function like securities. A security is more akin to when a company wants to raise money so that it can fund its company. That's a stock. Chair Gensler has already said, he's

literally said the words that Bitcoin is a commodity because he understands that it's a form of value in the same way that gold is a form of value, in the same way that oil is a form of value, and that it's more appropriately placed under the CFTC. So when you were putting this bill together, did the SEC ask for greater regulatory power than it is currently given in this version of the bill? It's not the SEC or the CFTC's responsibility to ask for power or oversight. It is Congress's job to regulate this industry. That is why Cynthia and I have come together to make the analysis of where is the appropriate regulation. Congress has to write laws.

They have to implement them. I also want to talk about the environmental cost to this industry because blockchain technologies that crypto runs on, I mean, it requires massive amounts of energy to power the computers that make it possible. How does this bill address those environmental concerns? One of the concerns that I share is what is the environmental impact of this industry. And so what we are doing is creating a disclosure mechanism where industry players can disclose what energy they're using, how they're acquiring the energy, and what the environmental impacts are. And so this potentially could be a huge opportunity for renewable energies because different Bitcoin miners that decide to use renewable energies or create a market for renewable energies will be helping us with our energy transition. And so making sure that this disclosure is required, it will create hopefully markets for the renewable energy industry.

But if there are disclosures that reveal that there are substantial environmental costs to certain crypto mining or certain crypto transactions, what happens next? It's just up to the consumer to decide? Absolutely. People who care about supporting renewable energies and care about climate change, they will make their choices based on the information they now will have. Without a regulatory framework, you have no mechanism to get that information. And coming from my state of Wyoming, which is an oil and gas producing state, we have Bitcoin mining equipment being moved right next to flared gas, wasted gas that is being flared into the atmosphere. They can hook right up to it and mine Bitcoin from an asset

that's being wasted and turn it into a useful product. So there are advantages to Bitcoin mining, even within a fossil fuel dominant system. You both have a lot of faith in crypto. You both would like to attract crypto businesses to your states. I'm curious, what is your message to the crypto skeptics out there who have seen the sell off in Bitcoin,, the collapse of Terra, and who are worried that this could be just one massive house of cards? Well, I would simply say that the industry today is the wild, wild west. And so if they want to ever be able to invest in any cryptocurrency or any digital asset or NFTs, that the first thing they'd want to see is that the United States actually regulate the industry. Once you create a framework where the SEC and the CFTC and the IRS and the OOC have jurisdiction over all of these digital assets, you have the framework of our entire banking and financial services and commodities industry, putting the safety and soundness and

the transparency, accountability over the industry. So it will work. That was Democratic Senator Kirsten Gillibrand of New York and Republican Senator Cynthia Lummis of Wyoming. We mentioned the crypto skeptics, and there are a number of technology and finance experts who say that cryptocurrency is a purely speculative asset, one that serves no real purpose. And this month, a group of them wrote a letter to leaders in Congress urging them to, quote, ensure that individuals in the U.S. and elsewhere are not left vulnerable to predatory finance, fraud, and systemic economic risks in the name of technological potential which does not exist. One of the signatories to that letter was Molly White. She's a software engineer who runs the blog Web3 is Going Great, which documents instances of fraud and catastrophe in the crypto universe. She is not a fan of this new bill. I was pretty disappointed to see it. I feel like it is very much what I think the cryptocurrency

industry was hoping to see from regulators, which is, you know, a very limited set of regulations applied to the industry. And she says one of the biggest problems she has with the legislation is that it hands over most of the regulatory power to the CFTC instead of the SEC. The SEC regulates securities, while the CFTC mainly regulates commodities. And White says cryptocurrencies are not like traditional commodities. So the CFTC shouldn't be the main regulatory muscle here. Cryptocurrencies are more like securities because, you know, people broadly put money into them hoping for a return on their investment. And when someone is, you know, engaging with something as an investment, that's a good sign that it

should go to the SEC. Commodities are things like wheat or oil. And, you know, cryptocurrencies have no intrinsic value that would, you know, broadly put them alongside those types of things. But I think the cryptocurrency industry has been resources to the CFTC to handle regulating even the largest cryptocurrencies? How does that sit with you? I think that there would need to be a major change in the amount of resources going to the CFTC for them to suddenly take on this enormous and much broader set of issues than they've dealt with in the past. And the SEC is frankly just more experienced in this field already. Well, in general, they say that this bill, including all the disclosure requirements under it, and this explicit assigning of regulatory responsibility will ultimately help protect consumers. As someone who spends a lot of time

looking into fraud in cryptocurrency, do you agree with that, that it's a step forward? I think that regulatory attention and attention from legislators to cryptocurrency is important. And I'm glad that we're beginning to see some of that. But I think that more than anything, this bill serves to legitimize a lot of the existing openness in the cryptocurrency space and the lack of regulation and the lack of serious consumer protections. And so I don't see it as a strong step forward towards the world that we really do need. Is it a step backwards? I think it is, because I think a lot of cryptocurrency companies have been operating in this sort of foggy regulatory space. And what

this bill is doing really is putting into legislation the fogginess that they have been taking advantage of. The letter to Congress that you signed says the crypto industry is built upon quote, a litany of technological fallacies, and that it creates systemic economic risks and leaves consumers vulnerable to fraud. If that is how you see these products, how should they be regulated? I think what we need really is clarity and transparency to consumers around what they're getting involved in. You know, these projects have been marketed, especially recently, as investments, as a reasonable place for people to put their money that they might otherwise be setting aside for retirement or their children's education. I think what we really need is clarity that this

is a gamble, you know, that if you are putting money into cryptocurrency, you are speculating in an extremely volatile and risky environment. And that there should be no expectation that you receive a return on that quote unquote investment. That was Molly White, who writes the blog Web3 is going great. It's Consider This from NPR. I'm Elsa Chang.