WASHINGTON, D. C. – More than 10 months after the high-profile collapse of the FTX cryptocurrency exchange, Senate Banking Housing and Urban Affairs Committee chair Sherrod Brown is weighing how to regulate cryptocurrency and prevent future fiascos.
“I’m still listening, because there’s no real agreement in the country, or in the Congress, or in either party, on how we address crypto,” the Cleveland Democrat told reporters last week. “Too many people have been scammed by it. We’re very concerned about it.”
While Brown weighs the pros and cons, the blockchain industry is lobbying for regulations, including a campaign to stress the technology’s importance to Ohioans. They note that more than 1 million Ohioans own cryptocurrency and say the industry could produce jobs in the state.
Brown has held multiple hearings on the risks cryptocurrencies present to consumers, including a hearing on the FTX collapse and a hearing on fraud and scams in the crypto and securities markets. At a Tuesday hearing with Securities and Exchange Commission Chair Gary Gensler, Brown said “the problems we saw at FTX are everywhere in crypto – the failure to provide real disclosure, the conflicts of interest, the risky bets with customer money that was supposed to be safe.
“FTX was just the biggest and the ugliest,” Brown continued. “For consumers, it adds up to billions of dollars gone. Meanwhile, bad actors keep flocking to crypto. They use it to launder money, evade sanctions, fund crime and human trafficking and terrorism. We need to protect workers and families in these markets and clean up the scams and frauds.”
Gensler told him that there’s “significant noncompliance” among crypto companies with investor protections built into current laws.
“It is a field that is rife with fraud, abuse and misconduct,” Gensler said.
Cryptocurrencies are not backed by governments, banks or other institutions. Their ownership is tracked through decentralized computer networks based on blockchain technology. There are thousands of different types of cryptocurrency, and their values can fluctuate dramatically. Hackers have stolen billions of dollars in the digital funds.
Previously valued at $32 billion, FTX was forced to file for bankruptcy after a run on deposits left it with an $8 billion shortfall, causing huge losses for investors who trusted the exchange with their money. The run was triggered by a report that questioned the stability of an affiliated company, Alameda Research, whose finances are entwined with FTX.
The cryptocurrency exchange’s founder, Sam Bankman-Fried, is scheduled to stand trial next month on charges that he stole billions of dollars from FTX customers to offset losses at Alameda Research.
When FTX collapsed last November, Brown pledged to pursue cryptocurrency legislation “to protect consumers and the stability of the U.S. markets and banking system.” As he’s examined what to do, the Republican-controlled House of Representatives has moved forward with its own legislation.
In the next few weeks, the House of Representatives is expected to vote on legislation called the Financial Innovation and Technology for the 21st Century Act that was approved in July by the House Financial Services and Agriculture committees.
That bill’s backers say it would close regulatory gaps between the jurisdictions of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prevent uncertainty in digital asset markets, protect consumers and allow blockchain technology to flourish in the United States instead moving to other countries.
The bill is endorsed by Blockchain Association CEO Kristin Smith, who said its approval by House committees “demonstrates that Congress, not overzealous regulators, have the responsibility to craft U.S. policy on digital asset regulation.”
An analysis of federal cryptocurrency lobbying data by OpenSecrets, a non-profit group that tracks money in politics, found the cryptocurrency industry’s spending has increased dramatically in recent years, from $2.5 million in 2020, to $8.3 million in 2021, to $21.6 million in 2022. It found the Blockchain Association spent $1.9 million on lobbying last year.
One of the bill’s most vocal advocates is U.S. Rep. Warren Davidson, a Miami County Republican who serves as vice-chair of the Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion. During a hearing on the issue, he said the committee’s goal was to “provide a clear legal framework for the entire country so that no one state can game the system or frankly so that people aren’t driven offshore out of our capital markets and our regulatory framework.”
“The status quo is not solving problems, it’s not serving people, and it’s leaving America weaker by the day for failing to provide clarity in the digital assets market,” said a statement Davidson released on the bill. “We now have the opportunity to harness and embrace this next generation of technology in the United States.”
Although several Democrats on the committee backed the proposal, it was panned by the committee’s top Democrat, California’s Maxine Waters. She said it heeded calls from the crypto industry while disregarding the views of the Biden Administration, the SEC, and consumer and investor advocates.
“We don’t need to invent new regulatory structures simply because crypto companies refuse to follow rules of the road,” Waters said. “Crypto firms should follow the law, and we should address the narrow gaps.”
A coalition of consumer groups say that bill would weaken consumer and investor protections for both traditional and crypto investors and would also reshape financial regulatory agencies’ jurisdictions in a way that reduces regulatory oversight of financial products and services.
“Instead of pursuing this ill-advised proposal, the best immediate step Congress could take to protect consumers who choose to participate in crypto markets would be to support regulators ongoing efforts to enforce existing rules,” said a statement from the groups, which include Public Citizen, Consumer Reports and the Consumer Federation of America.
The Financial Services Committee also approved a bill called the Clarity for Payment Stablecoins Act of 2023 that the committee’s chair, North Carolina Republican Patrick McHenry, said would provide a clear regulatory framework for the issuance of payment stablecoins. Waters said it would promote “a race to the bottom by creating 58 different licenses,” allowing issuers to potentially include a wide range of assets in their reserve and allowing large corporations such as Meta or Walmart to issue money, Coindesk reported.
Paul Grewal, a Stow native and ex-federal judge who serves as chief legal officer of Coinbase, the nation’s largest cryptocurrency exchange, says his company backs both pieces of legislation and that passing them will benefit Ohio. OpenSecrets’ lobbying analysis found Coinbase spent $3.4 million on federal lobbying in 2022, more money than any other cryptocurrency company.
“FTX has only underscored that we need laws and rules that protect Americans and that encourage businesses to set up shop here in the U.S. the way that Coinbase has, and it’s one of the reasons why we’ve been so active in encouraging Congress to pass legislation encouraging our regulators to adopt reasonable rules,” says Grewal. “We want to see this industry take root in the US and in Ohio, as much as anywhere else”
Coinbase says it has over 1 million cryptocurrency clients in Ohio. It says a poll it conducted with Impact Research indicates roughly 20% of Ohio residents own cryptocurrency and more than three in five of those crypto owners agree that cryptocurrency and blockchain technology can increase economic opportunities for Americans in a way that traditional finance can’t.
Grewal says Ohio is “quietly emerging as a center within the digital asset or cryptocurrency space.” He says cryptocurrency technology companies appreciate Ohio’s vacant industrial space and abundant natural gas supplies that can generate electricity for energy-intensive bitcoin mining. The state’s university system is also a huge draw for the industry, he says, as it was for Intel’s decision to locate a semiconductor plant near Columbus.
“We think Ohio could actually play a big part in the future of digital assets,” Grewal says.
Grewal describes cryptocurrencies as digital money that allows people to make payments on the internet with the same ease that they send email or text messages.
He says blockchain technology has many other uses apart from cryptocurrency. For example, he says it can be used to create portable digital health records that aren’t confined to a single provider’s legacy computer system, or to make information posted on social media accounts transferrable between different networks.
Grewal’s company also highlights the work of Cleveland-based CHAMPtitles, which is using blockchain technology to digitize vehicle titles and speed up the process to acquire vehicle registrations and liens. CHAMPtitles was the first product launched by Northeast Ohio auto dealer Bernie Moreno’s blockchain company, Ownum. Moreno, who has said he sold the company, is vying for the Republican party’s nod to run for Brown’s Senate seat next November.
Coinbase this year hired Brown ally Tim Ryan, a Democratic former congressman from the Youngstown area who lost a 2022 U.S. Senate bid to Republican JD Vance, to be on its new “Global Advisory Council” that will “navigate the complex and evolving landscape of the crypto industry, and strengthen relationships with strategic stakeholders around the world.” Ryan will headline an “Advocate Town Hall: Crypto in Columbus” event the company will host in Columbus on Wednesday.
Other members of its advisory council include former U.S. Sen. Pat Toomey of Pennsylvania, who was top Republican on Senate Banking Committee Brown chairs until he retired this year and former Democratic U.S. Rep. Sean Patrick Maloney of New York.
“We think it’s very important that leaders across Ohio understand that their citizens, their constituents, and their voters care about this issue,” says Grewal. “It’s a great opportunity to highlight that not only are people looking to invest in digital assets across Ohio, we’re seeing businesses now emerge in Ohio that can power some of the the technologies and infrastructure necessary for it.”
Earlier this summer, the SEC filed suit against Coinbase, claiming it operated its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. Grewal called that lawsuit “disappointing, but not surprising” as he testified at a congressional hearing about potential cryptocurrency regulations on the day it was filed.
He accused the agency of relying on “an enforcement-only approach in the absence of clear rules for the digital asset industry,” and said it showed the need for “legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation.”
Coinbase wants Congress to pass new laws that will protect investors, set high standards, and encourage people to do their business with U.S. companies instead of “chasing opportunities outside the U.S. that might not be as well regulated,” Grewal says.
He says his company has actively discussed legislation with both Republicans and Democrats alike on Capitol Hill and is also “encouraging voters in each of these different states and districts to to join the conversation themselves and to lend their voice to what’s being debated.”
At a February hearing on cryptocurrency regulation Brown said “time-tested financial safeguards can help protect against the harms and risks of crypto products.”
Brown said he’d look at basic principles such as clear disclosure and transparency, prohibitions on conflicts of interest and self-dealing by insiders, protecting customer funds by separating them from company assets, strong consumer and investor rights, and anti-money laundering and fraud prevention.
Last week, Brown told reporters that as public representatives, Congress needs to figure out public sentiment on cryptocurrency and what’s in the public interest, “not finger in the wind kind of work, but really figuring out how to make this work and how to how to regulate it better than Congress has.”
“There’s not a lot of agreement yet or consensus on what we should do as a Congress,” said Brown.