Battle lines over cryptocurrencies being drawn in Congress

WASHINGTON — Lawmakers are sharply divided over the government's approach to the growing popularity of digital currencies.

On one side are Democrats raising alarms about cryptocurrency price manipulation and the risk of digital currencies enabling criminal activity. Republicans have the completely opposite view that policymakers should get out of the way of innovation to allow the U.S. to compete globally.

"The last thing we should do is regulate these innovators into oblivion," said Sen. Steve Daines, R-Mont.

But Democrats such as Sen. Elizabeth Warren of Massachusetts echoed other lawmakers' concerns about pricing risk that she said could threaten the financial system.

"All the warning signs are flashing — the hype, the volatility, the wild claims that turn out to be false," said Warren. "As the crypto market grows, so do the risk to our financial stability and our economy. Regulators need to do their job and step in before it's too late."

The divide comes as an expanding universe of cryptocurrency providers and their partners become a more permanent staple of the financial mainstream, exciting investors and consumers while making policymakers nervous.

Bloomberg News

The debate in Congress corresponds with attempts by the Biden administration to develop recommendations for how the U.S. should regulate the digital assets.

Meanwhile, on the same day as the Senate hearing, a House Financial Services subcommittee discussed the prospects of the Federal Reserve issuing its own digital dollar. The issue of Central bank digital currency at times flips the party views, with Democrats largely supporting the effort's financial inclusion goals and Republicans questioning its necessity.

At the Senate hearing, most Democrats argued that the cryptocurrency market poses substantial risk for consumer abuse, with users tempted by the promise of an easier way to move money with the help of untested companies.

“All of these currencies have one thing in common — they’re not real dollars, they’re not backed by the full faith and credit of the United States,” said Senate Banking Committee Chairman Sherrod Brown, D-Ohio. “And that means they all put Americans’ hard-earned money at risk. … If we want a solution to Americans’ legitimate fears about our banking system, shady startups are not the answer.”

But Sen. Pat Toomey of Pennsylvania, the top Republican on the panel, said while Congress needs to understand the risks associated with cryptocurrencies, policymakers shouldn’t stifle the benefits.

“We shouldn’t lose sight of the tremendous potential benefits that distributed ledger technology offers,” Toomey said. “We should not suppress the concepts of individual entrepreneurship and empowerment that have made this innovation possible.”

Treasury Secretary Janet Yellen and key financial regulators discussed plans last week to issue recommendations on how to regulate stablecoins, which are digital assets tied to real currency like the U.S. dollar. At the same time, lawmakers appearing more open crypto and fintech innovation in general have formed a financial innovation caucus to better educate members of Congress.

Just this week, Bloomberg News reported that Yellen’s meeting with federal regulators focused on Tether and Facebook’s Diem, two stablecoins about which regulators have previously expressed concern.

Senate Democrats homed in on the decentralized nature of cryptocurrencies. Unlike traditional financial transactions, in which an intermediary or bank facilitates the movement of money from one entity to another, cryptocurrencies don’t deal with a central intermediary and transactions are validated by miners. Some experts warn that miners can operate as bad actors and exploit their power.

“Instead of leaving our financial system at the whims of giant banks, crypto puts the system at the whims of some shadowy, faceless group of super coders and miners, which doesn't sound better to me,” Warren said. "The giant banks have created huge problems, but I'm not convinced that crypto is the solution. In fact, crypto could be even more dangerous for consumers, more dangerous for the environment, and more dangerous for the stability of our financial system."

There is also a debate about whether cryptocurrencies can be used to facilitate crimes. Millions in cryptocurrencies were paid to the hackers involved in the Colonial Pipeline cyberattack earlier this year.

“When we have a situation where we have cybercriminals that ask for money on an essential piece of property, like the Colonial Pipeline, that is critical infrastructure for this country, and one of my constituents turns on the TV and sees that the payment was made in cryptocurrency, what should that person be thinking?” said Sen. Jon Tester, D-Mont. “Cryptocurrency is a part of that problem.”

But Daines noted that cryptocurrencies like Filecoin offer benefits outside of the financial space, such as the creation of a decentralized data storage marketplace.

“I truly believe we should always … look to support innovation, and be very careful that we don't over-regulated it of existence,” he said.

Sen. Cynthia Lummis, R-Wyo., a co-founder of the Financial Innovation Caucus, also pushed back on claims that cryptocurrencies can be used for illicit activities. She pointed out that transactions with cryptocurrencies are recorded on a traceable public distributed ledger that is traceable.

“There's a myth that virtual currency is anonymous, but aren't most virtual currency transactions recorded on a publicly available ledger that cannot be easily altered?” said Lummis. “It seems to me any criminal would avoid creating evidence like that.”

While senators largely focused on privately operated digital currencies, House lawmakers on Tuesday examined the Federal Reserve’s exploration of creating a central bank digital currency.

The Fed is set to publish a paper in September detailing its thinking about a digital dollar and digital payments. Many expect that paper to be a precursor to a decision from the Fed on whether or not to move forward with creating a central bank digital currency.

Republicans warned that a CBDC could hinder the private sector’s innovation, while Democrats said it could provide the Fed with a necessary tool to handle a crisis.

“The private sector already has a few different stablecoins that mimic what the Federal Reserve is considering creating,” said Rep. Roger Williams, R-Texas. “Whenever I hear the government’s going to come in and create a competing product or provide a similar service to the private sector, it really makes me wonder if it’s necessary for the government to get involved at all.”

But Rep. Ritchie Torres, D-N.Y., said that a CBDC would have been a useful tool during the coronavirus pandemic, when the government was trying to send stimulus payments to Americans.

“COVID-19 has shown us the fragility of the American social safety net, a fragility that stems from a lack of automatic stabilizers,” Torres said. “A CBDC, it would seem to me, would fill a critical void. … It would bring instantaneous [payments] delivered to hundreds of millions of Americans in times of economic instability. I know there are concerns, but it seems to me the systemwide stability that it would bring [outweighs] all the cost.”