Key Points of the Hearing | Lawmakers Worry About Cryptocurrency Bubble, Industry Players Believe Implementing "Feasible Regulation" Can Provide Protection

The U.S. House of Representatives' crypto hearing "The Future of Digital Assets and Finance: Understanding the Challenges and Benefits of U.S. Financial Innovation" took place yesterday (8). As expected, congress members raised concerns about the cryptocurrency/blockchain industry and questioned industry executives. Participants included FTX founder Sam Bankman-Fried, Circle founder Jeremy Allaire, Bitfury CEO Brian Brooks, Paxos founder Chad Cascarilla, Stellar Development Foundation CEO Denelle Dixon, and Coinbase CFO Alesia Haas.

Regarding cryptocurrency regulation, Democrats and Republicans generally focused on two aspects: Democratic members raised concerns about the lack of investor protection regulations in the digital asset market and the high volatility of cryptocurrencies, which could pose a risk to financial stability.

Chairwoman of the Financial Services Committee/Democratic member Maxine Waters expressed concerns about investor protection. She believes that the current lack of a unified, centralized regulatory framework in the cryptocurrency market makes investments in the digital asset space susceptible to fraud and price manipulation.

Advertisement - Scroll down for more

In addition to Maxine Waters, Democratic member Al Green raised a similar question: "In the past year, the market value of the crypto market has grown from $500 billion to $3 trillion, but the market volatility is still very high; there seem to be many potential factors forming a bubble, such as the ease of accepting leveraged trading, lack of transparency in trading, and issues with asset transparency. At what point in the future should we be concerned about the formation of a bubble?"

Responding to the Democrats' concerns, FTX founder Sam Bankman-Fried stated that one of the important features of the crypto market is 24/7 trading. Unlike traditional financial markets with overnight settlement risks, weekend/holiday settlement risks, large exchanges like FTX can settle in real-time and monitor these trades. Furthermore, while FTX accepts user margin trades, users are required to collateralize crypto assets.

SBF stated: "Another thing I want to mention is that during the 2008 financial crisis, you could see that many trades between financial entities were not transparent and were repeatedly packaged and leveraged. No one knew how much risk was involved until the bubble burst. If you compare this situation with the crypto market, FTX or most major exchanges can fully understand the risks of these unsettled futures trades, information is transparent, and a complete clearing structure can control risks. We are also working with the CFTC to bring this system to FTX.US for U.S. users."

On the other hand, Republican members are more focused on whether blockchain technology can reduce the costs of financial services and whether the operation of decentralized networks could usher in the "Web 3.0 era," redistributing information rights monopolized by tech giants back to the people.

In response to this, former OCC head and current Bitfury CEO Brian Brooks described early networks as a "carefully designed garden enclosed by walls," not meant for user interaction, while Web 2.0 allows users to create content. Web 3.0, on the other hand, gives users "actual control over the network," which is where cryptocurrency functions come into play.

How to Regulate the Blockchain Industry?

During this hearing, lawmakers naturally expressed concerns about the "investor protection issues" that the current or future cryptocurrency industry may bring, while executives of cryptocurrency companies have been explaining that the transparency of blockchain and transaction monitoring should be sufficient, so the focus should return to how to regulate the industry.

Most of the cryptocurrency executives at the hearing seem to believe that cryptocurrencies do not currently fit into the existing U.S. financial regulatory structure, and legislators should consider tailor-made regulatory laws for the cryptocurrency industry.

Alesia Haas, CFO of Coinbase, stated in her testimony, "Due to the unique underlying technology of cryptocurrencies and considering that the industry is still in its early stages, digital assets and traditional assets are actually traded in different markets, so the existing regulatory system is not suitable for this technology."

SBF, the founder of FTX, suggested that Congress could grant primary regulatory authority over the cryptocurrency industry to a "single federal regulatory agency" through legislation. Previously, FTX had issued "Market Surveillance Principles." They proposed, "FTX suggests allowing cryptocurrency market platforms to choose one regulatory agency as the primary regulator for spot and derivatives markets, comply with a collaborative framework, with another acting as a secondary regulator, holding influence over cryptocurrency platforms but not assuming daily regulatory responsibilities."

Additionally, SBF also welcomed stricter regulation of the Bitcoin or cryptocurrency spot markets.

"I'm not concerned about more regulation. I think in areas where regulation is lacking, strengthening regulation is very helpful in protecting consumers and building a strong ecosystem."

Stablecoin Issues

In addition to the issues of transaction regulation, another major focus of the hearing was stablecoin regulations. The Biden administration recently released a stablecoin report, which recommended that Congress legislate to require federally regulated banks to issue stablecoins.

In response to this, Danelle Dixon, CEO of the Stellar Development Foundation, stated that the report did indeed analyze risks and regulate in a compliant manner, but the solution is still far off.

Danelle Dixon stated, "On the contrary, we propose an alternative regulatory approach, requiring stablecoins to have a 100% reserve and reserves in 'appropriate assets' to control risks."

Danelle Dixon's response also echoed the opening testimony of Jeremy Allaire, the founder of Circle. He mentioned that stablecoins are expanding in the proportion of institutions and startups because stablecoins reduce the cost for small businesses in international transfers and speed up the transfer process. He believes that stablecoin regulation can move towards qualification requirements for "issuers."

"In terms of regulation, we have a lot of work to do, including defining reserves requirements for issuers, liquidity and capital requirements, as well as risk management and operational flexibility requirements."