On a wintry February morning in 2018, in the heart of America's political machine in Washington, lawmakers and regulators were avidly discussing Bitcoin.
Over the course of almost two hours, they conceded that they had not foreseen either Bitcoin's rise in 2017 or its impact on financial markets. This was a stark acknowledgement from the US Senate Committee on Banking, Housing, and Urban Affairs and the chairmen of the Securities and Exchange Commission and the Commodity Futures Trading Commission. They were supposed to be in control yet were short of answers for what course of action they needed to take in the wake of Bitcoin’s rise.
Moreover, the committees had met several years before, in late 2013, to discuss the same topic of virtual currencies, but that gathering had not given them any foresight of what was to come. The 2018 hearing, held on February 6 in the white marble-faced Dirksen Senate Office Building, was designed to inform the committee if it needed to act to give regulators more powers to control cryptocurrencies, in order to better protect investors.
On the day of the hearing, the market capitalisation of Bitcoin was about $115 billion. Four years earlier, at its previous hearing on the topic, the total value of Bitcoin had been just $5bn. At its 2017 peak, Bitcoin’s market cap had been $237bn. Today, it is approximately $360bn.
However, regulators in the US are still hesitant to take control of the emerging cryptocurrency industry.
The White House last week issued a framework for the development of digital assets after six months of discussions about “consumer and investor protection; promoting financial stability; countering illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation”.
“Digital assets present potential opportunities to reinforce US leadership in the global financial system and remain at the technological frontier,” the White House said. “But they also pose real risks as evidenced by recent events in crypto markets. The May crash of a so-called 'stablecoin' and the subsequent wave of insolvencies wiped out over $600bn of investor and consumer funds.”
The White House said it encouraged regulators such as the SEC and CFTC to step up its actions against fraud in the digital assets space. But according to the chief executive of the industry group, Crypto Council for Innovation, Sheila Warren, the White House’s proposed framework seems to only "kick the can down the road".
“We don't see clear recommendations. Those we do see seem to have an outdated and unbalanced understanding of the technology,” Ms Warren said.
SEC chairman Gary Gensler recently reiterated that Bitcoin isn’t covered by the agency’s securities rules. He’s been more bullish on the second-largest cryptocurrency, Ether, yet has fallen short of making any fixed pronouncements.
During the 2018 Senate committee hearing, Mr Gensler’s predecessor, Jay Clayton, in his testimony conceded that his officials had needed to get up to speed on cryptocurrencies "in a short amount of time", and that they had lacked enough resources to adequately keep on top of such technological innovations and their implications for financial markets. Mr Clayton said that the creation of a “new product and market [raises a] question for market regulators as to whether our historic approach to the regulation of sovereign currency transactions is appropriate for these new markets".
It seems that the question continues to be debated with few concrete answers.
The risk to this approach is that technology and financial markets move fast and, as we have seen with the rise of companies such as Google, Facebook, Apple and Microsoft, once regulators fall behind, they will struggle to catch up.
While it is important to avoid stifling innovation, it is also critical to ensure that we don’t have another wave of too-big-to-control companies materialising, as Web3, metaverses and AI become irreplaceable aspects of our daily lives.
As Ohio Senator Sherrod Brown said in a rasping voice during the 2018 hearing, he didn't know "how many people imagined how quickly and broadly the technology it's based on would spread. To most of us, it is nothing short of remarkable".
More worryingly, Wall Street’s entire approach to Bitcoin and cryptocurrencies has been a mix of opportunism, disdain and distrust.
Allowing large financial institutions to dominate another aspect of the financial system will only further take the power away from consumers and create the environment for potential financial crises.
The emergence of Bitcoin is a symptom of the benefits of technology's advancements in the internet age. The unique characteristics of the Bitcoin network, with its borderless, decentralised design, offers a vision for coping with a world in which trust in institutions has evaporated.
Instead of seeing this bigger picture, authorities are lost in the weeds of jurisdiction.
Since the 2018 Senate committee hearing, recent developments confirm that American regulators and lawmakers still don’t really know how to respond to the changing technological landscape.
They are keeping cryptocurrencies at arms-length. This only serves to show how powerless they feel and creates a vacuum to be filled by those with more narrow interests.