Some Federal Regulation of Digital Currency Businesses Needed, Mulvaney Says
The federal government must take some action to regulate digital currency to provide the sector with some certainty, said House Monetary Policy Subcommittee Vice Chairman Mick Mulvaney, R-S.C., during a Cato Institute event Tuesday. “We simply cannot help ourselves to do something” given moves at the state and international level to regulate digital currency businesses, Mulvaney said. Coin Center Executive Director Jerry Brito said it “may be time for Congress to begin to consider federal pre-emption” of state-based money transmission service licensing laws on regulation of digital currency businesses in the absence of progress in harmonizing state-based regulation of those businesses. Mulvaney told us he's "not averse" to Congress exploring legislation to pre-empt state laws on digital currency, but "I'm not sure what it would look like yet."
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“Sitting back and doing nothing is probably not advisable” because that will make it difficult for the digital currency industry to grow, Mulvaney said. Some regulation is needed to prevent the U.S. from becoming “second movers” in shaping global digital currency policy, he said. ​Mulvaney urged stakeholders to continue working to educate lawmakers on digital currency issues. Only a few congressmen have expertise on digital currency policy, including House Judiciary Committee Chairman Bob Goodlatte, R-S.C., and Reps. Thomas Massie, R-Ky., and Jared Polis, D-Colo., Mulvaney said. The U.S. has led the world in providing regulatory certainty on digital currency businesses, but advancements in regulatory regimes in the U.K. and other nations threaten American leadership in this area of regulation, Brito said. He urged federal banking regulators to “make clear to banks that it's perfectly fine” for them to establish relationships with financial technology and digital currency firms.
Only New York has implemented regulatory guidance for digital currency businesses via the state Department of Financial Services' BitLicense framework (see 1410220023 and 1412220038), while similar efforts in California and a handful of other states have stalled, Brito said. He praised the Uniform Law Commission's Regulation of Virtual Currency Businesses Act Committee for its work to draft model legislation that could be a template for states to use to draft their own digital currency business legislation (see 1602230071). He said he believes concrete results from the work “likely won't come to fruition for years.” A federal law on regulating digital currency businesses will be an “uphill” battle, “but if we don't think big, somebody else will,” Brito said.
Commodity Futures Trading Commission Commissioner Chris Giancarlo urged other federal financial regulatory agencies to take a unified approach to regulating decentralized ledger technology's (DLT) digital currency purposes. He suggested the best approach would be to apply the “do no harm” standard that federal agencies have long applied to their regulation of the Internet. DLT, also referred to within the digital currency industry as blockchain, is the technology that underlies digital currencies like bitcoin. “It is unfortunate” that the U.S. hasn't adopted a regulatory regime that is as welcoming of financial technology and digital currency companies as the one the U.K. has adopted, Giancarlo said. Brito praised Giancarlo and former CFTC Commissioner Mark Wetjen for taking a “forward-looking approach” to digital currency regulation by classifying them as commodities.
DLT presents the possibility that the digital currency industry can use “algorithmic governance” to achieve most of the “same policy goals” as traditional government regulation, potentially allowing lighter government regulation, said Blockchain Global Policy Counsel Marco Santori of Pillsbury Winthrop. Federal and state regulators should require digital currency businesses to “register and get on your radar” rather than requiring the firms to obtain a formal license, he said. State regulators “can't sit back” and wait for the digital currency industry to mature before building up a regulatory framework because regulators have a clear responsibility under the law, said Conference of State Bank Supervisors Deputy General Counsel Margaret Liu.
Provisions in the Patriot and Bank Secrecy acts that require financial intermediaries like digital currency businesses to report information to the Financial Crimes Enforcement Network (FinCEN) may become increasingly inadequate as digital currency stakeholders push for additional privacy protections to mask information on DLT-based transactions, Brito said. Digital currency Zcash uses cryptography technology that either the sender or recipient of a transaction can choose to enable to mask identifying data about the transaction, said CEO Zooko Wilcox-O'Hearn. If DLT-based digital currencies increasingly employ privacy protections on the level that Zcash uses, FinCEN may choose to ramp up its reporting requirements, said Financial Integrity Network Senior Associate Eric Lorber. Heightened FinCEN regulations would become “situation dependent,” such as if terrorist networks start to use digital currency on a “large scale,” Lorber said. There are no “public indications” that terrorists are using digital currency, he said.