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Thursday, December 9, 2021
For now at least, 'a good meeting of the minds'
The cryptocurrency industry’s major power players encountered skeptical yet noticeably polite questioning from Congress on Wednesday, where both sides laid bare their disagreements about how the emerging industry should be overseen by the federal government.
Lawmakers and crypto executives (again, politely) articulated their differences about what sort of rules are needed to protect investors and facilitate growth. They certainly fared better than Instagram’s embattled chief, who down the hall received an old-fashioned Congressional grilling over Meta’s (FB) role in undermining the mental health of teens — but that’s a subject for another day.
In a relatively tame cryptocurrency hearing, one major takeaway emerged as the most striking. Both camps fundamentally agree that oversight is a necessity, even if they haven’t found points of convergence on specific areas such as stablecoins.
"We believe sound regulation is central to fueling crypto innovation and adoption," Coinbase CFO Alesia Haas told the committee.
Anyone who’s been following crypto’s evolution for any length of time, should recognize how monumental that is. Not all, but many of the market’s early pioneers were largely libertarian/'anarcho-capitalists' (a label enthusiastically embraced by a very good friend for over a decade running, so don’t shoot the messenger) hostile to government involvement.
And crypto’s biggest appeal is its decentralized nature, an allure that’s been a draw for small investors, so getting a major executive to publicly back regulation is no small feat.
The biggest takeaway from Wednesday’s session is that it threw into stark relief the way crypto continues to mature. The industry’s players are clearly taking the long view of the sector’s development — and, for better or worse, embracing Uncle Sam’s guiding hand to prevent what House Financial Services Committee Chairwoman Maxine Waters said could lead to “fraud, manipulation and abuse.”
Quantum Fintech Group's Harry Yeh cheered the hearing, telling Yahoo Finance Live that it yielded “a good meeting of the minds.” Separately, 3iQ Digital Assets' Christopher Matta said that “a really thoughtful, honest conversation between the industry and the regulators” was starting to take place.
Yet as the saying goes, the devil is in the details, and the road to regulatory purgatory may easily get paved with good intentions. Haas touched on a theme we here at the Morning Brief have explored previously: namely, whether current financial regulation is suited for this brave new world we call cryptocurrency.
“We really believe that having policymakers deeply understand the technology... will help craft prudent regulation here,” she told lawmakers. “The ‘how’ we get there is going to look very different in crypto than it has in our traditional financial markets.”
Thus far, the conversation between policymakers and industry participants has been constructive. Yet the whipsaw price action that’s come to define Bitcoin (BTC-USD) and other cryptocurrencies — as well as instances of fraud and abuse — will put pressure on regulators to act quickly.
Ross Mayfield, chief investment strategist at Baird Private Wealth Management, pointed out last month that crypto’s volatility “is well-above most more traditional investments. Bitcoin has seen seven drawdowns of 50% or greater since 2012 alone; the S&P 500 has had fewer over the last century.”
There’s also the growing question about how much government involvement is too much for an asset class whose primacy is based on its independence.
As Morgan Stanley analysts warned recently, Bitcoin in particular “is becoming more centralized” – particularly as bigger institutions (like Visa (V), which on Wednesday announced it was hanging out a shingle to consult with banks on getting involved in crypto).
“As more institutions buy crypto (e.g. exchanges, asset managers, companies), more bitcoin units are held by fewer participants (even if they hold for others), causing centralization,” the bank added.
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