Senators Treat Crypto Like a New Jersey Digital Toll Highway

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Two US senators, Republican Cynthia Lummis of Wyoming and Democrat Kirsten Gillibrand of New York, last week unveiled a 69-page plan to regulate digital assets. Although the draft is unlikely to result in legislation until 2023 or later and is certain to be changed, its fundamental premise represents a bipartisan consensus in Washington. In the words of the senators, “it is important to create guardrails”, to which they added, “while leaving room for innovation to flourish”.

But you only build railings after choosing the path. The only “room for innovation” is to change lanes within the rails or to choose a speed between the minimum and maximum indicated. No innovation in direction, path or destination is allowed.

Crypto jumped the existing railings in 2008 and innovation flourished without waiting for federal permission. Before rebuilding the barriers, wise legislators should ask themselves what was wrong with the old ones so they don’t repeat the same mistakes.

The New Jersey Turnpike offers a helpful warning. Government planners teamed up with private interests to build a high-speed highway through eastern New Jersey, connecting the East Coast metropolitan areas. Only 15% of traffic was projected to connect points within New Jersey: exits were too far apart and tolls were too high for local transportation. The road wound through neighborhoods, towns, and farms, wiping out what the developers described as “gritty” (minority, poor, rural) properties. Property owners were compensated for acreage expropriated, but not for value destruction when their homes were left without jobs and purchases or farmers were forced to drive their equipment miles to get from one half of their farm to the other. . Small towns where residents had lived, worked, and farmed locally were destroyed to be rebuilt as bedroom communities for travelers to New York and Philadelphia. The turnpike’s guardrails turned the “Garden State,” which still exists in western New Jersey, into passenger housing, industrial concentrations, and transportation hubs.

Like the turnpike planners who ignore the locals, Lummis and Gillibrand do not mention the crypto economy itself. The bill refers only to people who move traditional financial assets into or out of cryptocurrencies, such as truck drivers speeding from New York to Philadelphia without a thought for brave people outside the railings.

Similarly, Lummis and Gillibrand call for an advisory committee of public and private sector experts. While the proposed bill does not describe those in the private sector, I suspect it is referring to people who run cryptocurrency exchanges and investment funds, not cryptocurrency innovators or users.

Much of the proposed bill deals with dividing crypto into commodities (regulated by the Commodity Futures Trading Commission), securities (regulated by the Securities and Exchange Commission), and currencies (regulated by the Treasury). This is fine for Washington’s empire building, but the proposed regime attacks a fundamental idea of ​​many crypto projects: that decentralized autonomous organizations can blur the distinctions between investors, customers, and employees. Much like building a toll highway that divides a county into residential, commercial, and agricultural areas, with guardrails slowing movement between them, imposing rigid categories for tokens destroys the character of many crypto projects.

The proposed legislation requires all stablecoins to be 100% backed by traditional financial assets. Not only does this leave no room for innovation, it takes cryptocurrencies back centuries to the pre-modern financial era before fractional reserve banking. This puts another key crypto idea off the rails: that a better alternative to a single government-issued currency can be achieved by allowing competition between different types of exchange mechanisms and stores of value.

An important goal of many crypto innovators is to enable pseudonymous peer-to-peer transactions without centralized supervision or control. Lummis and Gillibrand put this firmly off their railings with instructions to the Treasury to enforce sanctions, and presumably all sorts of other regulations imposed by restricting transactions, on the crypto economy.

A minor provision that is nonetheless revealing is a call to study the electricity consumption of proof-of-work tokens. I think this is an exaggerated and misrepresented issue, but regardless of opinion, there is no point in conserving electricity by regulating cryptocurrencies. To reduce electricity use, tax electricity and let people decide how to reduce it. Letting environmentalists with no interest in cryptocurrencies choose what use of electricity is justified and what use is not does not make any environmental or economic sense. This provision is an announcement to all political interest groups that it is hunting season for boons to be financed through restrictions on crypto innovation.

Lummis and Gillibrand’s plan is a manifesto for an alliance of Washington empire builders and cryptocurrency speculators to carve up the crypto economy into niches that are profitable for outsiders, disregarding the wishes and interests of the people who build or use it. crypto services. In all 69 pages, I can find no sign that the authors use or value cryptocurrencies for anything other than expanding regulatory fiefdoms or profiting from traditional currency, just as the New Jersey Turnpike planners ignored life from a small town in the Garden State.

More from other writers at Bloomberg Opinion:

• Coinbase made some mistakes at the level: Mark Gongloff

• The value of cryptocurrencies comes from the volatility of cryptocurrencies: Tyler Cowen

• The next stablecoin crash could be much worse: Editorial

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Aaron Brown was a former Managing Director and Head of Financial Markets Research at AQR Capital Management. He is the author of “The Poker Face of Wall Street.” He may have an interest in the areas he writes about.

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