Speaking at today’s US Senate hearing on cryptocurrencies, entitled “Examining Regulatory Frameworks for Digital Currencies and Blockchain,” Circle CEO Jeremy Allaire tells regulators that it’s imperative to distinguish between a decentralized cryptocurrency such as Bitcoin and the digital currency project Libra, and that lawmakers also need to address the custody of digital currencies and how they are classified.
Allaire believes the best course of action is to create a new classification for cryptocurrencies.
“It’s very easy when one hears about Bitcoin or Libra to assume this is all the same stuff. So I think one of the very first things for regulators and policymakers is to really distinguish between the different types of digital assets that are emerging.”
In addition to needing clear regulations for Bitcoin and its many cousins, Allaire says it’s important for regulators to understand the business of custody.
“Regulations around the custody of digital assets is a really critical need and something that a number of jurisdictions have actually put forward and built very specific rules around how do we custody these types of digital assets.”
Allaire also highlights blockchain, which underpins Bitcoin and other cryptocurrencies, as a revolutionary technology.
“Some of the most innovative technology in this field are what I call blockchain platforms. And these are really general-purpose infrastructure for record-keeping, transaction processing, writing code that executes different types of contracts, and this is, I think, one of the most important breakthroughs that we’ve seen, frankly, in the history of modern computing, and ultimately can lead to things like secure voting, new forms of governance mechanisms within firms as well as innovations in financial assets.
These types of assets have the broadest applicability and should be encouraged in their development in the same way that we encourage the rapid development of technical standards that made the commercial internet flourish.”
Addressing a question from Chairman Mike Crapo for clarification about why Circle moved its crypto exchange subsidiary Poloniex offshore, Allaire explains that a motivating factor was a lack of regulatory clarity in the US.
“Many of these digital assets do not easily fit classifications that we’ve had in our financial system. We’d like to say, ‘Oh, this is like a currency or this is like a commodity that you’d use or utilize in some way. Or this has some feature that maybe makes it look like an investment contract.’ Many digital assets have features of all three. It’s what makes digital assets very innovative – in that you can construct an asset that simultaneously can incentivize capital, incentivizes customer behavior, provides value in terms of access to goods or services in payments, and that’s a breakthrough in how we can develop corporate forums. It’s a breakthrough in how we can incentivize businesses and technologies.
Unfortunately, in the United States, the guidance that the SEC has given is extremely, let’s just say, narrow in terms of what they would deem to not be a security. The vast majority of digital assets if they were, in fact, treated as securities, as the Howey test application and the most recent theft guidance provides, effectively would mean that those are not accessible to US persons because the utility value of the asset would not be possible to function if it’s treated as a security.
So there’s a fundamental mismatch between the regulatory structure and guidance that we have here and the nature of these digital assets. And so, markets around the world are adopting these – not just Bermuda but Singapore or Switzerland. Even jurisdictions like France introducing tailor-purposed definitions of digital assets so that issuers can feel comfortable with their obligations. There’s investor protections associated with those, and security and the like, but which don’t try to jam these into the respective classifications we have today…
Yes, we should regulate these. I believe we need new definitions of digital assets as a new asset class. And there are circumstances where there are investor protection considerations. There are trading and market considerations. There are also circumstances that have to do with utility, commodity and end-user usage, and you have to be able to define these in a way where that can work.”