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Blockchain garnered plenty of mainstream attention in late 2017 when Bitcoin’s skyrocketing value featured prominently in newspaper headlines. That mainstream attention comes from everyday retail investors, sophisticated Wall Street investors, and the regulatory bodies and government groups who regulate and protect both of them. Both parties and both chambers of U.S. Congress have recently expressed interest in learning about blockchain and cryptocurrency to better understand the potential and pitfalls of this technological platform.
Many experienced crypto traders and innovators are distrustful of government attention, believing it restrains the innovation and democratic ideals of decentralized blockchain technology. Others welcome more regulation, arguing that government oversight could weed out bad actors and render the industry more reliable for investors and consumers, contributing to its long-term growth.
Congress’s April questioning of Facebook founder Mark Zuckerburg due to the Cambridge Analytica scandal drew fire because many Congressmen seemed to lack a basic understanding of how the platform worked, an alarming revelation for many constituents given Facebook’s vast economic and societal power. Luckily, recent blockchain discussions in the Senate and House have been lower-profile and thus more oriented around education and information than grandstanding. They’ve also provided hope for both sides of the debate over blockchain regulation. The House has held two recent hearings on blockchain–one in March covered ICOs, while another one in May gathered informational testimony on possible blockchain applications–and the Senate held a hearing in February to discuss upsides and downsides of government regulation.
Unlocking New Capabilities
Congress’s March Joint Economic Report devoted an entire chapter to blockchain. The annual report summarizes major economic forces and provides analysis and recommendations, and it made several mentions of blockchain’s potential to protect citizens and further U.S. interests. The report stated that blockchain technology could “revolutionize the world’s digital landscape and economy” and serve as “a potential tool for securing America’s digital infrastructure.”
Testimony and questions before House and Senate committees have introduced similar optimistic notes. Douglas Maughan, cybersecurity division director for the Department of Homeland Security’s Science and Technology Directorate, testified in early May that his unit is actively developing blockchain applications for supply chain management and improving higher security standards at U.S. customs and borders.
On blockchain’s potential, he stated “I think the applications are almost limitless,” drawing much praise from the crypto world. Spokespeople from private companies such as UPS followed and testified to blockchain’s potential to improve supply chain management and stamp out counterfeit or smuggled goods. Representative Tom Emmer, a member of the Congressional Blockchain Caucus, promoted blockchain’s democratic qualities during a March House hearing, praising its ability to democratize the process of raising capital.
Congress shows no signs of launching an apocalyptic cryptocurrency crackdown similar to China’s total country-wide ban anytime soon. But while their tone has been measured and cautious, several have expressed the desire to protect consumers and investors from exploitative or unstable crypto products. Some House members took oppositional stances during the March House hearing, with Rep. Brad Sherman calling cryptocurrency a “crock” and Rep. Bill Huizenga stating “This panel, this Congress is not going to sit by idly with a lack of protection for investors.”
Rep. Keith Ellison remarked that many of his constituents had asked whether they should get involved in cryptocurrency, drawing attention to the possible consequences of exploitative or unstable crypto products not just on accredited investors, but small retail investors.
Speaking before the Senate in February, SEC chairman Jay Clayton expressed concern that “Main Street investors” often assume crypto exchanges and ICOs are regulated much like the stock market, when in fact they lack government oversight. That the SEC took a more conservative approach towards blockchain is likely no surprise to most members of the crypto community, who have been nervously watching over the past year as the SEC has declared its right to regulate blockchain tokens as securities, cracked down on scam offerings, and subpoenaed several ICO startups. Clayton asserted that “every ICO I’ve seen is a security.”
Increased government regulation could lead to more and more companies offering TAOs, or Tokenized Asset Offerings. Companies who are accustomed to complying with securities laws, such as private equity firm Muirfield Investment Partners, use TAOs to sell tokens to accredited investors. The tokens represent fractional ownership shares in assets, embracing the securities label and the SEC regulation that comes with it. Though they place a premium on regulatory compliance, Muirfield shares Maughan’s optimism in the “limitless” power of blockchain. Advisor Rik Willard stated:
“By ‘limitless’ we are saying that almost anything or process that requires authentication — which is most people, transactions, and things — can benefit from the immutable provenance and permissioned environments that a well-conceived blockchain application can provide.”
Though most discussion of blockchain in Congress so far covers either its potential as a new technology or its dangers if left unregulated, some lawmakers have also acknowledged feasibility concerns. In the House’s early May hearing, Rep. Jerry McNerney tempered some participants’ enthusiasm for blockchain for international shipping applications by questioning the energy demand of a global blockchain system. He echoed many other environmentalists’ and tech innovators’ concerns over cryptocurrency’s environmental footprint.
The 2018 Joint Economic Report pointed to scalability issues in the Bitcoin and Ethereum network as a significant difference between “true currencies” and cryptocurrencies, observing that transactions can be so slow and expensive that they’re infeasible for everyday transactions.
The report also stated that “If Bitcoin or other digital currencies can improve their underlying protocols or find off- chain solutions, they could speed up processing time and reduce transaction fees.”
Many blockchain companies are making significant strides in enhancing blockchain’s scalabilities. Dispatch Lab’s new protocol which use on-chain ledgers to manage access to off-chain data artifacts, significantly reducing the required computing power of processing transactions. Dispatch also expressed appreciation of Maughan’s “limitless” comments, observing that improved scalability could unlock the potential Maughan and others lauded. CEO Matt McGraw stated:
“The applications to blockchain are almost limitless – in supply chain, yes, but also in AML use cases, in financial applications, in intelligence. Wherever the provenance of data is important – and where ISN’T it? – Blockchain is a good solution.”
It’s too early to say what actions Congress will take on blockchain. Some degree of revelation seems inevitable, but many government members also recognize blockchain’s transformative potential. Blockchain companies will have to stay attuned to government attitudes to pivot and survive under new rules and regulations.