With the advent of blockchain and cryptocurrencies disrupting our financial systems, regulators are forced to investigate the utility of this technology and propose new rules to ensure that citizens are able to receive the maximum benefit from using decentralized digital assets while minimizing any of its potentially harmful effects.
Through each ‘Crypto Bill’ proposed, we are able to better understand how the US government views cryptocurrencies, where they think it can provide benefits to citizens, and where it could be most harmful. Here are some of the key takeaways from the list.
Low-Income Lending and Investing Opportunities a Priority For Black and Community Bank
Members of the government are starting to recognize the utility of cryptocurrencies for lending and making crowd investments. On January 3rd, 2019, Bill HR 41, titled “RESCUE Act for Black and Community Banks” was released. It’s stated purpose is “To provide regulatory relief for Black and community banks, to codify the Minority Bank Deposit Program, and for other purposes.”
The Minority Bank Deposit Program (MBDP) is a voluntary program that encourages credit unions, as well as female and minority-owned banks to become depositories and financial agents for low-income communities. The initiative was created by the US Department of Treasury and is meant to make banking services more accessible to the most underserved communities.
Although not stated explicitly, “codifying” the MBDP program could imply the use of a blockchain ledger and smart contract system to record and deploy short-term loans based on a predefined set of rules written in code. Such a system would be a huge boost to communities that are underbanked and often targeted by payday lending services.
Payday lending is a $40 billion industry that makes its money by preying on those desperate for short-term capital. Loan interest rates can start out at a modest 10-15%, but can easily jump to 300% once borrowers become trapped in a debt cycle of continuous borrowing to keep up with bills and everyday expenses. According to Pew Trusts research, 12million American currently use Payday Lending services, 12% of whom are African Americans. Smart contract based lending would be a highly efficient and cost-effective alternative for both the borrowers and lenders.
Within the same bill, it mentions that the Comptroller General of the US intends to conduct a study on blockchain technology and how it could be used to enable lower-income individuals to invest in start-ups and other crowdfunded companies.
Crowd investing has long been thought of as a way to give businesses who aren’t a right fit for bank loans or VC capital a chance to raise money while opening opportunities for regular people to grow their wealth through access to more investment opportunities. Blockchain technology would give investors the transparency they need to feel safe about where their money is going, especially if rules were embedded into smart contracts to ensure that funds were only allocated when certain business milestones were achieved.
Cryptocurrencies Still Viewed as Nefarious Tools
The vast majority of bills proposed center around the topic of consumer protection and national security. While the Government sees some potential in using cryptocurrencies to provide financial opportunities to consumers, the main concern outlined in at least 7 of the 10 Bills proposed so far were focused on preventing cryptocurrencies being used to fund terrorism, human trafficking, drug trafficking, and financial scams.
One bill, HR 56, is called the Financial Technology Protection Act. It’s stated purpose is to “establish an Independent Financial Technology Task Force to Combat Terrorism and Illicit Financing and to provide rewards for information leading to convictions related to terrorist use of digital currencies.”
Not surprisingly, Bill HR 56 and Bill HR 502 (the ‘FIND Trafficking Act) are so far the only 2 bills to have passed the House, been received in the Senate and referred to the Committee on Homeland Security and Governmental Affairs (as well as the Committee on Banking, Housing, and Urban Affairs).
This indicates that preventing the potential dangers of cryptocurrencies takes precedence over promoting its many benefits. The perception regulators have about the crypto space is still very much based on what was observed between 2010 and 2013, where Bitcoin was primarily used to pay for drugs and illegal weapons in marketplaces like Silk Road. The FBI eventually shut down Silk Road in 2013, and the site’s founder is currently serving a double life sentence plus forty years without the possibility of parole.
When we think about the pace in which the Government conducts investigations, it makes sense that there is still a perception that bitcoin could be used for illegal activity. After all, the FBI is only just now conducting an investigation into Bitconnect, a crypto Ponzi scheme platform that launched in 2016 and shut down in December 2017.
This lag in time between crimes committed and investigations occurring creates the false perception that the current crypto space is not evolving, and that consumers have not learned about how to protect themselves from being victims of cryptocurrency funded financial crimes.
Crypto For Fighting Drug Trafficking and Terrorism funding
With regard to the drug and terrorism issue, a recent report by Bloomberg showed that $2 Trillion worth of shady transactions still occur each year from non-cryptocurrency sources (primarily cash, but also digital money transfers from colluding Banks).
One of the most famous cases was the case of HSBC, which failed to accurately monitor over $670 billion in wire transfers from Mexico and $9.4 billion in purchases of U.S. currency (according to a 2012 deferred prosecution agreement with U.S. authorities). Using an elaborate system of deposits and money transfers, Mexican and Colombian drug cartels were able to launder their illicit proceeds through the bank without detection. The bank was eventually fined $1.9 billion.
Cases like this should make it clear to regulators that cryptocurrencies are far from their biggest problem when it comes to shady transactions.
In fact, with a better understanding of blockchain technology, regulators would know that the immutable and transparent nature of the technology actually makes it harder for shady transactions to go undetected, and that the token economic structure that most cryptocurrency networks are established under it can be leveraged to create all kinds of incentive schemes to reward users for identifying and reporting shady transactions. Hence, eliminating the need for centralized governing bodies to waste resources launching investigations (especially ones that occur years after the crime has been committed).
Ultimately, there is something positive to be found in the efforts regulators are making to pass bills around the adoption of cryptocurrencies, as many leaders in the crypto space have been urging Congress to do for months now.
However, the kind of bills being proposed indicate that there is still work to be done to educate lawmakers about how cryptocurrencies and blockchain technology can not only provide financial opportunities to everyday people but also help solve many of the terrorism, drug trafficking and financial fraud problems that some regulators are incorrectly claiming it enables.