An Ohio lawmaker is pushing legislation that would define when cryptocurrencies — like bitcoin — were considered a security. The rules would allow companies to focus on innovating, rather than red tape, he argues.
(TNS) — An Ohio member of the U.S. House's Financial Services Committee has seen the future, and it's in crypto.
Rep. Warren Davidson, a Troy Republican in his third term, previously made a reputation for himself primarily as a stalwart member of the House Freedom Caucus. And in cryptocurrency — a digital currency or asset that uses encryption techniques for regulation and verification — Davidson has found an important legislative issue and a need that he hopes he can fill.
Cryptocurrency — bitcoin is one example — was created in the aftermath of the financial meltdown by a group of renegades frustrated by the power held by banks. As an alternative to common banking, they began creating a decentralized currency that used the blockchain — a distributed and public peer-to-peer digital ledger that can record transactions over many computers to protect the transaction through added transparency.
The technology aimed to replace the need for ledgers to be maintained by central authorities such as banks. In short, it took out the middleman.
The assets were used, initially, for illegal purposes; the website "Silk Road" became famous for using the digital assets for the sale of drugs. But the years have given them legitimacy — Facebook is the latest to announce it is launching a cryptocurrency — and now Davidson wants to bring it to the next level: He wants to regulate it — a move that also would hold someone accountable, much as banks are held accountable during traditional financial transactions.
Congress has little choice: Just as the Internet revolutionized virtually all aspects of human life, cryptocurrency, he said, has the potential to change the way the world does business.
Although the United States has emerged as a leader in innovation, he said, it is still losing ground.
Capital, he said, "is not going offshore to places where there are no laws. It's going offshore to places where they pass laws that provide certainty that if I put my capital here, I know the framework under which I'm going to be operating."
Davidson added that "we have all the innovations, we have the largest markets, we have these phenomenal capital markets, and we're driving that capital out of our country."
Davidson worries that there is no real legal definition of cryptocurrencies, and he said that creating one for "digital tokens" would be good for the economy and for Ohio.
The lack of clarity leaves the system vulnerable, and the lack of regulation has been frustrating enough that some companies have chosen to innovate here but move their capital abroad to countries such as Singapore, Switzerland and Malta, all of which offer regulatory guidance to those in the industry.
Davidson said a light-touch update to U.S. financial laws is needed to give companies and entrepreneurs the certainty they need to focus on innovating and creating jobs instead of navigating old red tape. To him, the technology has limitless potential; it could be used in a variety of fields such as music, jet engines, home loans and advertising.
Davidson has introduced a bill that would define when a cryptocurrency is a security.
His bill, he said, creates a "bright-line test" to determine what is and what isn't a security within cryptocurrency and who are the proper regulators of each product. Some products, he said, might be better regulated as a commodity or a good or service. His bill aims to remove confusion over what regulations the company must comply with.
"Having something out there is important," said Jonathan Dever, a lawyer and former state representative who works on the issue. "Because otherwise, we're in the Wild West."
Could the system continue to be abused even if regulated? Sure, Davidson says. But cryptocurrency offers protections that cash does not.
"When you steal cash, it's hard to find where the cash went," he said. "But when you have a distributed ledger, you can't move A to B to C without having a ledger. You can follow all the money. ... The good actors are the ones asking for a legal framework."
The prospect fascinates Davidson's fellow Financial Services Committee members, and the bill is truly bipartisan, with the bill drawing an equal number of Republican and Democratic co-sponsors.
Rep. Steve Stivers, R-Upper Arlington, said the new industry creates confusion.
"There are a bunch of different folks that could look at it," he said. "And Warren's point — which I agree with — is people need to know whether something is a security, a commodity or a currency."
For Davidson, the bill offers an opportunity to be at the forefront of a new way of doing business.
"To me, it's like the early days of the Internet," he said. "A lot of people knew it would be big; some people didn't quite get it. You're going to see similar trial-and-error stuff to launch digital assets. What we need is legal framework to make it clear that if you're launching these digital assets, we want you to do that innovation in America."
Kristin Smith of the Blockchain Association, a trade association representing the industry, agrees with Davidson that there are parallels between the advent of the Internet and the birth of cryptocurrency.
The association is an "enthusiastic" supporter of Davidson's bill.
"There's a lot of fundamental work that we think needs to be done in terms of regulation that is responsive to the unique considerations of open blockchain technology," she said. The goal is to craft regulations that "let the good guys know they're protected, the consumer know they're protected" and that encourage industries to continue to do business in the United States.
Davidson's bill is "a start," she said. "But it's a really good start."
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