The following is Lee Reiners’ oral statement delivered in front of the United States Senate Committee on Banking, Housing, And Urban Affairs at the Committee’s February 14th hearing entitled, “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets.”
Thank you for inviting me to testify at today’s hearing. My name is Lee Reiners and I am the Policy Director at the Duke Financial Economics Center and a lecturing fellow at Duke University School of Law. At Duke, I teach courses in cryptocurrency law and financial regulation, and prior to entering academia, I spent five years examining systemically important financial institutions at the Federal Reserve Bank of New York.
Satoshi Nakamoto introduced the first cryptocurrency, Bitcoin, to the world in a nine-page white paper posted on Halloween 2008, and the first Bitcoin transaction occurred in January 2009. Fourteen years, thousands of cryptocurrencies, and trillions of investor losses later, crypto scarcely resembles the “purely peer-to-peer version of electronic cash” first envisioned by Satoshi.
By technology standards, crypto is not new. For comparison, the iPhone was introduced in 2007. Anyone who held a smartphone in their hand for the first time immediately recognized its transformative potential. More recently, OpenAI made the artificial intelligence chatbot, ChatGPT, available to the public last November; two months later, ChatGPT had 100 million monthly active users, making it the fastest-growing consumer application in history.
After fourteen years and countless claims that crypto represents the future of money, finance, or something else, we have yet to see crypto’s killer use case. In fact, only 16% of U.S. adults have invested in, traded, or used crypto. The data is clear, most people invested in crypto simply because they thought they could sell it to someone else at a higher price in the future. Sadly, these people were wrong.
Fourteen years have provided ample evidence of the dire harm cryptocurrency inflicts throughout our society. Beyond the billions in investors losses due to frauds, hacks, and scams, crypto undermines our national security by facilitating terrorist financing and sanctions evasion. It undermines our economic security by fueling a surge in ransomware attacks that have crippled American businesses, health care systems, and municipal governments. And it jeopardizes our climate goals by needlessly consuming massive amounts of energy that contribute to carbon emissions and electronic waste. I ask, what benefits do we have to show for these costs?
Even as we stand in the ashes of the FTX implosion, the crypto industry is spinning new narratives to deflect and obfuscate the damage they have wrought. One such line goes that Sam Bankman-Fried was just a bad apple, and that the problem lies not with crypto’s underlying technology, but with centralized crypto intermediaries. But FTX was not an isolated incident: Terra/Luna, Celsius, Voyager, BlockFi, Axie Infinity, Genesis, Mango Markets. How many more must fail before we conclude that the entire barrel is rotten?
Another self-serving line spun by crypto boosters is that policymakers must embrace innovation, or else the crypto industry will migrate to other jurisdictions with a more favorable regulatory climate. But this implies that innovation is an unmitigated good. The truth is that innovation is value neutral, it can be used for good or bad. Instagram for Kids is technically innovative, but does anyone think it’s a good idea? Looking at crypto, it is clear that the costs outweigh the benefits, so why would we want to embrace it?
The millions of Americans who invested in crypto only to see their hard-earned money evaporate DO NOT care whether crypto is classified as a commodity or a security. They DO NOT care whether the industry is regulated by the SEC, CFTC, or some other agency. They only care about having the same basic safeguards they have come to know and expect from the traditional financial system. Unfortunately, we have let them down.
The time has come for action, action that only Congress can provide. While I agree with SEC chairman Gary Gensler that most cryptocurrencies are securities, subject to SEC registration and disclosure requirements, some cryptocurrencies, like Bitcoin, are commodities. While the CFTC regulates commodity derivatives, they do not regulate commodity spot markets. The practical effect of this structure is that cryptocurrency exchanges in the U.S. are presently not regulated at the federal level.
In my written testimony, I provide a detailed road map for how Congress can close this gap. I urge Congress to carve out cryptocurrency from the definition of commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws. This would give the SEC exclusive authority to regulate all aspects of the crypto industry. The SEC simply has more expertise, more resources, and more appetite for enforcement in the crypto realm than the CFTC does. Most importantly, unlike the CFTC, the SEC has a statutory mandate to protect investors.
Whatever Congress decides to do, the status quo in crypto is simply untenable. I look forward to discussing the way forward with you. Thank you.