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Senate Banking Committee presses crypto experts on systemic risk at hearing

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An engineer inspects a Sapphire Technology Ltd. AMD graphics processing unit (GPU) at the Evobits crypto farm in Cluj-Napoca, Romania, on Wednesday, Jan. 22, 2021.

Akos Stiller | Bloomberg | Getty Images

On Tuesday the Senate Banking Committee pressed a panel of crypto industry experts about systemic risks in a hearing titled “Cryptocurrencies: What are they good for?”

Some lawmakers made a point to speak in favor of the industry’s positive attributes. Sen. Cynthia Lummis, R-Wyo., said the transparency and openness of open source finance can promote financial inclusion. Sen. Sherrod Brown, D-Ohio, said blockchain technology could have many useful non-financial applications. The room seemed largely unconvinced, however that cryptocurrencies would make a good solution to the existing and very flawed financial system.

“Instead of leaving our system, our financial system at the whims of giant banks crypto puts the system at the whims of some shadowy, faceless group of super coders and miners, which doesn’t sound better to me,” Sen. Elizabeth Warren, D-Mass., said.

In a letter on Tuesday, Warren also called on Treasury Secretary Janet Yellen to draft a framework that federal agencies can use to regulate cryptocurrencies.

“As the demand for cryptocurrencies continues to grow and these assets become more embedded in our financial system, consumers, the environment and our financial system are under growing threats,” Warren wrote.

Two key themes

Lawmakers were fixated on two major themes: the reality of cryptocurrencies’ decentralized nature — that is, the fact that it doesn’t rely on centralized authorities like banks — and system failures in the crypto markets that could ripple over to the traditional financial system.

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“Crypto understood through a realistic lens is not a miracle get-out-of-the-financial-system-free card, it has the same problems,” said Angela Walch, a participant at the hearing and a professor at St. Mary’s University School of Law. “We need to acknowledge the power concentrations within it and make thoughtful policy and risk decisions about how to address that power.”

Walch, who is also a research associate at the UCL Centre for Blockchain Technologies, sat on the panel alongside Jerry Brito, executive director at the research and advocacy organization Coin Center, and Marta Belcher, chair of the Filecoin Foundation.

In response to various questions seeking a reality check on cryptocurrencies’ decentralization, Walch warned that taking crypto proponents at their word could mean turning a blind eye to concentrated “pockets of power” within crypto systems, including core software developers and miners who can “exploit their position of power to affect users of the systems.”

Systemic risk?

Lawmakers also pressed the panel about the developing problems in cryptocurrency “cascading into the conventional financial system,” as Sen. Pat Toomey, R-Pa., put it.

While that’s possible, said Brito of the Coin Center, the U.S. shouldn’t shy away from cryptocurrencies, but instead put appropriate guardrails in place for hedge funds and other market participants.

He noted that cryptocurrencies aren’t at a level of scale or reach into the economy that has systemic implications for everyone, referencing recent comments from Atlanta Fed President Raphael Bostic that have also been echoed by St. Louis Fed President James Bullard. In May, back when bitcoin and other cryptocurrencies sold off, both policymakers reportedly said they didn’t see digital currencies as a systemic concern.

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Brito added that even though a bug could pose a systemic threat to digital currencies invested in by hedge funds and others, the same could be said for any commodity, and “cryptocurrencies ultimately are commodities”

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