Takeaways from a Senate hearing on cryptocurrency

A woman gestures with a hand while seated. Other people are in the background.

Staff Writer

Feb. 14, 2023 1 PM PT

WASHINGTON — A Senate panel met Tuesday morning to hear from a trio of expert witnesses about what the federal government can do to create safeguards for digital assets such as cryptocurrency.

Sen. Sherrod Brown (D-Ohio), chair of the Senate Banking, Housing, and Urban Affairs Committee, opened the hearing illustrating the abrupt fall of the crypto industry, contrasting the explosion of money behind crypto commercials during last year’s Super Bowl with the sector’s absence at Sunday’s game.

“What a difference a year makes. The cryptocurrency industry spent a whopping $54 million on eight ads promising Americans untold riches and a chance to make history,” Brown said. “Of course they didn’t tell us about the high fees, the risk of loss, the outright theft that plagued the crypto industry, but if you watched the Super Bowl two nights ago, you didn’t see a single ad for crypto.”

Brown said the industry has “imploded,” with the crypto market losing nearly $1.5 trillion last year. He also warned that “this crypto nightmare isn’t over yet” as members of Congress learn more about the collapse of the FTX cryptocurrency exchange and consider regulation to protect both consumers and innovation.

Here are some of the top takeaways from the hearing:

‘Financial criminals love crypto’

Sen. Elizabeth Warren (D-Mass.) used the hearing to promote her bipartisan anti-money laundering crypto legislation with Sen. Roger Marshall (R-Kan.).

“Big-time financial criminals love crypto,” Warren said. “Just last year — just in one year — crypto was the payment method of choice for international drug traffickers, who raked in over a billion dollars through crypto; North Korean hackers, who stole $1.7 billion and funneled that money into their nuclear program; and ransomware attackers, who took in almost $500 million. The crypto market took in $20 billion last year in illicit transactions.”

Lee Reiners, policy director of Duke Financial Economics Center, testified that “crypto pseudonymity makes it ideally suited for bad actors” and that ransomware gangs — which use malicious software to block computer system access until a ransom is paid — wouldn’t exist without cryptocurrency because it’s “the exclusive payment method of choice for ransomware hackers.”

“That’s why Sen. Roger Marshall and I are reintroducing our anti-money laundering bill to clamp down on crypto crime and give regulators the tools they need to stop the flow of crypto to drug traffickers in places like North Korea and Iran,” Warren said.

Crypto inclusion is ‘predatory’

Throughout the hearing, cryptocurrency and digital assets were discussed as currencies that could potentially provide financial access to people of color and people with low incomes who don’t have access to traditional banks. Sen. Tim Scott (R-S.C.), the top Republican on the panel and a potential 2024 presidential candidate, said 44% of Americans who own cryptocurrency and trade digital assets are new investors or people of color. But Reiners called such inclusion “predatory.”

“There is no evidence whatsoever to suggest that crypto promotes financial inclusion. In fact, overwhelming evidence suggests the exact opposite is happening,” he said. “Most people who’ve invested in cryptocurrency have lost money. Of those people, a plurality are minorities and low-income Americans. So this is an example of predatory inclusion.”

Reiners likened such crypto activity to the subprime loans that led to the 2008 financial crisis. “We saw the same thing,” he said, “where low-income and minority communities are being explicitly targeted with very, very risky products, and, unfortunately, they have lost — in many cases — everything.”

Reiners went on to criticize Fidelity Investments for offering 401(k) investors access to cryptocurrency. “Would we think it’s OK if they just let Powerball tickets end up in our 401(k)s?” he asked. “Crypto’s just gambling.”

Vance likens crypto to the internet

Sen. J.D. Vance, who owns cryptocurrency, said he has been “fascinated” by the digital asset for a long time. “But I also recognize that there are downsides to it, that there are risks that come along with it,” he said. “My basic bias here is that we don’t really know what it is yet, meaning not just cryptocurrency but a lot of the other underlying related Web3 technologies and that our regulatory approach should basically be to protect consumers while ensuring that we don’t destroy the dynamic upside of this.”

Vance used an analogy to explain his point about dynamic upside.

“What I wonder is how people would have described the internet in the 1970s, the 1980s, before it was commercially available, before it was a major part of the way that we did commerce, and if we had taken an overbearing approach then, we might’ve destroyed a lot of the upsides that have come over the last three decades,” he said.

Vance’s analogy drew praise from Linda Jeng, a visiting scholar on financial technology and adjunct professor of law at Georgetown Institute of International Economic Law, and Sen. Thom Tillis (R-N.C.) — but not from Reiners, who said crypto isn’t new, noting that the first bitcoin transaction occurred in 2009.

“We have a 14-year track record to look back and assess this. It didn’t take the internet 14 years to prove its worth,” he said. “And so when you look at cryptocurrencies, I would just ask what’s the fundamental value? Why are they worth anything? ... There’s no reason to think that cryptocurrency’s going to generate returns indefinitely into the future. It’s clear that people are just buying it because they think they can sell it to someone else at a higher price in the future.”

U.S. isn’t leading in crypto regulation

Two of the three expert witnesses testified that the U.S. is at risk of falling behind other nations with cryptocurrency regulation, potentially empowering other countries to set the rules and standards for the rest of the world to follow when it comes to digital assets.

“Unfortunately, the U.S. is extremely behind the curve at this point,” said Yesha Yadav, a professor at Vanderbilt University Law School. She said that while American leadership has allowed the U.S. to export its financial market regulation across the globe, other entities — such as the European Union — have taken the lead on regulating crypto.

“Here, it doesn’t feel like we’re leading,” Yadav said. “It feels like we’re potentially following others where they have taken a lead and have set the standards and are using their frameworks to say what rules are good and what rules are bad.”

Georgetown’s Jeng identified other nations that are ahead of the U.S., including Australia, Hong Kong, Singapore and China.

The outlier was Reiners, the policy director of Duke Financial Economics Center, who disputed the characterization that America was falling behind and stressed the importance of American policy to be right, not first.

Other nations are “embracing crypto because essentially they’re gambling that it can help juice their economy,” he said. “Look at the situation in the Bahamas, where they embraced crypto. They rolled out the red carpet for [FTX founder] Sam Bankman-Fried, and obviously it didn’t turn out so well. As I said in my opening testimony, crypto is doing more harm than good to our society.”

Scott calls out SEC chair

Scott wasted little time going after Gary Gensler, the chair of the U.S. Securities and Exchange Commission.

“Before I dig into my opening comments, I want to address the elephant in the room,” Scott began. “If Chairman Gensler is going to action — enforcement action — Congress needs to hear from him very soon. The chairman had lots of time to do the rounds of the morning talk shows. If he has time for that, he should be here testifying with us this morning, and I hope that we see him here very soon.”

An SEC spokesperson told The Times that Gensler wasn’t invited to Tuesday’s hearing, which the person noted included no government witnesses.

Still, Scott criticized the SEC for failing to take meaningful preemptive action to prevent catastrophes and again called out Gensler’s absence.

“If they have the tools they need, were they just asleep at the wheel?” he asked. “If they don’t, why aren’t they here to tell us what they need? We’d be happy to have Chairman Gensler testify sooner — much sooner — than later.”