Washington proposes rules for innovative digital money, while letting government agencies continue fighting over the crypto that actually exists.
The draft Lummis-Gillibrand Responsible Financial Innovation Act was unveiled on June 7 to much fanfare. The names of Senators Cynthia Lummis (R., Wyo.) and Kirsten Gillibrand (D., N.Y.) on the bill suggest a bipartisan solution bridging the world of finance as it currently exists and the Wild West of cryptocurrencies, digital tokens, “smart” contracts, and decentralized, autonomous organizations.
Lummis and Gillibrand have put together a Rorschach test of a bill. As far as we can tell, the only thing animating it is the belief that innovative digital currencies already exist, or soon will. But if you take away that belief, the bill does very little. As art, satire, or a mirror for the mass delusion of crypto, it may be perfect; but as legislation, it is deeply unsatisfying.
Perhaps the bill’s most important contribution, if any, is to define digital assets, dividing the digital-asset universe into “virtual currencies,” “payment stablecoins,” commodities, and securities. The bill defines a “digital asset” as a ledger entry on a blockchain: a “natively electronic” item “recorded using cryptographically secured distributed ledger technology or any similar analogue.” Besides stretching the usual notion of an “asset,” the definition further asserts that such a ledger entry “confers economic, proprietary, or access rights or powers.” A naïve observer might have believed that commercial and property law confers such rights and powers. But, in the crypto world, that logic doesn’t exist. Indeed, the hand of the crypto lobby is visible right up front in the bill’s definitions section, in which privileges are arrogated to the industry from the start.
The bill offers new regulatory treatment for cryptocurrencies to the extent that such digital assets may be classified as virtual currencies or payment stablecoins. A “virtual currency” is defined as a digital asset that “is used primarily as a medium of exchange, unit of account, store of value, or any combination of such functions.” In the world outside of the bill, these traditional functions of money are linked by “and,” not “or,” because many things would otherwise (and undeservingly) be able to be called “money” if only one function was deemed sufficient. Nevertheless, no existing cryptocurrency meets even this definition, a definition that wouldn’t pass muster in a basic Economics 101 class.
For something to be a medium of exchange, it must facilitate transactions of goods and services by making barter unnecessary. Items of real economic importance can establish terms of trade vis-à-vis one another because both can be, and regularly are, exchanged for money. Cryptocurrencies, on the other hand, are most often exchanged for other cryptocurrencies. It is hard to identify a cryptocurrency that facilitates real, noncriminal economic exchanges with any frequency. None are primarily used as a medium of exchange in an economic sense.
For something to be a unit of account, it must be used as a standard when registering and discharging debts. The government denominates your tax bill in dollars, and you must pay dollars to discharge it. The same goes for bank loans, your salary, and so on. By contrast, no debts of any economic importance are denominated in cryptocurrencies — and “staking” claims do not count. Indeed, few, if any, users of crypto even pretend to measure their holdings in any unit of account other than the dollar or the official currency in the user’s home jurisdiction.
For something to be a store of value, it must retain its purchasing power over time. No money has ever done this perfectly, of course. But crypto’s failure to function as a medium of exchange means that it lacks purchasing power until it is converted into actual money. And even if we credited cryptocurrencies with purchasing power, the frequent hyperinflations and hyper-deflations of cryptocurrencies would clearly disqualify them as stores of value.
If no extant cryptocurrency is a virtual currency — and if the “used primarily as” part of the definition is not read as a statement about intentions rather than facts — then a cryptocurrency’s last hope for special regulatory treatment is to be a “payment stablecoin.” According to the Lummis-Gillibrand bill, a payment stablecoin is “redeemable, on demand, on a one-to-one basis for instruments denominated in United States dollars and defined as legal tender” and “intended to be used as a medium of exchange.” Whether there are any stablecoins fully redeemable on demand for dollars as with a money-market mutual fund is an open question, but it is already clear that none of them qualifies as a medium of exchange.
Thus, if you don’t believe the industry hype about cryptocurrencies — and you shouldn’t — cryptocurrencies are treated as either commodities or securities by the bill, which preemptively recharacterizes this potential defeat as a victory. According to the official summary of the bill, it “makes a clear distinction between digital assets that are commodities or securities by examining the rights or powers conveyed to the consumer, giving digital asset companies the ability to determine what their regulatory obligations will be and giving regulators the clarity they need to enforce existing commodities and securities laws.” Indeed, it may be that the crypto lobby asked for the world but that all they got was the rebuttable presumption that crypto is a commodity. Nevertheless, we doubt that even that outcome is benign.
A proposal toward the end of the bill calls for regulating innovative technologies via “interstate sandbox activities,” which would bless the kind of permissive regime established in Wyoming for cryptocurrency. That proposal contained in the bill states that a “financial product, service, business model, or delivery mechanism” is innovative if it “has no substantially comparable, widely available analogue in common use in the United States.” As we and others have stated repeatedly, neither cryptocurrency’s supposed functionality as digital money nor its implementation on distributed-ledger technologies is innovative.
In sum, it seems that the financial innovations protected by the Lummis-Gillibrand Responsible Financial Innovation Act do not yet exist, begging once again the many pressing questions about how the rampant abuses of the current cryptocurrency landscape will be legally resolved.
Steve H. Hanke is a professor of applied economics at Johns Hopkins University. He is a senior fellow and the director of the Troubled Currencies Project at the Cato Institute. Matt Sekerke is a fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.