Senators Treat Crypto Like a Digital New Jersey Turnpike

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Two US senators, Republican Cynthia Lummis of Wyoming and Democrat Kirsten Gillibrand of New York, unveiled last week a 69-page blueprint for regulating digital assets. Although the rough draft is unlikely to result in any legislation until 2023 or later and is certain to be modified, its fundamental premise represents a bipartisan consensus in Washington. In the words of the senators, “it’s important to create guardrails,” to which they added, “while also allowing room for innovation to flourish.”

But you only build guardrails after choosing the path. The only “room for innovation” is to change lanes within the guardrails or to pick a speed between the posted minimum and maximum. No innovation is allowed in the direction, path or destination.

Crypto jumped the existing guardrails in 2008, and innovation flourished without waiting for federal permission. Before rebuilding the barriers, wise legislators should ask what the problem was with the old ones so they don’t repeat the same mistakes.

The New Jersey Turnpike provides a useful cautionary tale. Government planners allied with private interests to build a high-speed road through eastern New Jersey, connecting the metropolitan areas of the Eastern Seaboard. Only 15% of the traffic was projected to connect points within New Jersey — the exits were too far apart and the tolls too high for local transportation. The road sliced through neighborhoods, towns and farms — bulldozing what the developers described as “gritty” properties (minority, poor, rural). Property owners were compensated for the acreage taken but not for the destruction of value when their homes were cut off from jobs and shopping or farmers were forced to drive their equipment miles to get from one half of their farm to the other. Small towns where residents had lived, worked and farmed locally were destroyed to be rebuilt as bedroom communities for commuters to New York and Philadelphia. The guardrails of the turnpike converted the “Garden State” — which still exists in western New Jersey — into commuter housing, industrial concentrations and transportation hubs.

Like the turnpike planners ignoring the locals, Lummis and Gillibrand make no mention of the crypto economy itself. The bill is concerned solely with people moving traditional financial assets into or out of crypto — like truck drivers speeding from New York to Philadelphia without a thought to the gritty people outside the guardrails.

Similarly, Lummis and Gillibrand call for an advisory committee of public and private sector experts. While the proposed bill does not describe the private sector constituents, I suspect it means people running crypto exchanges and investment funds, not innovators or users of crypto.

Much of the proposed bill deals with carving up crypto into commodities (regulated by the Commodity Futures Trading Commission), securities (regulated by the Securities and Exchange Commission) and currencies (regulated by the Treasury). This is fine for Washington empire building, but the proposed regime attacks a fundamental idea of many crypto projects — that decentralized autonomous organizations can blur distinctions among investors, customers and employees. Like building a turnpike that divides a county into residential, business and agricultural areas — with guardrails curbing movement among them — enforcing rigid categories for tokens destroys the character of many crypto projects.

The proposed legislation requires all stablecoins to be backed 100% by traditional financial assets. Not only does this not allow room for innovation, it sends crypto back centuries to the pre-modern financial era before fractional reserve banking. This puts another key crypto idea outside the guardrails — that a better alternative to a single government-issued currency can be achieved by allowing competition among different types of exchange mechanisms and stores of value.

An important goal of many crypto innovators is to allow pseudonymous peer-to-peer transactions without centralized oversight or control. Lummis and Gillibrand put this firmly outside their guardrails with instructions to the Treasury to enforce sanctions — and presumably all sorts of other regulation enforced by restricting transactions — in the crypto economy.

A minor provision that is nevertheless telling is a call to study electricity consumption of proof-of-work tokens. I consider this to be a misrepresented and exaggerated issue, but regardless of opinion, it makes no sense to conserve electricity by regulating crypto. To reduce electricity use, tax electricity and let individuals decide how to cut back. Letting environmentalists with no interest in crypto pick what electricity use is justified and what use is not makes no environmental or economic sense. This provision is an announcement to all political interest groups that it’s hunting season for favors to be funded by restrictions on crypto innovation.

Lummis and Gillibrand’s blueprint is a manifesto for an alliance of Washington empire builders and crypto profiteers to carve up the crypto economy into niches that are profitable to outsiders, disregarding the desires and interests of people building or using crypto services. In all the 69 pages, I cannot find any sign that authors use or value crypto for anything other than expanding regulatory fiefdoms or making traditional currency profits, much like the New Jersey Turnpike planners disregarded small-town life in the Garden State.

More From Other Writers at Bloomberg Opinion:

• Coinbase Made Some Mistakes: Mark Gongloff

• Crypto’s Value Comes From Crypto’s Volatility: Tyler Cowen

• The Next Stablecoin Collapse Could Be a Lot Worse: Editorial

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is author of “The Poker Face of Wall Street.” He may have a stake in the areas he writes about.

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