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Midterm Election May Determine the Fate of Crypto

With a number of regulatory legislations up for consideration by a global regulatory power, the makeup of the US Congress in 2023 can determine the fate of crypto, and everyone – not just crypto natives – should be watching.

Many crypto commentators are up in arms in regards to the US midterm elections coming up this Tuesday. To them, Capitol Hill is currently considering bills that will impact how crypto is regulated – and midterm voting will define what bills would pass, and not. 

According to crypto natives, the outcome of these elections, in the long term, can fundamentally determine how the regulation of crypto and digital assets, but also blockchain technology, will look like.

While crypto is being hailed by many as “the future of money”, it is also important to recognise how such laws can be drafted and debated on – in public – in a way that takes everyone’s best interests into account.

While US regulatory forces have been particularly unkind to a future where crypto is commonplace, we can only see what to do once the next set of US Congress seats are appointed.

Amongst the many bills that can rewrite American legislation include two equally important bills relating to crypto – the DCCPA, and the Stablecoin Transparency Act.

The Digital Commodities Consumer Protection Act (DCCPA)

The Senate Agriculture Committee’s Digital Commodities Consumer Protection Act (DCCPA) is intended to protect customers’ assets, where providers are to hold greater accountability by imposing rules.

The DCCPA seems like it may be a good change of pace, given the immeasurable loss from the downfall of platforms like Celcius Network and Voyager Digital – the bill defines crypto tokens as “digital commodities.” 

The term “digital commodities” will put crypto under the watchful eye of the Commodities Futures Trading Commission (CFTC) – but one striking detail may harm crypto businesses and users.

In the initial one-pager of the DCCPA, a clause mentions that all digital commodity platforms must register with the CFTC, which means that once approved, US-based DeFi businesses and platforms may have to shut down operations, or move out.

While Developers can take a sigh of relief as this DCCPA clause exempts persons who “develops or publishes software”, what the bill defines as one of many in the category of “digital commodity broker,” concerns of leaving out key DeFi operators still remain.

In a sense, approving the DCCPA can hinder and stop the flow of DeFi itself in the US. While open-access, decentralised software-driven ecosystems of interconnected, composable protocols are heralded by those eager to keep crypto decentralised, registering with the CTFC will inevitably make their operations centralised.

DeFi doesn’t need intermediating authorities – as a “permissionless” environment can expand what developers can do to innovate smart contracts and more. Introducing an intermediary authority only puts in extra rules that can limit the possibilities of what DeFi can do.

Bringing in a centralised entity to keep ‘DeFi’ in check can also put interest rates, gas and service fees, and other taxable parts of any transaction under the limits set by financial middlemen. It’s also worth mentioning that the US’s financial service sector’s revenues – the price that banks and other institutions charge for their intermediation and supervision – ran to $4.85 trillion in 2021, or 7.4% of the country’s GDP.

The Stablecoin Transparency Act

In March 2022, Senator Bill Hagerty (R-Tenn.) introduced S. 3970, the Stablecoin Transparency Act and Congressman Trey Hollingsworth (R-Ind.) introduced a companion bill (H.R. 7328) in the House. 

This resulted in a still work-in-progress combination bill that was made by opposing lawmakers, with much debate still focused on the question of who gets to regulate stablecoins.

Currently, the bill states that stablecoin issuance is not a regulated bank’s job, but rather non-bank issuers who have to operate under strict regulations set by the Federal Reserve, or any specific monitoring force. 

But what’s the big deal between who gets to issue stablecoins? It can determine whether stablecoin issuers can get access to federal backing, or end up getting deposit coverage from  the Federal Deposit Insurance Corporation.

Federal backing allows stablecoin issuers to apply for loans subsidised by the government, whereas deposit coverage can assist issuers who cannot pay debts.

Potential US stablecoin issuers who may be affected include Circle (currently operating with no banking licence); Paxos (operating on a federal trust charter from the Office of the Comptroller of the Currency); and Custodia Bank (licensed under Wyoming’s digital asset banking regulation).

Is there anything else?

On top of the bills, the US Federal Reserve has been considering implementing a central bank digital currency (CBDC) – but it is unclear how the DCPAA, or stablecoins, will operate alongside each other.

If the US decides to pursue a CBDC, coins or stablecoins regulated by the US Fed may contribute to further dollar dominance in the global economy, which then can impact the monetary sovereignty of other countries.

Not to mention, there are other risks at hand. At the moment, none of the bills are clear in measures to control and contain any chances of hyper-surveillance from private corporations.

Legislators, upon regulating crypto, should consider balancing what there needs to be limits on, while also encouraging innovation, financial competition, customer protection, and geopolitical stability. 

Suffice to say, the results of the 2022 US midterm elections will have a great impact on the future of money itself.

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