On Tuesday, the Senate Banking Committee discussed systemic risks with a panel of crypto industry experts in a hearing that was titled ‘Cryptocurrencies: What are they good for?’ A few lawmakers made it a point to highlight the positive attributes of the crypto industry. According to Senator Cynthia Lummis of Wyoming, the openness and transparency offered by open-source finance can be helpful in promoting financial inclusion. Ohio’s Senator Sherrod Brown said that there were a number of non-financial useful applications of blockchain technology. However, the room appeared to be largely unconvinced that cryptocurrencies would turn out to be a good solution for the current, extremely flawed financial system.
According to Senator Elizabeth Warren of Massachusetts, it doesn’t sound better to leave their existing financial system, which is at the whims of massive banks, and switch to cryptocurrencies because that would put them at the whims of some faceless and shadowy group of miners and super coders. Warren also wrote a letter on Tuesday in which she called on Janet Yellen, the Treasury Secretary, to come up with a framework that can be used by federal agencies for regulating cryptocurrencies. She said that growing crypto demand and the integration of these digital currencies into the financial was creating threats for the environment, consumers, and the financial system as a whole.
There were two major themes that had the focus of the lawmakers; the reality of the decentralized nature of cryptocurrencies, which means that they don’t rely on central authorities such as banks for operating, and the system failures in the crypto space that could have an impact on the traditional financial system. One of the hearings’ participants said that if you look at crypto through a realistic lens, it becomes obvious that it has the same problems and is not a miraculous solution for the existing financial system.
The power concentrations within the crypto space need to be acknowledged and thoughtful risk and policy decisions need to be taken for addressing this power. The panel was also questioned about the developing problems in digital currencies that could have an impact on the traditional financial system. This was put forward by Senator Pat Toomey. The experts responded that while this was certainly a possibility, it didn’t mean that the country should shy away from the crypto market. Instead, they should place proper guardrails for the market participants, including hedge funds.
It was also noted that cryptocurrencies have not yet reached a level of scale or have such a reach into the economy that they can have systemic implications for everyone involved. This was in reference to the recent comments that were made by Raphael Bostic, the Atlanta Fed President, which had also been echoed by James Bullard, the St. Louis Fed President. When Bitcoin and the other cryptocurrencies had sold off in May, both policymakers had stated that they did not regard digital currencies as a systemic concern. While a bug could be a systemic threat, the same rules applied to other commodities and not just cryptocurrencies.