Rep. Warren Davidson has a such a stellar reputation among cryptocurrency enthusiasts for his work promoting laws to nurture America’s burgeoning blockchain industry that Bitcoin Magazine dubbed him the “Crypto Congressman.” But to hear him tell it, he hasn’t exactly had a lot of competition.
When the Ohio Republican became a member of the House Financial Services Committee after winning a 2016 special election for Congress, one of his first priorities was to raise awareness of cryptocurrencies. He found, however, that “the level of understanding inside Congress on crypto and blockchain more broadly was was pretty low,” he told MarketWatch in an interview.
But that is starting to change, as it becomes clear the cryptocurrency experiment is not going away any time soon, Davidson said. He said that his colleagues are becoming informed on the issue, with some recognizing the need to collaborate with the Securities and Exchange Commission to create new rules that would provide clarity for the emerging industry to succeed or fail on its own strengths, rather than be smothered by bureaucratic indecision.
Now, Davidson is optimistic that Congress and the SEC can come to an agreement relatively soon that will create a bright-line test to determine whether a crypto token will be considered a security or an asset. That’s a critical question since securities, but not assets, face strict oversight by the SEC and must go through the burdensome and expensive process of registering with the regulator.
Davidson reintroduced bipartisan legislation in March, called the Token Taxonomy Act, which would give entrepreneurs regulatory-cost certainty before they launch a crypto-related project. Though Davidson said he was “a fan of bitcoin in particular,” the act would be less focused on the most popular cryptocurrencies like bitcoin and ether which the SEC has said aren’t securities. But it could be valuable to entrepreneurs planning to create virtual tokens of their own.
The bill would create a legal definition of a “digital token,” which would be exempt from U.S. securities laws if it can be demonstrated that no entity is able to modify or tamper with the ledger that tracks the token’s transaction history. It would also make the exchange of digital tokens tax exempt, contrary to the IRS policy today. The ability for users to know they won’t be taxed for exchanging a cryptocurrency — as is the case with spending a U.S. dollar — is essential for more people to transact using digital currency, advocates say.
Davidson promoted his bill as a way to make the U.S. more competitive in the crypto market, saying in a March statement that “the window is closing. If we don’t act quickly, the United States will be left behind. Other countries have found ways to regulate blockchain projects and, in doing so, have made themselves more attractive to entrepreneurs.”
The congressman has also been a leading voice in the debate over efforts to create a digital form of the U.S. dollar that would enable holders to maintain the safety, stability and anonymity that Federal Reserve notes provide, but in a digital form that allows online transactions.
There are many ways a so-called central-bank digital currency can be designed, but Davidson, a self-described libertarian Republican, has taken a somewhat controversial stance. He said he believes that it should be designed on a decentralized and permissionless structure, just like bitcoin is today. This would create a very robust system, like bitcoin’s, which has run for a decade without interruption or a successful cyber attack.
At the same time it would involve the Federal Reserve giving up control and potentially make it possible for bad actors to frontrun transactions. It is also not clear how the Fed, in such a scenario, would reward users for verifying transactions on the network.
Other members of Congress support the idea of a digital dollar, but for much different reasons. For instance, many Democrats see it as a means to create more financial inclusion and for the government to quickly and directly issue benefits to citizens through individual bank accounts held at the Fed.
“I think the idea would put far too much power in the hands of the Fed, and it would be inherently vulnerable,” because it would rely on this centralized authority’s guarantee that it could not be hacked by cybercriminals, a tall order given the growing spate of cyberattacks on vital U.S. institutions, the congressman said.
The issue of privacy, however, is one that might bring enough Democrats and Republicans to agree on a framework for a future digital dollar. Davidson is passionate about the idea that the emergence of the modern finance has drastically reduced the power of the Fourth Amendment, which guarantees the right of U.S. citizens to be free from unreasonable government search or seizure of their personal information.
The so-called third-party doctrine, developed by a series of Supreme Court cases in the 1960s and 1970s, says that citizens do not have a legal right to privacy with respect to information that a person willingly gives to a third party, including banks and other financial firms. Davidson argued that modern society requires citizens to share information with all sorts of institutions, but a digital dollar, designed correctly, would greatly reduce the need for Americans to share data with financial institutions that must provide information, often without a subpoena, that federal agencies demand.
Many Democrats would also be excited to bring more power to the meaning of the Fourth Amendment, and Davidson has personally worked with Democrats like Rep. Zoe Lofgren of California to expand civil rights by paring back some provisions of the Patriot Act.
“I think the collaboration on the regulatory front with the SEC is making progress, Congress’ understanding of the issue has increased, and we have a chairman of the SEC understand the issue personally,” Davidson said, citing reasons to be optimistic that some sort of pro-crypto regulations will be enacted. “It’s not a partisan issue — it really breaks on unconventional lines.”