By: Chi Kim
During his second term, President Biden has taken a more proactive stance on crypto by asking the Federal Reserve to explore digital currency options and even announced a general gameplan around around digital assets. However, not all initiatives were as open minded. In July 2022, the United States Office of Government Ethics issued a directive that all U.S. officials holding cryptocurrencies and stablecoins directly as personal investments will be disqualified from working on any regulation that could influence the value of their digital assets. Although well-intentioned, this directive is an oversimplified policy to mask the appearance of conflicts of interest that will stifle meaningful regulation of the crypto-industry. The policymakers for crypto should actually understand the space and its nuances to ensure that it can develop without obstacles. This directive is short-sighted because if rulemakers do not hold and engage with a modest amount of crypto, then they will not have the sufficient knowledge and experience to effectively rulemake.
The crypto industry is not composed of regular securities and should not be treated as such by regulators. The crypto-industry is a fluid environment with new products emerging from decentralized finance (defi) that will require regulators to be just as flexible. When crypto developers create new projects, they often do not start from scratch and use a base layer cryptocurrency from commonly used platforms like Ethereum, Polkadot, or Solana to start building. For the layperson, I would analogize this to real estate, where developers continue to build their projects based off of the technology of the underlying platform and smart contracts to bring more complex financial products from these base layers. Beyond complex layering structures, there are utility coins that have functionality built around the coin’s use like for file storage or for renting computer power. Most notably, Non-Fungible Tokens (NFTs) have exploded in popularity and have come to resemble a market much like art more than any type of financial product. These products cannot be blanketly dismissed as securities.
Federal officials unfamiliar with cryptocurrency will be greatly disadvantaged without the ability to learn as a retail user. As a relatively new industry, crypto does not have traditional paths or longstanding resources to become knowledgeable. The crypto industry does not have a universal organization that has certification courses like the FINRA’s Securities Industry Essentials Exam or Series 7. Most crypto experts became knowledgeable from working in industry or simply by being a customer. Government officials should be afforded the same opportunity to learn by becoming end users. From this perspective, government officials can also create better policies that actually serve retail users and the ecosystem.
Lastly, there is a great incongruence of standards between the average federal employee and Congressional members. Last year, Senator Kelly Loeffler and Senator David Perdue may have profited in the ballpark of tens of millions of dollars from selling securities with non-public information. During the 2021 term, Congress even beat the market trading nearly $290 million in securities through the year. If a stricter standard needs to be set, it does not have to be here, but rather to individuals that regularly benefit from non-public information. The Biden Administration has an opportunity here to create a more comprehensive policy that can be replicated rather than implementing a crude blunt ban.
The Biden Administration should temper its strict restrictions to conform to the different nuances within the cryptocurrency ecosystem by allowing certain kinds of utility coins to be held. Government employees can also be supported with a robust policy that consists of holding limits, disclosure requirements, and restricted trading periods. Holding limits will cap the amount of crypto held by policymaking employees to give flexibility around holding small amounts, especially for educational purposes. Disclosure requirements can help create transparency around financial gains by the employee to their respective agencies. Restricted trading periods create safeguard periods for employees following significant events to maintain trust around non-public information. These efforts create a more robust policy with flexibility for small holdings rather than create a superficial blanket against conflict of interests.