September 15, 2022

ICYMI: Toomey Discusses Crypto Regulation on Bloomberg’s Odd Lots Podcast

Washington, D.C. – U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) this week joined Joe Weisenthal and Tracy Alloway on Bloomberg’s Odd Lots podcast to discuss his concerns with the Securities and Exchange Commission’s (SEC) regulation-by-enforcement approach to cryptocurrencies.

Senator Toomey also highlighted his proposal to establish a new regulatory framework for payment stablecoins and expressed optimism over Congress passing stablecoin legislation by the end of this year.

On the harmful consequences of applying existing securities law to cryptocurrencies:

“Much of our securities law is based on 1933 and 1934 legislation, literally. And court cases that followed that, often in the forties and fifties. Can you imagine being more far removed from crypto? It doesn’t fit well.”

On the importance of Congress passing legislation to provide a regulatory framework for cryptocurrencies:

“In the absence of Congress speaking, you have what we are witnessing, which is regulators trying to grab authority here, whether or not they ought to. And that’s no way to create an environment for a really important new technology to thrive. That’s why I’m so determined to get something done in the legislative realm so that we can provide some certainty and hopefully a rational set of guardrails that will allow this innovation to continue.”

On the benefits of cryptocurrencies and their underlying technologies:

“I also think that there’s going to be very exciting innovations that we probably can’t imagine yet. When the internet was first being developed, I don’t think too many people envisioned Amazon and Uber and Netflix and the things that have totally transformed consumption. And not just consumption of information, but even consumption of goods and services. I think that could happen here as well.”

“I think programmable money, for instance, is a very exciting technology. The ability to have embedded in a unit of value, a form of money, a transaction, a movement of that value based on some exogenous but verifiable event. That’s really interesting. And I could imagine lots of applications validating ownership in an immutable way. That’s something that blockchain allows. I think there’s all kinds of applications that are likely to emerge and we should not presume that that can’t happen, and we certainly shouldn’t do anything to preclude it.”

On Chairman Gensler’s regulation-by-enforcement approach to cryptocurrencies:

“Part of the problem is there has not been sufficient clarity as to what does constitute a crypto security and what does not. You could use crypto tokens in a transaction that definitely falls under the jurisdiction of the SEC, right? So Celsius and Voyager, when they’re taking crypto deposits, paying an interest rate on it, using those deposits to then lend to hedge funds and other institutions, that definitely falls under the SEC. And frankly, I think there are questions about why after an enforcement action against BlockFi early in the year, nothing happened to Celsius and Voyager until they blew up. But that’s a little bit different from the question of why is it that every crypto project other than Bitcoin is a security. I think legislative guidance that would make clear what is and what is not would be very, very helpful.”

“I would say two things that ought to cast serious doubt on Chairman Gensler’s argument. One is, there are many projects where there is no centralized authority. Bitcoin is an obvious case, but it’s not the only one. And if you have a truly decentralized platform, you have code, you have software. That’s what it is. The fact that people are using it doesn’t mean that there’s a central authority. And the idea of a central authority, traditionally an issuer, is at the heart of what makes something a security.”

“The other thing I would point out is that every security that I can think of involves a claim on an issuer. If it’s equity, it’s a claim of ownership. If it’s a bond, it’s a claim on the assets. There’s a specific claim, and there’s usually also a specified return, either it’s an interest rate or it’s a dividend, or it’s a promise of some share of income. Crypto doesn’t typically have that. Now there may be some tokens that do, and I’ll call them a security. But when there is no claim on an issuer, when there is no built-in return, then I’m not sure it should even pass the Howey test. And at a minimum, I think you have to acknowledge that it’s very different from all the securities that we have acknowledged over the years. That’s why I think Congress should act on this and specify how these projects ought to be regulated.”

“Look at it from the point of view of a creative developer who has an idea for an application of a smart contract... But it’s got to run on a Layer 2 protocol. And his concern is he really doesn’t know, is there a way to design this so that it wouldn’t be considered a security or do I have to go to bed every night, wondering whether the SEC’s going to come knocking on my door in the morning and accuse me of dealing with an unregistered, therefore, illegal security? That’s where you end up, that’s where we are now. And that’s where you end up when you don’t provide the clarity that both consumers and developers deserve.”

On the future of stablecoin regulation:

“I think [stablecoins are] the easiest and simplest challenge for Congress and for regulators to solve. I’ve introduced legislation, a draft of a bill that deals with the category of stablecoins that I think could plausibly be widely used as a method of payment. And that would be asset-backed stablecoins. I think algorithmic stablecoins are in a different category, but what I define as payment stablecoins and are backed by assets, I think a regulatory regime makes sense . . . I think it would make a lot of sense to start there. I could imagine you could start in other places, but that’s my first ambition in this space.”

“I believe that when Terra and Luna collapsed, it seems to have elevated the issue of stablecoin regulation with the White House and with the administration in general, and with some of my colleagues . . . The fact that there was a sort of sensational bad event, did move this up the list of priorities, put it on people’s radar, who didn’t have it on their radar.”

“I still think there’s a chance to get stablecoin legislation done this year. I think the administration would like to get something done. There are Republicans pretty overwhelmingly that would like to get something done. Some Democrats would as well.”

“I’m still going to hold out hope that we can get a stablecoin bill done this year, and next year Congress might do considerably more.”

On the best approach to consumer protection:

“My approach here is the same as it is in most areas, which is to have a lot of respect for consumers. I think sometimes some of my colleagues and some of the regulators adopt the really paternalistic approach. They want to protect consumers from themselves and they want to put all kinds of regulations about who can do what and under what circumstances. I don’t view the world that way. What I think we ought to do is make sure that consumers have enough information to make a well-informed decision about what they want to do. So, for me, it’s mostly about disclosure. With the stablecoins, for instance, the heart of the regime that I’m advocating, is full disclosure, audited disclosure, attestation of continuity of the assets backing the stablecoin. That’s the heart of it for me. And I would take a similar approach to non-stablecoins, other crypto projects.”

Click here to listen to Ranking Member Toomey’s full interview on Bloomberg’s Odd Lots Podcast.