The Deeply Flawed Crypto Bill Making Its Way Through Congress

Last month, a bipartisan majority of the House of Representatives passed a bill to deregulate the cryptocurrency industry. The Financial Innovation and Technology for the 21st Century or “FIT 21” Act passed with 71 Democratic votes and now heads to the Senate for consideration, where there appears to be bipartisan interest considering the measure. And while the White House released a statement of opposition, it did not threaten to veto the legislation. But even if the bill dies in the Senate or on the president’s desk, its progress is still worrisome because it might augur that an inadequate regulatory regime is coming for the booming crypto economy.

Having spent two years working on financial regulation and consumer protection issues at the Treasury Department, I find bipartisan support for deregulating the crypto industry troubling, if not entirely surprising. A complicated financial instrument that’s lightly regulated—when has that ever gotten us into trouble? Instead of joining a political and financial race to the bottom, Congress should work with the White House to protect Americans from predatory financial companies. 

In September 2022, I oversaw a Treasury Department team, taking a hard look at the risks that crypto poses for consumers and investors. We found that some of the technology in the crypto ecosystem may be novel, but the risks they pose are painfully familiar. We documented frequent instances of operational failures, market manipulation, fraud, theft, and scams—including schemes with eye-popping names, such as “rug pulls” and “pig butchering.” Our report, presented to the White House, noted how some crypto companies misleadingly market their products as safe and stable, with guaranteed returns. Sometimes, they even liken them to federally insured bank deposits. But as we saw in the bankruptcies that piled up in the “crypto winter” of 2022, crypto firms take big risks, sometimes using their customers’ money. Investors often don’t appreciate the potential for loss or what happens when a crypto company goes bust. 

While proponents claim that crypto will revolutionize payments, it has not been widely used for consumer purchases or money transfers because it’s too volatile, the fees are high, and the technology is clunky. It has been a useful tool for money laundering, sanctions evasion, and cybercrime. Last November, the CEO of the world’s largest crypto exchange, Binance, pleaded guilty to criminal violations of anti-money laundering laws. As one of the FIT 21 Act’s Democratic supporters once said, crypto’s most obvious use case seems to be “some weird combination of libertarian fantasies and drug dealers and terrorists.” 

Financial regulators can partly address the gaps. But as is often the case, there are others that only Congress can fix. Commonsense examples include providing the Commodity Futures Trading Commission (CFTC) with regulatory authority over spot markets for crypto commodities like Bitcoin and enhancing the Treasury Department’s authority to address crypto money laundering. 

Unfortunately, the FIT 21 Act creates a special, light-touch regulatory framework for companies and products that use crypto-based technologies. It would exempt investments that use “blockchain” technology from important investor protections and allow self-certified “decentralized” technology systems to evade the authority of the Securities and Exchange Commission (SEC). While the legislation is pitched as a boon to small businesses taking on big banks, others will benefit from this flimsy framework. Fly-by-night crypto outfits, Big Tech companies, and Wall Street banks alike could all take advantage of the loopholes that FIT 21 creates in protection laws so long as they utilize blockchains or decentralized platforms.

By undermining critical consumer and investor protections for crypto products, Congress would whittle away the 90-year-old laws that ensure investors have adequate information to make sound investment decisions. After the stock market crash of 1929, caused by Wall Street banks and other unregulated speculators peddling sketchy financial products to unwitting investors, President Franklin Roosevelt prioritized enacting new securities laws as an essential part of the New Deal. FDR also called for regulating the stock exchanges that were rife with conflicts of interest and protected the profits of Wall Street trading houses at the expense of ordinary investors. The stock exchanges had their own version of Sam Bankman-Fried, or SBF, the former CEO of the bankrupt crypto exchange FTX, who was recently convicted of several counts of fraud and conspiracy for misappropriating FTX customers’ money. In the midst of a lobbying blitz against the newly created SEC, New York Stock Exchange President Dick Whitney was convicted of stealing from investors in the funds that he managed. The FIT 21 Act would exempt crypto exchanges like FTX from the safeguards against conflicts of interest for customers that apply to other exchanges.

There are other historical parallels to this misguided effort. Many of the risks of crypto mirror the excesses that led up to the 2008 financial crisis. Like subprime mortgages, crypto exposes low-income and minority communities to scams and predatory financial products that can strip their wealth. As it did when the CFTC tried to regulate complex financial derivatives that contributed to the financial crisis, Congress is again proposing to clip the wings of a financial watchdog—this time, the SEC—that is trying to enforce the law and protect the public against risky financial products. And like today’s crypto critics, pre-crisis skeptics of financial engineering were derided as “Luddites” or naifs who would watch the best financial markets migrate to London. If we don’t learn from our nation’s financial crises, we’ll be condemned to repeat our mistakes. 

It’s not clear why Congress is poised to give the crypto industry this special dispensation since it’s not a politically salient issue in any meaningful sense. Most Americans have shown little interest in using crypto and have so far benefitted very little from it. Claims that crypto can advance financial inclusion have not materialized. Surveys show that household use of crypto has declined by over 40 percent in the past two years and that it’s overwhelmingly being used for investment and speculation, not to make everyday payments. Americans who are familiar with crypto are skeptical of its legitimacy. This all suggests that the crypto industry’s outsized influence might have more to do with the tens of millions of dollars that crypto-affiliated groups are pledging to spend during this year’s election and the industry’s substantial political and lobbying operation.

Don’t get me wrong. It would be good for Congress to spend more time on financial policy. More needs to be done to address the legacy of predatory and discriminatory lending that has caused many Americans to distrust financial institutions and turn to shady actors. For example, right now, hundreds of thousands of people have lost access to their money in the bankruptcy of a poorly managed financial technology company. To its credit, the Biden Administration has amassed a strong record on consumer and investor protection, including helping Americans save millions of dollars by eliminating unfair “junk fees.” These issues are far more worthy of Congress’s attention than providing special treatment to speculative products and technologies.

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