Building Blocks for America’s Financial Future
When he was sworn into office in January 1961, President John F. Kennedy delivered a stirring inaugural address. He struck a profoundly idealistic note in his speech, but his hopefulness imbued a generation of Americans with the audacity to change the world. Just four months into his term, President Kennedy spoke before a joint session of Congress and announced the goal to send a man to the moon.
In the context of the “space race” and the United States’ competition with the Soviet Union, this ambitious objective concretely defined a standard for American success. The associated computing and technical obstacles to this achievement challenged America’s best minds to synthesize their collective brainpower in the pursuit of a common goal. Symbolically and scientifically, Neil Armstrong’s first steps on the moon spurred a generation of American advancement.
But what if the US had been second? What if the Soviets had “won the race?”
Since the establishment of the Bretton Woods system in 1944, the United States has been the global leader in economic policy. Additionally, our Securities and Exchange Commission (SEC), our Internal Revenue Service (IRS), and our Federal Reserve have served as models for the rest of the world. With this in mind, American regulators have been alarmingly slow to adopt or even provide guidance on blockchain technology and cryptocurrency.
As FinTech innovation takes the world by storm, it’s vital for the American government to support its innovators. Anything less would amount to the renunciation of American exceptionalism. Clear and timely guidance is crucial.
In March, the SEC rejected the Winklevoss twins’ exchange traded fund (ETF) proposal. Apart from brief – and unofficial – comments by Valerie Szczepanik (head of the agency’s distributed ledger working group), since then there has been nary a whisper regarding cryptocurrency or blockchain technology. The potential for blockchain to revolutionize the securities industry is beyond reproach. Reducing transaction fees, solidifying ownership, and improving investor communication should be high on the agency’s priorities list.
By comparison, the Abu Dhabi Securities Exchange has already begun hosting shareholders’ meetings using blockchain technology.
At present, the US SEC is working on a Consolidated Audit Trail (CAT) to efficiently and accurately track all activity throughout the US Markets in National Market System (NMS) securities. The last publicly available update is dated January 17, 2017. At this point, Thesys Technologies LLC had been selected as the “Plan Processor” for the CAT NMS Plan.
The slow reaction of the SEC might be attributed to management turnover. After Chair Mary Jo White departed, President Trump selected Jay Clayton as her replacement. Nonetheless, this is no excuse for the snail’s pace of the securities industry’s foremost leader. For the SEC to retain its position and prestige, the agency must embrace the financial future.
Blockchain technology presents uncertainties, but that’s no reason to prefer the status quo. As international exchanges adopt cryptocurrencies and blockchain technology, the SEC risks getting left in the dust.
Of course, this plight is nothing compared to the backwards approach of the IRS.
Since overreaching its authority in an ill-advised power grab, the IRS has failed to respond to Congressional concerns about cryptocurrency regulation. In fact, the Internal Revenue Service has not issued guidance on the taxation of cryptocurrencies since 2014.
Way back in 2014, the IRS explained that virtual currency ought to be treated as property, and advised taxpayers that the receipt of virtual currency in exchange for goods or services should be computed in gross income at “fair market value.” Furthermore, the agency expressed that the sale or exchange of virtual currency would lead to treatment as a “capital asset.”
Simply put, the tax man has no idea what to do with cryptocurrency – and this has resulted in bureaucratic confusion across the board. In September 2015, the Commodity Futures Trading Commission (CFTC) ruled that virtual currency should be classified as a commodity. Like the baby in the Judgment of King Solomon, virtual currency needs an impartial judge to decide which agency can claim cryptocurrency’s regulatory jurisdiction.
While clear-cut regulation may demand patience as the technology further evolves, surely monetary supply could be simplified. In a 2015 study, Deloitte noted the pressing need for an updated global financial system:
“The payment systems in the U.S. and the rest of the world are in dire need of overhaul. Many of today’s payment systems are considered slow, error-prone and expensive relative to performance in other high-tech industries.”
Widespread adoption of virtual currency is hindered by anti-money laundering and illicit trade concerns, as well as volatility, ease of use obstacles, and a lack of basic trust. The point is that making the shift is worth it, not that it will be easy.
The savings available to the government, not to mention the bolstered tax base, surely outweigh the costs of implementation. Furthermore, a national cryptocurrency does not need to replace the dollar. As recently noted by the International Monetary Fund, central bank digital currency can function in parallel with traditional fiat currency.
By issuing a federal cryptocurrency, the US Fed could position itself as the authority for the entire digital economy. On a domestic level, this would also allow the Fed to retain power over the money supply and interest rates.
On a global level, America has taken a backseat as compared to other nations.
In March 2017, Standards Australia published a Roadmap for Blockchain Standards Report, explaining how the continent-country can take advantage of distributed ledger technology. Since September 2016, Australia has served as the leader of the blockchain standards committee in the International Organization for Standards, or ISO. The US is one of 20 participating members on the 35-country committee. As previously reported by ETHNews, Australia has hosted experts from around the globe to establish worldwide standards for blockchain and DLT.
It’s great that the US has a seat at the table, but our country isn’t leading the meeting. That doesn’t bode well for America’s place in the financial future.
Ultimately, the United States needs to invest in its financial infrastructure to remain a global economic power. Private and public partnerships are part of that strategy, but it’s crucial for the government to set the stage.
From controlling sanctions to adjusting monetary policy, these issues require powerful, decisive leadership at home and abroad. The US must ensure that its regulatory, fiscal, and monetary institutions appropriately guide blockchain entrepreneurship and encourage virtual currency adoption.