Did you know Congress has an entire research department? Given some of the laws Congress approves it’s hard to believe, but true! The research department is called the Congressional Research Service (CRS); not an imaginative name but easy to remember. Clanity friends, we are going to discuss what the CRS has been telling Congress regarding digital wallets because, well, Congressmembers work for us, in theory at least, and what they do affects the crypto industry.
Let’s start by noting CRS published their research article prior to 3 Arrows, Celsius, and FTX scandals. A good portion of the article is factual, not editorial. For instance, the CRS explains the mechanics of how hard wallets function, including basics such as, you need a smart phone, internet connection, etc. etc. I think everyone in crypto, and Clanity, know these basics, but the audience is Congress not the crypto community.
The article navigates its way into policy issues beginning with consumer protection. The Clanity community in specific, and crypto in general, supports consumer protection legislation and regulation. We understand every industry has scammers, including crypto, and building trust and transparency via supportive and balanced legislation and regulation is critical to mass adoption.
The CRS article raised consumer protection concerns regarding insured deposits. According to CRS, consumers may be deceived into believing funds in their hard wallet are FDIC insured because some wallets act as a pass through from a FDIC insured bank to a hard wallet. The report further states if enough customers believe their funds are federally insured, there could be a systemic risk. Three major projects have collapsed, including a $32B exchange (FTX), without any signs of systemic risk. Why would that be true? Clanity nation would give a three-part answer. First, everyone in crypto understands there is no FDIC insurance in our space. Second, there are no federal bailouts of crypto, just free enterprise. Last, crypto is too nascent to threaten a systemic risk.
CRS raised the issue of regulatory fairness. CRS pointed out unlike banks crypto currency transactions are not subject to Regulation E. CRS is correct. Of course, Regulation E does not apply to crypto but there is a simple explanation. Crypto transactions are not bank products and Regulation E is for banking products. Why is that unfair to banks? Clanity wants to understand the logic?
Although I don’t agree with the regulatory fairness point, I must declare the CRS’ third point is spot on. The point concerns crypto exchanges. Here is what the report says (keep in mind it was written long before the FTX scandle):
“Digital Assets in custodial wallets reside in non-segregated “omnibus accounts” of the digital exchange, which may comingle user and platform assets, unlike a traditional investment account. Market observers have criticized this structure as introducing a principal-agent conflict. Non-segregated accounts could also make it harder for investors to recover assets if an exchange failed or was hacked.”
CRS’ analysis reads as if it could be the conclusion of the FTX investigation one day, right? That’s why Clanity says, “not your wallet, not your crypto”.
The Congressional Research Report concludes by noting Coinbase (yes, CRS called out Coinbase by name) is a partner in the issuance of stable coins and a custodial wallet provider; and therefore, could result in an excessive concentration of economic power. The crypto revolution fundamentally is a decentralization movement. At Clanity, we love decentralization of power.
In summary, the CRS report provides a basic understanding of digital wallets and raises legitimate policy issues. Clear and fair legislation and regulations that are consistently applied is what the crypto community and Clanity support for our industry.
Written By: Nelson Hernandez
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