The following is a guest post from Nimini RubinChief of Staff and Head of Global Policy at Hedera.
When I testified before the House Subcommittee on Commodity Markets, Digital Assets, and Rural Development about the future of digital assets, the discussion turned to the impactful use of cryptocurrencies and how the lack of regulatory clarity in the U.S. has hampered the development of the blockchain. industry in the US.
The House Financial Services Committee and the Agriculture Committee met jointly in May to work on crypto legislation, and this is an important opportunity for the US to regain its position as a leader in internet infrastructure innovation.
Why Public Blockchains Need Digital Assets
“The Internet” as we know it is essentially a decentralized set of computers that talk to each other using open protocols on a public network. Each protocol is prepared by a multi-stakeholder governing body. Those protocols, such as TCP/IP, DNS, HTTPS, etc., continue to evolve to enable additional capabilities that benefit society. Internet protocols initially allowed multiple institutions to share information (the read-only, “web1”).
Protocol innovations enabled people to self-publish and securely message (read and write, “web2”) anyone. Web2 protocol innovations enabled secure e-commerce and mobile app connectivity, making the Internet possible everywhere.
Public blockchains are dubbed ‘web3’ because they offer the next major protocol innovation, enabling unprecedented personal control – the ability to read, write AND own your data and assets – without relying on centralized intermediaries. Unlike Web2 where a user account only exists on a single company’s servers, in web3 the entire blockchain network records account ownership. Web3 user accounts are persistent across a range of services that exist on blockchains.
Public blockchains are run by a network of independent computers or nodes. Since public blockchain nodes act as the platform on which applications are built, they cannot fund operations by selling advertisements or subscriptions like Web2 intermediaries. Instead, users must compensate nodes directly through fees, such as water and electricity costs.
Node charges are usually small and frequent, with hundreds or thousands of messages or transactions processed per second. It is not possible with the existing financial system to send fractions of a cent so quickly, efficiently and worldwide.
To solve this problem, public blockchains use a digital asset, or cryptocurrency, to transfer value directly between users and operators. The cryptocurrency serves as the fuel on which the network runs. For example, the Hedera network has processed more than 1.5 billion transactions in the past month. Each transaction costs one-tenth ($0.001) and one-hundredth ($0.0001) of a cent, paid in the network’s native cryptocurrency, “HBAR.”
Public blockchains advance the economy and humanity
Blockchain’s ability to provide reliable and time-stamped records enables people to store, track and control data in new and powerful ways. For example:
- Starling Lab, co-founder of Stanford and the University of Southern California, built a framework to verify and preserve the authenticity of photographs and other evidence used to prevent the Holocaust archive and USC Shoah testimony from being compromised. Foundation is messed up.
- On the DOVU marketplace, farmers can generate additional income by changing farming techniques and planting additional crops. Their actions are tokenized as carbon credits to fund carbon reduction projects.
- Built by Avery Dennison, atma.io helps brands reduce waste throughout the supply chain for more than 28 billion items – delivering both economic and environmental benefits.
- Everyware monitors the cold chain storage of vaccines in the supply chain and picks up on any irregularities before administering these vaccines to patients, keeping patients safe.
Recommendations for the Congress
Selling digital assets to raise money to create a network or application is fundamentally different from using digital assets as fuel to pay the costs of network operations or to access other goods or services. Regulations must be tailored to the unique characteristics of each.
Based on the premise that regulation of digital assets should protect consumers, enable innovation and promote competition, Congress should pass legislation to create an activity-based framework that regulates the use of digital assets based on the nature of the transaction:
- First, Congress must clearly define and delineate between “digital commodities” and “digital security,” or when a digital asset is neither.
- Second, Congress would need to authorize the CFTC to regulate certain Digital Commodity activities, such as operating a centralized spot marketplace. Clarity here will significantly improve consumer safety.
Similarly, not all assets are securities, not all digital assets are securities. Applying existing securities laws to all cryptocurrencies severely restricts, if not prohibits, the actual use of public blockchains.
For example, a supply chain application for the manufacturing process of a food product to ensure expiration dates are accurately tracked for consumer safety may require an SEC-registered broker-dealer to pay just a one-cent cryptocurrency transaction fee to trade a $100,000 transaction fee. log supply chain. event.
Legislative clarity for innovative products has been done before. The Dodd-Frank Wall Street Consumer Protection Act of 2010 successfully assigned regulatory authority for swaps to multiple federal agencies. The same approach can be taken for digital assets.
The use of digital assets is inherently international and it is important that any regulation takes this into account. To regulate fast-moving innovations such as digital assets, the CFTC is a more appropriate regulator than the SEC because the CFTC adheres to the concept of “principles-based regulation,” while the SEC takes a prescriptive, rules-based approach.
The current regulatory environment in the US does not provide a clear path to compliance, leaving two choices: 1) find that way abroad, or 2) continue to hope that regulation catches up before enforcement penalizes another innovator.
The Internet is global but was invented in the US, allowing American values to form the basis of fundamental Internet protocols. Congress must create rules for public blockchains to thrive so that the next wave of internet value creation continues to echo the US’s commitment to markets and democracy. Other countries are advancing rapidly with digital asset regulations.
The resulting regulatory certainty could give companies in those locations an advantage over US companies; it can encourage US-based companies to move abroad, and it can pose national security risks.
Congress must create rules that allow American innovators to continue to play a leading role in the future of the Internet.