In an interview with CryptoX on Friday, Oct. 18, United States Representative Warren Davidson gave his thoughts on the Securities Exchange Commission’s (SEC) flawed approach to regulating digital assets as well as Mark Zuckerberg’s upcoming Oct. 23 testimony before the House Financial Services Committee.
Congressman Davidson (R-OH) is a figure familiar to many in the crypto world for his role in authoring the Token Taxonomy Act, as well as his general optimism about the role of blockchain in the U.S.
On regulating Libra as a security
While discussing regulating cryptocurrencies at large as opposed to Libra, Davidson was highly precise in his taxonomic definitions:
“We use the term ‘cryptocurrencies’ to refer to everything in the crypto space, which is sloppy language. What we need to focus on is, what is Libra’s goal? Its goal is to be a currency. Let’s not conflate that with what other things in the space want to do and how we regulate them. How we look at Libra would be to apply, in my view, the Token Taxonomy litmus test.”
Davidson concluded that Libra is ultimately classified as a security, and therefore falls under the purview of the SEC within the United States. He explained this as being a function of the influence of a central organization over Libra’s composition. It was originally planned as a “basket” of currencies, though David Marcus, head of Calibra, yesterday suggested that these could instead be fiat-pegged stablecoins.
Speaking about Libra’s classification as a security, Davidson said, “It has nothing to do with stablecoins. It has to do with whether there’s a central authority that can alter it.” The congressman was unconvinced that the planned basket of currencies would be fixed and stable, opening Libra up to the Libra Association’s tampering. He ceded that SEC Chairman Clayton is correct in his assessment as to how this makes Libra a security, rather than a true currency.
“It’s the ability to destroy your value,” Davidson said. “And in that sense, when you’re placing all your faith in the value of that token on the actions of a central authority, that’s where I tend to agree with Jay Clayton. That looks a lot like a security.”
Elaborating on Libra’s centralization, Davidson said, “The way that they proposed to do it — and the fact that it’s Facebook doing it — highlights to me the problem with centralized tokens.” Bitcoin (BTC) came up as a comparison: “Whoever Satoshi Nakamoto is, you can’t serve Satoshi papers. There’s no headquarters to subpoena.”
Davidson did credit Facebook’s initial whitepaper for Libra with a rapid expansion of interest in crypto:
“It was the moment that I think a lot people said, ‘Wow this is really gonna be a thing, it’s not just this wonky niche.’ Facebook’s talking about doing it all over the planet, this is going to scale up. It really raised the profile of blockchain. I think that’s great.”
On the SEC’s “third-world” approach to crypto: regulation by enforcement
Despite his desire to see Libra under the SEC’s jurisdiction, Davidson was extremely critical of the commission’s current regulation of digital assets. The present strategy has largely consisted of legal action against companies making moves that the SEC deems missteps:
“The SEC is doing a complete patchwork of regulation. No one knows where they’re going. They’re literally told if you want to launch a token, whatever you think you want to do with it, come check with the SEC first. […] And you can grovel. If you grovel well enough, then we’ll give you a no-action letter. You have hundreds of companies waiting on no-action letters. They’ve approved two. You can’t raise capital while you’re waiting for that.”
Telegram recently made a similar argument in response to the SEC’s emergency action against the company’s distribution of Gram tokens on Oct. 11. Telegram alleged that the commission had ended up facing an “emergency of its own making” by not doing anything in the 18 preceding months during which it was aware of Telegram’s plans.
Davidson blamed this strategy for a flight of capital from the U.S. to other countries. In the case of the Libra Association, that money’s going to Geneva. This move drew the ire of Davidson’s fellow committee members when David Marcus spoke to them in July. To Davidson, this is a search for clarity rather than anarchy:
“So what are people doing? They’re like,’Screw you guys, we’re just gonna launch it in Switzerland, Singapore, Malta — wherever.’ And they’re not going to avoid our laws — we don’t have a law. As I told Chairman Clayton, you’ve got all the charm and inefficiency of third-world power structures. Go see el jefe and maybe you can cut your own deal. That’s a horrible way to regulate the economy. You do not regulate by enforcement. You regulate by passing a simple law as a uniform standard for everyone. That’s easy to comply with. That’s what first-world countries do.”
After the SEC hearing, CryptoX asked whether the next steps were in the hands of legislators in Congress or regulators like the SEC. Congressman Davidson came down on the side of legislation first.
The congressman attributed the current hold-up to the mechanics of how the SEC’s commissioners operate: “They’re having a debate internal to the board as to how to go forward. And frankly, part of the holdback is Chairman Clayton. He’s got a lot of power and he doesn’t want to give it up.”
It remains to be seen how recent events will or won’t compel other members of Congress to back the Token Taxonomy Act (or any equivalent piece of legislation). On a more optimistic note, Davidson expressed continuing hope for the future of blockchain and crypto in the United States: “I believe that this is a great industry. America should be leading the world in it, we should set our framework for it.”
On his hopes for the Oct. 23 committee hearing with Mark Zuckerberg
With Davidson’s views on Libra’s status as a security established, he elaborated on what he wants to see at Wednesday’s hearing. He seemed to prefer that the hearings stick to the subject of Libra rather than reining in the company as a whole: “Hopefully it focuses on blockchain and this tokenized idea that they have versus just Facebook.”
A major concern for Davidson is the degree of control that Libra and the associated Calibra wallet will have over transactions. In his words: “Some people want the wallets to filter transactions. I don’t know. I’ve got a wallet. Does your wallet filter transactions? Does your wallet say, ‘No, you can’t buy that?’” He continued:
“Would Libra itself — which is supposed to be a store of value, money, a currency, a synthetic currency, basically — would the association have any way to filter transactions? And if they do, then it’s not really money, it’s a system of control.”
In no uncertain terms, the congressman asserted his opposition to that kind of control of consumer finances: “It’s a civil liberties thing. If you’re going to defend freedom, you have to defend money.”
