Why Congress Should Regulate Cryptocurrency Now

The United States has a chance to become a standard-bearer as digital currencies expand.

By , a policy analyst with FP Analytics.
Maxine Waters, chairwoman of the House Committee on Financial Services
Maxine Waters, chairwoman of the House Committee on Financial Services
Maxine Waters, chairwoman of the House Committee on Financial Services, attends a meeting in Washington on June 25, 2020. ROD LAMKEY/AFP via Getty Images

When Bitcoin was first introduced in 2008, few lawmakers could have predicted that cryptocurrencies would grow into a $2.5 trillion asset class. The potential of cryptocurrencies to create a more efficient and inclusive financial system has captured investors’ attention. But the rise of stablecoins, which are largely backed by fiat currencies, poses regulatory hurdles and could destabilize the global monetary system.

On Wednesday, the U.S. House Committee on Financial Services hosts a hearing on cryptocurrencies and financial technology, on the heels of a Treasury Department report on stablecoins published last month. Executives at key industry players—Bitfury, Circle, Coinbase, FTX, Paxos, and Stellar—will address the risks that stablecoins and other cryptocurrency technologies pose, and they will identify opportunities to improve consumer protection and prevent illicit activity, such as ransomware targeting, money laundering, and terrorism financing.

The U.S. dollar remains the world’s reserve currency, and Congress’s approach to the cryptocurrency industry could inform that of other countries—making the United States a standard-bearer. In addition to wrapping their heads around the fast-moving world of cryptocurrency, regulators must now create clear rules of the road to balance innovation with mitigating risks. The ability of these digital currencies to undermine control of the monetary system and thus erode sanctions power presents a particular risk to the United States. Absent decisive action, the U.S. market may instead be governed by foreign frameworks.

When Bitcoin was first introduced in 2008, few lawmakers could have predicted that cryptocurrencies would grow into a $2.5 trillion asset class. The potential of cryptocurrencies to create a more efficient and inclusive financial system has captured investors’ attention. But the rise of stablecoins, which are largely backed by fiat currencies, poses regulatory hurdles and could destabilize the global monetary system.

On Wednesday, the U.S. House Committee on Financial Services hosts a hearing on cryptocurrencies and financial technology, on the heels of a Treasury Department report on stablecoins published last month. Executives at key industry players—Bitfury, Circle, Coinbase, FTX, Paxos, and Stellar—will address the risks that stablecoins and other cryptocurrency technologies pose, and they will identify opportunities to improve consumer protection and prevent illicit activity, such as ransomware targeting, money laundering, and terrorism financing.

The U.S. dollar remains the world’s reserve currency, and Congress’s approach to the cryptocurrency industry could inform that of other countries—making the United States a standard-bearer. In addition to wrapping their heads around the fast-moving world of cryptocurrency, regulators must now create clear rules of the road to balance innovation with mitigating risks. The ability of these digital currencies to undermine control of the monetary system and thus erode sanctions power presents a particular risk to the United States. Absent decisive action, the U.S. market may instead be governed by foreign frameworks.

Future of Money

[For a deeper dive into all things cryptocurrency, FP Analytics’ three-part Future of Money Power Map series examines the new technologies, economic power shifts, and geopolitical tensions driving changes in the international financial system.]

Stablecoins aim to address the notorious price volatility of cryptocurrencies by backing digital tokens with price-stable assets, primarily fiat currencies. The most popular stablecoins by market capitalization—Tether, USD Coin, and Binance USD—are backed by the U.S. dollar. Stablecoins are now used for trading, lending, and borrowing, but their proponents hope they will soon be used for payments, too.

Demand for digital currencies and payments has grown rapidly as consumers seek convenience and enhanced security in financial services. Prominent companies, including Meta (formerly Facebook), have developed their own stablecoins to compete with native cryptocurrencies such as Bitcoin, central bank digital currencies, and fiat currencies. The coronavirus pandemic has accelerated the adoption of digital payment technology and blockchain due to an increase in the overall digitization of goods and services. Cash use has declined significantly in recent years, although cryptocurrency use as a form of payment is still minimal compared to other digital payment options.


Stablecoins are still in the nascent stages of development, but their market value is around $150 billion, and they hold promise in facilitating cross-border payments with lower transaction fees. However, private control of stablecoin issuance and oversight has raised concerns that they will undermine fiat currencies and weaken global monetary policy. Critics have also raised questions about stablecoins’ backing, which could pose risks if consumers are unable to exchange their tokens for cash. In October, for example, Tether was fined $41 million by the Commodity Futures Trading Commission for lying about its reserves.

The United States doesn’t yet have a comprehensive regulatory framework for stablecoins. Cryptocurrencies fall under multiple legal definitions depending on their use, leaving federal agencies jostling for authority over the industry. The Biden administration’s $1 trillion infrastructure deal signed into law last month contains provisions for cryptocurrency taxes, but their implementation remains unclear. Other legislation regarding cryptocurrency regulation has stalled in Congress. Meanwhile, some industry leaders have described the most prominent proposal to date, the known as the STABLE Act, as a “disaster,” arguing that it would stifle innovation and prevent individuals from participating in cryptocurrency networks.

Congress won’t have all the answers regarding stablecoin regulation in the short term, but Wednesday’s hearing appears to be a step in the right direction toward finally addressing cryptocurrencies’ legal gray zones. It also suggests that stablecoins are becoming mainstream, with policy discussions slowly expanding beyond individual companies to focus on the whole sector. One key thing to watch: if the hearing dives into the technical aspects of cryptocurrencies’ underlying technology and what, if any, opportunities exist for regulators to work with the cryptocurrency industry to develop a robust policy framework.

Potential areas for collaboration could include enhancing cybersecurity standards across the cryptocurrency ecosystem to protect the integrity of digital transactions and prevent malicious hacking attempts, addressing the growing ransomware risk, and reducing the environmental impact of cryptocurrency mining and transactions.

The Treasury Department offered several recommendations in its report, notably that stablecoin issuers be treated as banks, subjecting them to federal oversight. However, it did not provide clarity on whether stablecoins fall under federal commodities and securities laws. This suggests that the Securities and Exchange Commission and the Commodity Futures Trading Commission may not be best positioned to address the systemic risks posed by stablecoins, although they could still play a vital role concerning other cryptocurrency assets, such as nonfungible tokens.

Regulators can no longer ignore the potential transformative role cryptocurrencies will play in the future financial system. With competition over digital currencies among private companies and governments ramping up, the regulations established today will set the path for the future of global finance.

Gahyun Helen You is a policy analyst with FP Analytics, the independent research and advisory arm of Foreign Policy. Her research focuses on international security, economics, technology policy, and governance. She is a graduate of New York University.

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