The following is a guest post from Chief of Staff and Head of Global Policy at Hedera.
When IIn front of the House Subcommittee on Commodity Markets, Digital Assets and Rural Development, the discussion addressed the impactful uses of cryptocurrencies and how a lack of regulatory clarity in the US was thwarting the development of the blockchain industry in the USA
The House Committee on Financial Services and the House Committee on Agriculture met jointly in May to work on crypto legislation, and this represents a significant opportunity for the US to re-establish 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 communicate with each other via open protocols on a public network. A multi-stakeholder governing body created each protocol. Those protocols, such as TCP/IP, DNS, HTTPS, etc., continue to evolve to enable additional capabilities that benefit society. Initially, Internet protocols allowed multiple institutions to share information (read-only, “web1”).
Protocol innovations allowed people to self-publish and securely send messages to anyone (read and write, “web2”). Web2 protocol innovations enabled secure e-commerce and mobile application connectivity, bringing the Internet everywhere.
Public blockchains are called ‘web3’ because they offer the next big protocol innovation, allowing for 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 the servers of a single company, in web3, the entire blockchain network records ownership of the account. Web3 user accounts are persistent across a variety of services that exist on blockchains.
Public blockchains are operated 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 through the sale of ads or subscriptions like Web2 intermediaries. Instead, users must directly compensate nodes through fees, such as water and electricity charges.
Node fees are typically small and frequent, with hundreds or thousands of messages or transactions processed per second. It is not possible to use the existing financial system to send fractions of a cent so quickly, efficiently and globally.
To solve this problem, public blockchains use a digital asset or cryptocurrency to transfer value directly between users and operators. Cryptocurrency serves as the fuel on which the network runs. For example, in the last month, the Hedera network processed more than 1.5 billion transactions. 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
The ability of blockchains to provide reliable, time-stamped records allows people to store, track, and monitor data in powerful new ways. For example:
- Starling Lab, co-founded at Stanford and the University of Southern California, created a framework to verify and preserve the authenticity of photos and other evidence, which is used to preserve the USC Shoah Foundation’s Holocaust archive and testimony from tampering .
- The DOVU market allows farmers to generate additional income by changing farming techniques and planting additional crops. Your shares are tokenized as carbon credits to finance carbon reduction projects.
- atma.io, created by Avery Dennison, helps brands reduce waste in the supply chain of more than 28 billion items, delivering economic and environmental benefits.
- Everyware monitors the cold chain storage of vaccines throughout the supply chain and detects any irregularities before administering those vaccines to patients, keeping patients safe.
Recommendations for Congress
Selling digital assets to raise money to build a network or application differs fundamentally from using digital assets as fuel to pay for network activity costs or gain access to other goods or services. Regulations must be adapted to address the unique characteristics of each.
Based on the premise that digital asset regulation 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 Commodity” and “Digital Security,” or when a digital asset is neither.
- Second, Congress should empower the CFTC to regulate certain digital commodity activities, such as operating a centralized spot market. Clarity here will significantly improve consumer safety.
In the same way, not all assets are securities, not all digital assets are securities. The application of existing securities law to all cryptocurrencies severely limits, if not prohibits, the actual use of public blockchains.
For example, a supply chain application for a food manufacturing process to ensure accurate tracking of expiration dates for consumer safety may require an SEC-registered stockbroker to only pay a transaction fee. one cent in cryptocurrency to register a 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 exchanges to various 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 take this into account. For regulating fast-developing innovations like 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 follows a rule-based, prescriptive approach.
The current regulatory environment in the US does not provide a clear path to compliance, leaving two options: 1) find that path abroad, or 2) continue to wait for the regulation to catch up before the application punish another innovator.
The Internet is global, but it was invented in the US, allowing American values to support the fundamental protocols of the Internet. Congress must define rules to allow public blockchains to thrive so that the next wave of value creation on the Internet continues to reflect the US commitment to markets and democracy. Other countries are moving quickly with digital asset regulations.
The resulting regulatory certainty may 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 set rules that allow American innovators to continue to play a leading role in the future of the Internet.