At the Bitcoin 2021 conference in Miami earlier this month, Congressman Warren Davidson (R-OH) participated in two panels on stage and made himself accessible to the community. Davidson serves as the Ranking Member of the Financial Technology Task Force, where he participated in a hearing on central bank digital currency. In that hearing, Davidson stressed the importance of privacy and how any kind of digital dollar should offer the same traits as that of physical cash today.
I had a chance to interview the Congressman as well as host him on the new Clubhouse app where we had a ‘town hall’ among those in the Bitcoin industry. In both the interview as well as his time on Clubhouse, the three areas Davidson sounded like a representative of the Bitcoin community were: 1) his belief in sound money; 2) his concern about the Fed’s monetary policy and the deterioration of the U.S. dollar; and 3) the third-party doctrine regarding privacy and the notion of self-custody vs. holding Bitcoin on an exchange.
Below is my interview with Davidson.
Jason Brett: What is the Task Force on Financial Technology and how does it relate to cryptocurrencies and blockchain technology?
Congressman Davidson: The FinTech Task Force is a temporary subcommittee on the House Financial Services Committee. Its purview includes most emerging technologies in finance and the goal is to provide regulation and oversight that helps America maintain its position as the country that attracts innovators and entrepreneurs. Payment systems are facing dynamic innovation. Cryptocurrencies—and blockchain more broadly—show some of the greatest promise for revolutionizing finance and the way we live and so play a role in how the task force considers the future of finance.
Brett: What is the Working Group on Digital Assets and how is it related to the FinTech Task Force?
Congressman Davidson: The Digital Assets Working Group is a Democrat-only working group organized by Chairwoman Waters to examine digital assets. Rep. Gottheimer is on the working group, and he is a cosponsor of the Token Taxonomy Act, so I’m hopeful that their conversation will include regulatory clarity. I’m concerned by the partisan approach, but I look forward to seeing what they come up with.
Brett: Are you concerned about the leadership of the new SEC Chair in regard to offering ‘regulatory clarity’? What would you like to see done differently than under the previous SEC Chair?
Congressman Davidson: I’m encouraged that Chairman Gensler clearly understands crypto and blockchain with expertise. The differences on policy in this space aren’t generally partisan, but normally reflect gaps in understanding and information issue. Former SEC Chairman Clayton wasn’t very engaged in the area, so I’m hopeful that with more engagement and knowledge inside the SEC we’ll final see some rational regulatory clarity.
Brett: As Bitcoin gets more exposure from institutional investors and stories in the media about it as an asset class appear almost every day, do you agree with the SEC Chair’s assessment where he wants to work with Congress to provide a regulatory regime over crypto? Is such a regime needed in your opinion?
Congressman Davidson: We absolutely need a regulatory regime to clarify cryptocurrencies. The status quo is regulation by enforcement, where companies find out they’ve violated SEC regs when they get a demand letter. This uncertainty discourages investment in the United States. Clarifying regulations would give the US more of an advantage, because right now crypto investors are building their companies in other countries with more certainty. We want investment, innovation, and operations here. Regulatory clarity is also essential to protect consumers and investors. The absence of clear policy or regulation is being exploited by fraudsters, so failure to act is a failing average consumers and investors.
Brett: At the hearing of the FinTech Task Force on Tuesday, issues relating to ‘privacy’ around a potential central bank digital currency were discussed. You raised what you described as the ‘third party doctrine’ and what has been a decline in American privacy when it relates to our finances. Can you elaborate to our readers on the issue you see and is a certain type of technology the way to fix this problem?
Congressman Davidson: Sure. The third-party doctrine in practice allows the government to access your private conversations via phone, text, or email through your cell phone carrier or internet service provider. The same is true for traditional banking. Know your customer (KYC) laws mean that the government can get LOTS of private information about Americans’ financial transactions. I believe a digital dollar should behave like cash. If you choose, then: No middleman, no service provider, just a person-to-person transaction. Alternative structures for a digital dollar would be less secure and subject to external filters if they flow through a gatekeeper: directly, via the Federal Reserve, or indirectly, via FDIC insured banks (3rd parties). A permissionless system must be preserved. It depends on how Congress acts. If we preserve the permissionless architecture of true distributed ledger and that aspect of cash in any US central bank digital currency, Americans could see a rare event. Freedom surrendered is rarely reclaimed. This version of CBDC could actually improve the privacy and security of the financial system, restoring civil liberties long compromised by the 3rd party doctrine.
Brett: Do you think that the U.S. dollar is ‘sound money’? If not, why not? What is sound money?
Congressman Davidson: No, the Federal Reserve and Congress are destroying the value of the U.S. dollar and jeopardizing its status as the global reserve currency by spending more money than anyone will lend. To close this gap, the Fed is simply creating more money, increasing the supply of money. Most will say they oppose Modern Monetary Theory, but that’s the effective policy right now. As Herb Stein famously observed, if something can’t continue, it will eventually stop. Sound money is a stable store of value and an efficient means of exchange. To defend freedom, America must return to sound money.
Brett: How do you believe stablecoins fit into the picture of a new ‘digital monetary landscape’ if you will? Does an effective private sector stablecoin nullify the need for a central bank digital currency?
Congressman Davidson: There’s a right way and a wrong way to do a CBDC. China, for example, with the digital yuan, is likely to use its CBDC to tighten its grip on the people. CBDC’s have an advantage over private stablecoins inasmuch as they will probably enjoy widespread adoption, which would be critical to their success. Any stablecoin’s viability would depend on its whitepaper, on its supply, and whether there is a gatekeeper (central authority) or if it’s permissionless. An effective, permissionless stablecoin operating on a true distributed ledger would make a Central Bank Digital Currency largely unnecessary the payment system were ubiquitous.
Brett: The Federal Reserve seems to be working itself out of an extremely challenging time in our economy. Is it time for the Fed to be more transparent about some of the underlying issues or do you believe they will find a way to exercise their tools in a way to meet the mandates as assigned in the Federal Reserve Act?
Congressman Davidson: I do think it’s time for the Fed to be more transparent. I support efforts to “Audit the Fed”. In recent years, I believe the Fed has overreached its mandate. The Federal Reserve fails their mandate for stable prices. Their asset purchases cause economic distortions and grow the wealth gap by creating monetary inflation, asset price inflation, and consumer price inflation. And, the Feral Reserve fails their mandate for full employment. Labor force participation this century is down by 10% and productivity is not making up the gap. They have these two jobs officially, and they’re failing them both. Then, they serve as regulator. I have a bill that would separate their regulatory activity from their monetary policy activity. Their use of regulatory tools creates further economic distortions. Note, for example, the repo and reverse repo markets. Sound the alarm: the Federal Reserve is failing.
Brett: A Commissioner of the CFTC recently described ‘DeFi’ as potentially illegal in a public speech. What is your take on the DeFi marketplace? How do we define the regulatory perimeter with decentralized technology and what is the right amount of regulation vs. sending jobs and the future of finance overseas to other countries?
Congressman Davidson: It’s important to provide the context in which Commissioner Berkovitz referred to DeFi as potentially being “illegal.” Under the Commodity Exchange Act (CEA), derivatives like futures and options must be traded on CFTC licensed markets. DeFi, by its inherent nature, would establish a system where financial intermediaries would no longer be needed (i.e., the licensed markets we currently see today.) In my opinion, to say it’s “illegal” would mischaracterize DeFi as a potentially negative development. I would instead say that DeFi is irreconcilable with our regulatory framework with the way it is currently established. When the CEA was enacted in 1936, we were in the midst of the Great Depression. There’s no doubt people back then wouldn’t have been able to predict the technological advancements we would see in the next century. America needs to update the regulatory framework in many areas. DeFi technology often accomplishes the intent of the outmoded laws, just with a different structure. Some of my colleagues are very interested in addressing these changes with updated legislation and I look forward to working alongside them so that future DeFi will develop right here in America.
Brett: China is looking to develop and is moving forward with a central bank digital currency of its own. It is also working on the Blockchain Services Network (BSN). How should the U.S. respond to these developments?
Congressman Davidson: It’s a sign that our international competitiveness depends on getting cryptocurrency regulation and DeFi regulation right. It’s imperative that we move on this because blockchain technology is going to revolutionize the world the way the internet did. Very few people trust China. America cannot abdicate our position in the global marketplace by doing nothing. China approves of inaction by America. It’s time for Congress and American regulators to provide the framework our innovators need to compete and win.
Brett: What keeps you up at night when you think about the cryptocurrency and blockchain ‘space’?
Congressman Davidson: An adjacent issue: we’re bankrupting America in the name of compassion, but that’s not a compassionate approach.