The Los Angeles Rams’ come-from-behind win against the Cincinnati Bengals on February 13, 2022, wasn’t the only victory people were talking about following Super Bowl LVI. The spectacle, which drew more than 100 million viewers, was also a triumph for the big cryptocurrency companies whose ads, featuring star turns by the likes of actor Matt Damon, dominated the game’s commercial breaks.
But cryptocurrency’s coming out party proved a bit premature. By this summer, the market for digital money had crashed, companies like Celsius Network had imploded, and millions of investors suffered unexpected losses. In response, members of Congress are once again eyeing opportunities to place guardrails around the largely unregulated industry, a daunting challenge given perennial partisan gridlock.
Harvard Law Professor Howell Jackson, an expert in financial regulation, has offered another solution for one segment of the cryptocurrency market. In a new paper, Jackson and his co-authors Timothy Massad ’81, former chairman of the U.S. Commodity Futures Trading Commission (CFTC) and Cornell Law Professor Dan Awrey argue that the federal government already has the authority to oversee a version of cryptocurrency called stablecoins, the market values for which are tied to another currency or financial instrument, notionally making them less volatile. In a recent conversation with Harvard Law Today, Jackson explains the current state of the cryptocurrency market, how it is (or is not) regulated today, and how the federal government could make it safer for consumers and more efficient for stablecoin issuers.
Harvard Law Today: A lot has happened in the world of cryptocurrency since all those Super Bowl ads in February. Where do the markets stand today?
Howell Jackson: A lot has gone on since the Super Bowl and maybe some of those celebrities are wishing they hadn’t done those slots. One thing, of course, is the value of some of the more prominent digital assets like Bitcoin have declined a good bit. Whereas last September, many entering 1Ls [first year law students] were telling me how much money they’d made on crypto, I’m going to guess there won’t be a lot of stories like that as classes are starting up this year.
From a public policy perspective, another interesting development is the emergence of new digital assets known as stablecoins, which have been growing important over the past two years, and they’re increasingly the subject of regulatory scrutiny. While these stablecoins are primarily used, right now, to buy other cryptocurrencies, there’s increasing interest in using them as payment mechanisms for retail and cross border transactions, connecting them up to the real economy. At the same time, there has been mounting concern about the regulation of stablecoins, their threat to financial stability, and potential consumer losses. These concerns have become more acute with the highly publicized collapse of Terra, a high-profile stablecoin, with knock-on effects for other products. Several cryptocurrency companies are going into bankruptcy, and many individuals are discovering that they were taking on a lot more financial risk than they had understood. So, that’s increased the scrutiny in the area.
HLT: How is the cryptocurrency space regulated today?
Jackson: Well, this space is regulated in a fragmented way, if at all. There are some applicable money laundering laws, for instance. But there are good actors and bad actors. And there are various ways of disguising transactions. So, while those money-laundering rules may formally apply, compliance is spotty and enforcement limited. There’s also state-level regulation of money transmission, which picks up some transactions, as well as various Securities and Exchange Commission interventions. But it’s a hodgepodge of regulatory coverage. Some products like initial coin offerings come under SEC jurisdiction, but cryptocurrency like Bitcoin, Ethereum, and Ripple may not. So, it’s quite complicated.
HLT: What do you think of efforts in Congress to regulate it more tightly?
Jackson: There are a host of legislative proposals that are kicking around in Congress now, and more are coming along. These include an effort in some legislation to clarify how these instruments should be regulated. Are they securities? Are they commodities? Is there a new category that we need to create? Which agency should be responsible? The SEC? The CFTC? A new agency?
And the people who are talking to members of Congress have a wide range of views. Entrepreneurs in this space are trying to get a green light for more innovation. Consumer protection advocates are concerned about consumer abuse and are more inclined to legislate an orange or even red light. Then there are community banks that may worry that innovation might favor big banks or, even worse, Big Tech. There are the credit card payment systems that make a lot of money on payments and may be hesitant about losing their monopoly on large volumes of retails transactions. So, there’s a whole bunch of constituents, which is a recipe for making it difficult for members of Congress to move forward.
The most promising avenues are the bipartisan efforts on the House Financial Services Committee to come up with a bill that might get support on both sides of the aisle. So conceivably, there will be legislation. But passing any legislation isn’t easy these days and I would be very surprised if it happened this calendar year and it’s hard to know what will happen after the mid-term elections.
HLT: You and several colleagues have recently proposed a way of regulating stablecoins that doesn’t require congressional action. Can you briefly summarize your proposals?
Jackson: I’ve been working with Tim Massad, a Harvard Law graduate who has served as a senior official in government and the Treasury Department and chair of the CFTC. We’ve been examining in a series of papers what could be done with technological innovation now, under current law, because of the difficulty of adopting legislation. Our most recent piece focuses on the stablecoin market. We explore the extent to which it could be possible to set up a regulatory structure at the federal level that would create reasonable guardrails for stablecoins and attract digital innovators. Our proposal focuses on options available to the comptroller of the currency, which is the federal banking agency that charters and supervises national banks and the national trust banks.
In coming up with our proposal, we’re working off the President’s Working Group report from last fall, which recommended that stablecoins be regulated within the banking system and proposed the adoption of legislation for that purpose. In our paper, Tim and I are saying it is possible to achieve the same goal administratively. It would require considerable coordination on the part of several regulatory agencies, not just the OCC but also the FDIC and the Federal Reserve and maybe also the SEC and the CFTC. But it could be done. Our paper is both a mental exercise to see how this reform could be structured under current law and a practical proposal which might actually be implemented. Even if the proposal is not adopted exactly as we propose, our work could help inform legislative efforts, which will need to solve many the challenges we addressed.
HLT: What would be the advantages for the markets and consumers of this kind of regulation?
Jackson: One advantage is that it would create a safe structure where folks who use federally regulated stablecoins would be assured that they would get what they were promised, rather than pennies on the dollar in the event of the failure of a stablecoin issuer. A regulatory structure would protect consumers and ensure financial stability, an important consideration if these products became more ubiquitous and used throughout the economy. Our approach would also provide a better structure for addressing money laundering concerns and national security issues, including sanctions enforcement.
A number of states have been inventive in how they’ve approached this. New York, Wyoming, and others have state models, but they contemplate getting licenses in fifty different jurisdictions in order to do business, all with somewhat different regulatory structures. That adds cost and uncertainty. And the resources of a state regulator, frankly, are just not the same as the resources of the federal government. So, federal regulation is more efficient. And from the perspective of stablecoin issuers, it’s just easier to have one rulebook instead of fifty or more.
The other major benefit for consumers is that the payment space in the United States is now quite expensive compared to the rest of the world, particularly in areas like cross border transfers of funds for remittances. For many people working in the United States and sending money to their home countries, the traditional banking system is an extraordinarily expensive mechanism for making cross-border transfers. A properly regulated stablecoin can do that much more efficiently and inexpensively. So, there are lots of public policy and consumer benefits to having an appropriately regulated structure for stablecoins.
HLT: It seems as if no administration can unilaterally make any big changes in regulatory policy without provoking litigation. Would this inspire legal challenges?
Jackson: You can never guarantee that there won’t be litigation. But the goal of the article is to suggest that there is a path forward under current law that could withstand legal challenge. Our argument is that the legal authority needed to regulate stablecoins — chartering power with the OCC and administrative discretion elsewhere — already exist within the relevant federal agencies. These powers are located across a number of agencies, and regulators would definitely need to cooperate to implement our plan, but our view is that, if sued, they would ultimately prevail, which is the best that lawyers can do.
HLT: You’ve outlined a lot of benefits, but philosophically, doesn’t regulating cryptocurrency contradict the more libertarian ethos that inspired its creation and popularity in some quarters?
Jackson: There are definitely those who think the internet wants to be free, that it should be the Wild West, and that good things will come from that approach. This may just be revealing my generation, but that’s not my view. These products are functionally equivalent to financial products like money or bank deposits or securities. And we have hundreds of years of experience that suggests that certain kinds of economic relationships should be regulated.
Another view I’ve heard – and this is where I thought you were going with your question – is that by regulating it, you are just encouraging folks to do things that they really shouldn’t be doing. I understand that concern. But I also think that new technologies, particularly in the payment space, can reduce costs, improve remittances, and increase the welfare of individuals. We can’t turn our backs on new technologies just because people in my generation have lived most of our lives in a world of paper checks and plastic credit cards. Many students at Harvard Law School come in with a lot of enthusiasm for new technologies and how they might be harnessed to improve our lives. Some of that excitement might be overly optimistic, but there’s great energy here and at other universities around the country to find ways to develop these new technologies for the greater good. I think it’s incumbent upon regulators and academics to try to figure out a way that that can be realized in a safe and productive manner that benefits everybody.