Senate Holds Hearing on Digital Currencies, Blockchain

A decade after Bitcoin and blockchain made their debut, the US Senate has finally gotten around to holding a hearing on potential regulatory frameworks for digital currencies.

The hearing, which was held by the Banking, Housing, and Urban Affairs Committee, included expert witnesses Mehrsa Baradaran, a law professor at the UC Irvine School of Law; Rebecca Nelson, a specialist in international trade and finance with the Congressional Research Service, and Jeremy Allaire, CEO of Circle Internet Financial Limited, who represented the Blockchain Association.

“The digital currency and blockchain ecosystem is diverse, and care must be taken in determining what gaps may be present in the existing framework and developing a more comprehensive approach,” US Sen. Mike Crapo, an Idaho Republican and chairman of the committee, said in his opening remarks. “With the appropriate balance of regulation, digital currencies, and their innovative underlying technology could provide meaningful benefits.”

One of the main topics discussed in the hearing was the June announcement by social media giant Facebook that it was delving into cryptocurrencies with the launch of Libra, which will be powered by blockchain technology.

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The new cryptocurrency will be supported by more than two dozen companies including Uber, Spotify, Mastercard, and Visa, and would be classified as a so-called “stablecoin” because its value would be backed by a basket of low-volatility assets, such as bank deposits and short-term government securities, from stable and reputable central banks.

However, as Nelson pointed out in her testimony, there has been a backlash against Facebook’s foray into crypto over questions about its lack of banking expertise, the size of its network, and concerns about its handling of user data. Nelson cited G-7 finance ministers and central bank governors who said Libra raises “serious regulatory and systemic concerns, as well as wider policy issues, which both need to be addressed before such projects can be implemented.”

The creation of digital currencies came in the aftermath of the 2008 financial crises when many expressed dismay at the banking sector, accusing it of creating inequalities, perpetuating fraud, and harming people with their greed-fueled risk-taking.

The cryptocurrency industry aims to offer a more efficient, confidential, and accessible payments system than what is offere by the bank-operated payments system, which they claim is slow, outdated, inefficient, and exclusionary.

“Our existing financial system is in desperate need of transformation,” said Allaire. “We currently have a global system with limited access and exorbitant fees that impose a tax on real economic activity; a system rife with money launderers and financial crime.”

Allaire said that with digital currencies payments and value exchange will be commoditized and become free services on the internet akin to the way that sharing content or data and communicating online are free.

“This will ultimately return hundreds of billions of dollars of value to the real economy,” he said, “as the fees that people and businesses pay to intermediaries to move value drops to zero. This will also lead to greater economic activity between people around the world.”

However, Baradaran argued that “while I share many of the cryptocurrency industry’s concerns with respect to failures of the banking industry, I do not believe cryptocurrency is the best solution to the problems of financial inclusion and equity in banking.”

Among the stated goals of the cryptocurrency industry is to establish a public payments system available to all, but Baradaran said this was unnecessary because such a public payments system already exists—the Federal Reserve.

“The problems of inequality and inefficiency that bitcoin and the cryptocurrency industry has set out to solve are not problems of technology, they are problems of policy,” Baradaran said. “Every American not only deserves the right to participate in the economy, but also to participate democratically in the monetary policy decision-making that affects their lives. We do not need to replace the Federal Reserve or fiat currency to achieve that. In fact, our Congress must do just the opposite and ensure that our public institutions are achieving their mission.”

Tags: Blockchain, Cryptocurrency, Senate

Editor’s note:
Since this July 17 meeting occurred, a revision to the code of conduct policy was made, cutting the controversial paragraph, according to Wayne Davis at the public affairs office at CalPERS. Board members told CIO they received the revised document last week. “I will review the document and be prepared to discuss any changes at the August meeting,” said Board President Henry Jones. Board member Jason Perez told CIO the controversial line was deleted and he “is happy with the deletion.” The revision will come before the board in August for a first reading, to be followed by a second reading at a later board meeting.

A controversial section of a proposed code of conduct would bar California Public Employees’ Retirement System (CalPERS) board members from speaking out against investment decisions or policies following board approval.

Critics of the draft policy, including current and former CalPERS board members, say the plan is aimed at stifling dissent and preventing CalPERS board members from talking to the media.

Proponents of the plan, including CalPERS Board President Henry Jones, argue that as the largest US institutional investment organization, CalPERS must present a united front to help ensure the success of investment decisions.

The code of conduct was unveiled at a CalPERS retreat meeting on July 17. The three-page code of conduct deals with a wide variety of issues for board members, such as keeping confidential closed-door board session material and board members avoiding conflicts of interest.

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The majority of the 13 board votes indicated they were in agreement with the code, although several voiced opposition. The matter is expected to come before the CalPERS governance committee for an initial vote on August 20.

The section of the conduct code in dispute is labeled “integrity.” It states: “when action is taken by committee or the full board, all board members will support the actions regardless of their individual vote on the policy.”

Board members could still express their dissent on investment issues before a vote, but if the board approves an investment decision, continuing the discussion at later meetings or talking to the press would be prohibited.

CalPERS Board Member Jason Perez said the “integrity” section is misguided.

“I firmly believe if CalPERS is making the wrong investment decision, I have a fiduciary duty to continue to bring it up,” he said in an interview with CIO.

A well-known press freedom group, the Reporters Committee for Freedom of the Press, is also concerned.

“It strikes me as an attempt to control the news, to shield embarrassing or negative news that CalPERS does not want the public to hear,” Rick Blum, the organization’s policy director, told CIO.

Jones said in an interview with CIO that the policy is not meant to stifle board member opinions or prohibit members from talking to the press.

“That is absolutely untrue,” he said. “Everyone has the right to express their opinion under the constitution.”

Jones said the problem is that CalPERS board members could be hurting the pension plan’s investment program by continuing to speak out against the investment decision after the vote.

He cited as an example, CalPERS’s planned direct-style private equity program, which has yet to be brought up to the board for final approval.

Under that program, CalPERS has proposed investing as much as $20 billion to create two private equity investment organizations. One would take direct stakes in companies and the second will fund late-stage startups in the venture capital cycle.

Jones said if the program was given final approval, and board members in opposition kept up their disagreement, it could scare the pension plan’s investment partners away.

“Board members should not be taking action to avoid implementing a policy or program,” he said. “If you take such action, it’s not in good faith.”

Jones said the draft code of conduct stems from board discussions a year ago as to developing standards for board members’ behavior.

At the July 17 retreat meeting, CalPERS Board Member Margaret Brown voiced her opposition to the code of conduct section, noting that she had voted recently against preliminary approval of the CalPERS direct-style private equity plan as well as against a pay raise for CalPERS Chief Executive Officer Marcie Frost.

Brown said she does have one agreement with the plan.

“I do agree that I need to defend my position,” she said.

In an email to CIO, Brown added, “They want to take away board members 1st amendment rights. This is an outrage.”

It’s unclear what penalties board members would incur if the gag section of the code of conduct was to be enacted.

Several board members discussed public censure of their colleagues or barring travel as possible consequences.

Former CalPERS Board Member J.J. Jelincic, said the policy is really aimed at avoiding negative publicity for CalPERS.

“They are more concerned about bad press,” he told CIO. “The policy is about avoiding dissent. We know what is best and let’s toe the line.”

While on the CalPERS board, Jelincic was censured several times by fellow board members for speaking his mind on board policies and decisions.

Back in 2014, the board reprimanded him for publicly criticizing the hiring of then Chief Investment Officer Ted Eliopoulos in a newspaper interview.

In 2017, the board censured Jelincic again, accusing him of leaking confidential board material to the press. His penalty was to attend a special training on open government laws at the University of California at Berkeley.

Jelincic wants to rejoin the CalPERS board and is challenging Jones in an election that will be decided in September.

At the retreat meeting on July 17, the debate over the controversial gag section of the code of conduct turned into a much wider discussion on whether CalPERS board members should talk to the press and whether they should consult the pension plan’s public relations staff before doing so.

CalPERS Board Member Theresa Taylor said she’s had calls from The Wall Street Journal on various CalPERS investment matters.

“I have called them back a couple of times,” she said. “I have worked with our [public relations] team to call them back, and I have done it on my own. I think you have to be very thoughtful about how we respond to the press.”

Another CalPERS board member, David Miller, said he had concerns about talking to the press generally, and if he did so, he would consult the public relations staff.

“I have tremendous respect and appreciation for the free press, but at the same time, as a fiduciary, I have to recognize for me personally, I can hurt our reputation,” he said. “I can hurt our fund by saying something that I may be perfectly sincere about, but I’m not thinking in the context of why am I saying this, what is my relationship with the fund, why I’m talking to this reporter.”

Jones said in the interview with CIO that there are no current rules prohibiting board members from talking to the press. He said, however, board members are encouraged to consult with the public relations office to ensure that they get their facts straight before talking to the media.