Committee hearing discusses US leadership in the blockchain space, separating financial and non-financial use cases

Regulatory approaches and U.S. leadership in the blockchain space dominate the Innovation, Data, and Commerce Subcommittee hearing on “Exploring Web3 and Other Applications for Distributed Ledger Technologies.”

On June 7, the U.S. House of Representatives Energy and Commerce Subcommittee on Innovation, Data, and Commerce met to discuss the future of blockchain technology and Web3. The hearing was focused on “strengthening American leadership in blockchain technology,” and much time was spent exploring how regulation could encourage or stifle this goal.

The expert witnesses, drawn from academia, research, and the industry, were keen to point out the non-financial use cases of blockchain technology, attempting to extricate it from a public image based on digital currencies such BTC and exchanges such as FTX. Many speakers—both witnesses and committee members—appeared to advocate for policy and regulation of blockchain informed by a deeper understanding of the technology, in particular, an approach that would not lump every use case in the financial markets pile.

“Blockchains, Web3, and other applications of distributed ledger technologies represent a new technological shift comparable to the breakthrough of the internet,” said House Energy and Commerce Committee Chair Cathy McMorris Rodgers in her opening statement. “We must ensure we can lead the next era of American innovation and entrepreneurship with a regulatory environment that keeps pace with the constantly evolving tech sector… That’s especially true with blockchains.”

Regulatory concerns dominated the discussion, much as they have dominated debate in the digital asset industry of late. A theme that came out of the hearing was distinguishing the different applications of blockchain technology for the purposes of legislation.

Not just ‘cryptocurrency’

“Cryptocurrencies and certain financial aspects of blockchains have hijacked the public’s attention when it comes to this emerging technology… Today’s hearing will highlight that blockchains are not just impacting Wall Street but are also changing Silicon Valley and the internet as a whole,” said Chair of the Subcommittee on Innovation, Data, and Commerce Gus Bilirakis in his opening comments.

He hammered down on this point later, stating that: “Blockchains are not a crypto casino. In fact, according to one report, despite crypto prices falling roughly $2 trillion—a 70% decline—blockchain developers have only declined 10%… There are respected developers who aren’t trying to make a fast buck, but rather they’re building a new evolution of the internet.”

Chair Bilirakis suggested that before any sweeping regulatory changes are made that might impact all of the blockchain space, a better understanding of the distinction between different uses is necessary. “It is essential that Congress accurately understand what it is regulating before it does so.”

Carla L. Reyes, Associate Professor of Law, SMU Dedman School of Law backed up the concerns of the Committee chairs and was keen to highlight blockchain’s non-financial use cases, particularly in relation to smart contracts:

“Smart contracts represent another frequently misunderstood feature of blockchain protocols… what a smart contract is, for legal and policy analysis purposes, depends on how it is used… Recognizing the role of both the social context and the technical architecture in determining the nature of any particular smart contract or smart contract-based application or organization is key to enabling efficient and effective policy-making that enables innovation and preserves the transactional power of smart contracts without facilitating bad actors.”

She outlined the benefits of smart contracts, including boosting regulatory compliance and transparency and increasing democratization for businesses and entrepreneurs, while lamenting the over-focus on financial use cases and making a case for regulation specific to different technology applications.

“Legislative and regulatory discussion related to blockchain technology generally centers on financial use cases, including various forms of digital assets and decentralized financial projects,” said Reyes. “This hyper-focus on one segment of blockchain technology-related use cases risks the creation of legal regimes that are neither clear nor—more basically—fit for purpose, and heightens the risk of discouraging useful innovation in areas unrelated to finance and financial services.”

Another witness, Hasshi Sudler, Professor at Villanova University College of Engineering and CEO of Internet Think Tank, contributed to this discussion by outlining his work on non-financial uses of blockchain, including in healthcare.

Sudler explained how using blockchain technology for contact tracing on phones during the COVID-19 pandemic could have allowed for global tracking of the spread of disease rather than state- or country-based tracking. He also agreed that regulation molded to the use case is the way forward: “Maturing blockchain technology will need appropriate legislation to encourage broader innovation around its use cases.”

When it came to the regulatory discussion, the only dissenting voice amongst the speakers was Ross Schulman, Senior Fellow of Decentralization, Electronic Frontier Foundation. Rather than introducing reams of new regulation specific to different applications, Schulman suggested that “broadly speaking, Congress should rely on the regulations that already exist to protect people.”

He went on explain how “in thinking about regulating blockchains, they should be treated much like any other tool would be. Normal consumer protections should apply to them, and Congress should pass a consumer-driven comprehensive data privacy law, but blockchain-specific legislation is unlikely to be necessary.”

All of this discussion on how best to legislate for blockchain was framed in the context of maintaining or regaining U.S. leadership in technological innovation and the risks of falling further behind international competitors if lawmakers mishandle regulation.

US leadership

“We need to ensure that America—not China or Europe—is charting our path to lead in the deployment and standard setting of these technologies,” said Rodgers in her opening remarks. “Our mission in Energy and Commerce is to help foster and promote innovation and American technological leadership.”

This was echoed by fellow Republican Bilirakis, who urged that: “the United States must lead on the international stage so our adversaries do not have an opportunity to set the rules of the road.”

The Republicans have often favored a pro-innovation, pro-business approach to the digital asset space, so it was no surprise to hear the two Republican Committee Chairs applying this to the broader blockchain and Web3 ecosystems.

However, the Committee did cite several reports as a reason for its concern, stating in the hearing memo that “despite housing Silicon Valley and the best technical talent in the world, entrepreneurs are fleeing the U.S. for more friendly regulatory environments overseas. In 2023, American shares of blockchain developers are declining, and less than 40% of all blockchain companies are headquartered in the United States.”

Witness Ryan Wyatt, President of Polygon Labs, did nothing to assuage the committee’s fears that inadequate legislation was part of the reason the U.S. might be putting off blockchain companies.

When asked by Rep. Debbie Lesko about the appropriate balance that can be struck between encouraging innovation and appropriately regulating the technology, Wyatt said, “I think it’s really important that we establish guidelines, regulation, and rules of the road, so that there is clarity and people feel comfortable that they are capable and enabled to innovate in this country.”

This further demonstrated how the hearing’s discussion of U.S. innovation leadership was inextricably linked to the broader topic of regulation, which Rodgers also highlighted:

“Congress needs to have a conversation about what blockchains are, and are not, to ensure the heavy hand of government regulation doesn’t force blockchain startups to re-evaluate if America is the best location to begin their business.”

Regulatory clarity is something—almost—everyone can agree on. But while the hearing’s nuanced discussion around the broad spectrum of blockchain technology use cases was heartening, a persistent issue in the space was still very much on show. U.S. lawmakers continue to find it difficult to balance the scales of encouraging innovation vs. protecting consumers.

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