Before We Regulate Crypto, We Need to Know What Crypto Is

The government needs to know more about crypto before it can regulate it.

That was a central premise of a congressional hearing yesterday devoted to the risks crypto presents for retail and institutional investors. The hearing was provocatively titled: “America on ‘FIRE’: Will the Crypto Frenzy Lead to Financial Independence and Early Retirement or Financial Ruin?”

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"Today's hearing will ... assess the systemic risks to the economy, as well as the risk of loss to individual investors caused by recent periods of extreme volatility in crypto assets that are not backed by any form of tangible collateral," Rep. Al Green (D-Texas) said, kicking off the event.

The hearing took place at a moment when U.S. lawmakers seem to be cranking up the heat on the crypto industry. A host of government officials and agencies have stated the importance of rethinking the nation’s crypto strategy.

CoinDesk Managing Editor Nik De said yesterday’s meeting on Capitol Hill seemed to be more of a fact-finding mission for Congress than a witch hunt. (He live-tweeted the event if you want a full rundown.)

Finding facts could be a difficult task in crypto. Despite the fact the industry is (mostly) built on fully transparent and audible ledgers, there’s a remarkable amount that’s unknown. For instance, exactly how big is this industry? How many cryptocurrencies are there?

“At the outset it is worth noting that there is no official public data source for cryptocurrency prices, market size or volatility. This lack of data is a significant problem,” Sarah Hammer, managing director of the Stevens Center for Innovation and Finance at the Wharton School at UPenn, testified.

“Financial regulators are at a distinct disadvantage in evaluating their regulatory options,” she added later, conceding a general lack of knowledge.

Hammer brings up a significant point: Before regulators can get clear about the risks to consumers or the economy as a whole, they need to get a better grasp on crypto. She noted that before the 2007-2008 financial crisis, there were no official data sources for credit default swaps (the derivatives product that blew a whole in the world’s biggest banks) or clarity on how to regulate them.

Of course, there are a number of independent and trustworthy data sources in crypto. But sometimes even getting a clear answer on what bitcoin’s price is could be daunting – fractured markets mean there is no unified price, only various estimates using different measures.

Read more: Does Crypto Need Circuit Breakers? Last Week’s Price Crash Ignites a Debate

A similar question came up this week when a judge dismissed the U.S. government’s case against Facebook for monopolistic practices. U.S. District Court Judge James Boasberg wrote in an opinion: The Federal Trade Commission’s “inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share” makes its argument “too speculative and conclusory to go forward.”

Boasberg gave the government 30 days to come up with a metric that measures how big the social media economy is and how much attention share Facebook has captured. It’ll be a difficult task.

Of course, the government isn’t pursuing legal action against “crypto,” but it is trying to answer a similar question about size.