In the first episode of the new Blockchain Policy Matters online video series, Bitcoin Association sat down with U.S. Congressman Patrick McHenry (R-NC 10), Republican Leader of the House Financial Services Committee, to discuss the present political landscape for digital currencies, his personal vision for the future of finance, as well as how he sees blockchain technology as a positive force for financial inclusion.
With financial fairness and digital currencies the talk of the town in Washington D.C., North Carolina’s Patrick McHenry has fast found himself in the national spotlight just weeks into the 117th United States Congress. A staunch proponent of blockchain technology and digital currencies, McHenry is an established voice amongst a slowly growing contingent of congressional leaders pushing for an embrace of the technology. His role as Republican Leader of the House Committee on Financial Services affords him a front-row seat to the innermost workings of the U.S. economy – permitting the highest possible vantage point from which to assess its apparent shortcomings and identify opportunities to innovate.
‘Here in the United States, we pay more for the movement of funds than the rest of the first world. There is a profit motive for that, certainly, but what we need is action to bring more competition into the exchange of money [and] the movement of money,’ McHenry told Bitcoin Association.
‘We see the benefits across society of digitisation using technology. In essence, instead of having a person make the decision, you enable the technology to do it quickly and efficiently. Once that technology is set up, there are massive cost savings.’
‘Combine the two – a competitive marketplace for moving money and digitisation – and you can see how this will make the small exchange of cash, the small exchange of value, very affordable and competitive. That’s what I think is interesting. It’s not the movement of a million dollars between institutions that is of interest; it’s the ability for me to give you 25 cents.’
McHenry was quick to acknowledge that technically speaking, the technology to deliver micropayment capabilities does indeed exist today, but pointed to the disparate nature and poor interoperability of existing solutions, as well as an oftentimes difficult and complicated user experience as presenting significant barriers to adoption for everyday users – a factor he said is holding back the sector at large.
‘What we can’t think of or contemplate is the world of digital payments that is a decade in the future, because all we can think of is the clunkiness now,’ McHenry said.
‘We’re talking about a wholly different view that is broadly enabled by technology; you may not be able to see it, you may not be able to feel it, but you’ll experience the good results of it in the future.’
McHenry’s outlook for innovation in this space however goes beyond just payments in the traditional sense, he sees applications for the broader technology going far further and intertwining with other aspects of our increasingly digitised global economy.
‘The first layer here is to actually monetise the Internet and to make the Internet truly the Internet of money,’ said McHenry.
‘Bitcoin is that layer that will enable us to take the exchange of data and actually have an exchange of data for some value. I think it’s a huge opportunity to connect data and tradeable value.’
McHenry’s vision for a brighter, Bitcoin-based future will be a familiar one for many in the digital asset community, however, it’s far less common to hear this type of vision articulated by a senior lawmaker. While most representatives on the Hill struggle to distinguish a distributed ledger from a digital currency, North Carolina’s McHenry is hard at work conceptualising the next evolution of the technology and the benefits it may bring.
‘Imagine talking about a very small transaction, to perhaps read an article or for a driverless car to ask another driverless car to let you pass, there are huge opportunities that are quite limitless for the use of blockchain technology,’ explained McHenry.
‘The potential here is that you have connected with your daily life perhaps dozens or hundreds of transactions. I think that is the world of the future – potentially thousands of these small transactions [that] would enable your life in a more seamless way.’
But developing a ground-breaking or world-changing technology is only part of the equation, acceptance and adoption – both from the population at large and the lawmakers tasked with setting the rules of engagement – can be just as, if not more challenging – particularly for new or nebulous ideas.
‘The initial reaction out of Washington is that everything must fit the existing regulatory regime, which is not really keeping up with where we are in terms of the technology of Bitcoin or a distributed ledger technology,’ explained McHenry.
‘[Bitcoin] is neither a commodity nor a security – it does not fit into either rubric well. In fact, it’s very difficult to think of it on really the two planes of thinking that we have in Washington This is a whole new way of thinking and that is very difficult for Washington to adapt to at its best. And Washington is currently not at its best.’
For McHenry, improving understanding amongst lawmakers around the capabilities of blockchain technology and the benefits it offers to society is a critical first step, not only from the perspective of affecting a positive regulatory response from legislators, but also ensuring that misinformation or misunderstandings don’t make their way into the policymaking process.
‘Education has to be the primary driver here. Most policymakers are not informed about the basics of cryptocurrency, the basics of blockchain technology – just the basics – so we need that base level of education to rise and then we can build off that platform,’ says McHenry.
‘Right now, that baseline of education for policymakers is very important, because what we don’t need out of Washington or the states is to restrict or crush or try to kill this type of technological advancement.’
McHenry was realistic about the challenges and obstacles that lay ahead for progressing positive policy in the blockchain and digital currency space at the federal level, but remained optimistic about the potential for individual states to take the lead in enacting sensible rules and regulations within their own jurisdictions.
‘At the state level, we’ve seen various different types of adoption of distributed ledger technology and an acceptance of cryptocurrencies and Bitcoin. I think that will eventually percolate up into policymakers better understanding it in Washington,’ said McHenry.
‘New York is not what I would call a “light-touch” financial regulatory state, but they are more thoughtful when it comes to cryptocurrency. It is encouraging that they can “get it” – have what I would say is an onerous set of financial regulations – but they can get this within an atmosphere of innovation.’
While McHenry praised the thoughtfulness of New York state lawmakers, he was quick to caution any over-eagerness in pushing through legislation with the potential to impinge on innovation in the space.
‘I don’t think we need to go into a more onerous atmosphere around cryptocurrencies and their adoption – I don’t think that’s necessary, nor do I think it’s proper,’ he said.
‘I do think it would inhibit innovation and the adoption and the raising of funds in order to adopt these technologies here in the United States.’
The issue of capital raising was a pertinent one for McHenry, who denoted it as one of a pair of legislative priorities he had for digital currencies in the current congressional session.
‘We have to build off what the Securities Exchange Commission laid out in the guidance they’ve given in order for legitimate money to come into the development and capacity to deploy new cryptocurrencies and new innovations,’ explained McHenry.
‘We have to build on that legislatively so that you can have more legitimate dollars flow into this technology and into the development of this technology.’
Equally important for McHenry is the tax component – an ongoing source of confusion for all corners of the industry – as lawmakers continue to grapple with the difficulties of implementing a fair and effective tax regime for digital assets – one which recognises the various nuances of instruments that at present, don’t fit neatly into a pre-prescribed taxation box.
‘The IRS views those that own or hold cryptocurrency as pure speculators and that there is no use case for any of these technologies – that is the default in the IRS rules, which is basically saying that everyone is out there making millions and billions of dollars on this, which is not, in fact, the case,’ said McHenry.
‘In order for these assets to be widely deployed, you have to have the democratisation of their holding – these IRS rules actually run quite counter to that. That’s why I think we need to get this right so that you can be a holder of [digital currencies] and when you accrue value, it is accrued as a different third case – neither income nor capital gains – with a wide set of minimum standards so you can hold these, use them to buy and sell things, and make them deployable in a massive way.’
‘You’re going to have an onerous set of tax regulations around this new technology because [the IRS] see volatility and therefore the IRS – and Washington generally – see opportunity for enrichment right into the federal treasury. So, I think we have got to get the tax piece right
Formulating policy and enacting legislation that will effectively balance the benefits of blockchain technology with the need to regulate the actors and entities involved appears poised to be subject to an ongoing arm-wrestle in Washington. But before extending a long regulatory arm into private sector applications of blockchain technology, McHenry urged his fellow lawmakers to take a hard look at the information systems and technology that they themselves rely on.
‘The federal government is very far behind, they haven’t caught up with APIs and on top of that, we’ve seen an enormous number of data breaches in the federal footprint,’ he said.
‘Those honeypots of data and information – the federal government keeps building and is intentional about building up these really clunky, last-generation systems – so the federal government has to advance dramatically. I think blockchain technology for our federal record-keeping is really quite right, but that is going to take quite a while to do.’
Similar to McHenry’s outlook on advancing the legislative and regulatory standing of digital assets, in his view, a blockchain-based approach to information systems in government would have to be driven at the state level before it was likely to gain traction federally.
‘At the state level, I think you’ll see [blockchain technology used] at the recordkeeping levels of counties and states, very basic information – for example, when you buy or sell a car or when you buy or sell a house – very basic societal pieces of information that governments do a good and wise job of holding on to and keeping track of – those will move onto a public ledger of sorts,’ said McHenry.
‘I think you’ll see certain states have this type adoption and it will be three-to-five states, then it’ll be 40, but it’s going to take a while to get this group of policymakers and elected officials seasoned to this and seeing the huge advantage and the huge cost savings year-over-year once it’s deployed.’
McHenry’s home state of North Carolina has been quick to embrace the potential of blockchain technology, with a dedicated task force established to explore opportunities for the deployment of ‘blockchain technology, virtual assets, smart contracts and digital tokens’ within the state apparatus.
‘[North Carolina] want to purposefully be a leader in blockchain technology and in putting more onto a blockchain across the governmental footprint to give people open access to their data,’ explained McHenry.
‘I think it’s a huge opportunity at the state level and I think it’s going to be the big driver here in the United States for federal policymakers to catch up.’
McHenry enters his ninth congressional term beset with a policy agenda to advance responsible innovation with blockchain and digital currencies, an approach that is underpinned by a personal appreciation of the opportunities financial technology can unlock.
‘I saw the benefit of financial technology to my father’s entrepreneurial business that he started out of our backyard,’ he explained.
‘The second piece of equipment he bought, he put on a MasterCharge, which was the brand-new financial technology innovation of its day. That MasterCharge, now MasterCard, was a huge boost to him being able to start a business and put my two brothers, two sisters and I through college.’
That first-hand experience and understanding for McHenry has undoubtedly played a role in shaping his approach and positions throughout his political career, the hallmarks of which are evident in his overarching priorities for the current congressional session.
‘I see huge benefits for entrepreneurs and everyday people via technology transformation,’ he said.
‘Democratising capital and driving innovation are my two primary focuses, and I think they’re quite linked. That’s what I’m focused on, and I think that as a result of that, we will have greater financial inclusion.’