Public Policy at Hedera

The Hedera Governing Council is pleased to submit these comments regarding the IRS proposed rulemaking, Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions, concerning the definition of broker and reporting for digital asset transactions in an effort to assist the agency by offering six constructive recommendations that mitigate the risk of unintended consequences inherent in the existing language.

The Hedera Governing Council welcomes the opportunity for further dialogue regarding open source security, and how the Hedera Network open source community can collaborate with the Administration to foster the long-term sustainability of open source platforms that enable enterprise applications for both the public and private sector.

The Hedera Governing Council agrees with Recommendation 1 of the IOSCO's policy recommendations for crypto and digital asset markets. However, it believes that the development of regulatory obligations should provide clarity to actors who may not share liability for compliance. Regulatory proposals that include a broad diffusion of liability significantly increase regulatory uncertainty throughout the crypto-asset industry and may not achieve outcomes beyond ineffectively increasing enforcement targets and suppressing the development and operation of this technology. Hedera recommends that proposals to regulate crypto-asset service providers include precise definitions and include carve-outs and safe harbors for certain actors where appropriate.

The Council agrees that regulators should take an outcomes-focused approach to the regulation of crypto-asset activities. However, existing regulations often fail to achieve comparable outcomes when applied to novel activities compared to their intended application to traditional activities. The Council recommends that any use of existing regulatory frameworks must first assess and modify the framework to incorporate consideration of the novel characteristics of crypto-asset infrastructure, such as the disintermediation of transaction processing and the decentralization of control, operation, and information asymmetry between transaction participants.

The Hedera Governing Council submitted feedback to the U.S. Securities and Exchange Commission (SEC) regarding the proposed amendments to Exchange Act Rule 3b-16, which pertains to the definition of an exchange. In the letter, the Council expressed concerns about the unintended negative consequences that the proposed amendment would have on the DLT industry in the US. The Council believes that the amendment could potentially capture various parties, such as developers, protocol governors, DLT network validators, internet service providers, digital asset creators, liquidity providers, and IT service providers, as liable members of the "group of persons" who "make available" a "communications protocol" that acts as an exchange. The Council also pointed out that the proposal would fundamentally change the role of DLT network validators from message recording systems to intermediaries of network activities, extending liability for securities exchange activities to infrastructure providers, such as DLT network validators.

The Council strongly believes that the adoption of the proposal would undermine the vast benefits of DLT to US citizens and stifle or eliminate technological innovation. Therefore, the Council encouraged the SEC to reduce the scope of the definition of an exchange and provide precise definitions of regulated entities under the rule in compliance with their legislative authority. The Council also suggested that the SEC offer a reasonable and defined path to registration and compliance with the rule to avoid unintended consequences. The Council's feedback reflects the concerns of the DLT industry and highlights the importance of clear and precise regulations that support innovation and protect investors.

The Hedera Governing Council provided feedback to the Office of Science and Technology Policy's Request for Information on Digital Assets Research and Development. The Council believes that the development of digital identities is a critical component of digital asset infrastructure for various applications, including a U.S. Central Bank Digital Currency system. They suggest that additional research, development, and testing of digital identity implementations are necessary to ensure a balance between privacy protection and mitigation of illicit finance while promoting democracy, equity, and fairness. The council welcomes further dialogue on digital identity and its associated standards and privacy considerations.

The Hedera Governing Council responded to the US Department of Treasury's Request for Comment on ensuring responsible development of digital assets, focusing the response on questions two and three of the AML/CFT Regulation and Supervision section of the request. The Council emphasised that disintermediation of both financial and non-financial transactions is one of the primary innovations inherent in digital asset infrastructure, presenting novel challenges to regulators seeking to enforce public policy initiatives and prevent illicit activity in the financial system. The Council argued that sanctions laws may require additional precision and clarity to achieve desired policy outcomes without undermining the benefits and purpose of the technology. The Council also discussed a recent sanction on virtual currency mixer Tornado Cash and how it created substantial uncertainty for developers and DLT network participants to understand the scope of sanctions enforcement and to control for such outcomes and liabilities.

The Hedera Governing Council and The HBAR Foundation responded to the Commodity Futures Trading Commission's Request for Information on Climate-Related Financial Risk. The authors appreciate the commission's effort to understand climate-related financial risks and offer to engage with the Office of Technology Innovation to enhance their distributed ledger technology platform to meet the requirements in the carbon credits market. The response focused on addressing questions 22, 24, and 25 of the RFI. The Council and the HBAR Foundation believe that carbon credit tokens issued on well-governed public DLT platforms are a key component of the mission to bring the balance sheet of the planet to the public ledger. They offer their time and expertise to advance efforts to tackle climate change and the transition to a clean and reliable electricity grid.

Hedera expects to continue to respond to these types of inquiries from various stakeholders, and to continue to champion the policy pillars outlined above. We welcome collaboration from other industry participants in these efforts to move the industry forward and enable a better future for us all.

The Hedera Governing Council responded to the U.S. Department of the Treasury's Request for Comment on the responsible development of digital assets. The Council appreciates the Treasury's efforts to understand the impact of digital assets on the economy and supports the government's approach to regulating the emerging industry. The Council provided details on competitive aspects of DLT, such as fair timestamping, fair ordering, and settlement finality, which we believe are critical in recognizing how this new technology could underpin financial markets in a competitive and fair, equitable manner. The Council believes that other methods used by other DLT networks may also address these risks, but it is important to identify the protections each technology claims to have and analyze and understand them. The Council noted that it looks forward to future opportunities to engage with the administration where their experience might be helpful to policymakers navigating the complexities of the impacts of these innovations on the future state of the U.S. and global financial system.

The Hedera Governing Council responded to the Department of Commerce’s Request for Comment on "Developing a Framework on Competitiveness of Digital Asset Technologies". The Council stated that any public implementation of digital asset technology requires a cryptographically secure method of compensating all of the decentralized infrastructure providers fairly, and detailed how this works on Hedera. The response noted that the current U.S. regulatory landscape hinders the competitiveness of U.S. digital asset businesses due to the uncertain application and incompatibility of existing laws and regulations to digital assets and their underlying infrastructure. The Council believes that future regulatory shifts that create clear legal pathways to operate and develop products and services on distributed ledger networks will increase the global competitiveness of U.S. digital asset businesses.

In early 2022, Hedera and the HBAR Foundation responded to a request for proposal from the White House Office of Science and Technology Policy, on the role of distributed ledger technology (DLT) in addressing climate change and the transition to a clean electricity grid. We believe that DLT can facilitate growth in climate innovation and help achieve the US's greenhouse gas pollution reduction targets by 2030 and net-zero emissions economy by 2050. The response emphasizes the importance of trust and transparency in empowering government oversight of financing for green technologies, and the need for standardized open data and transparent carbon accounting measurements. It also discusses the use of AI and IoT in reducing costs and improving prediction quality and monitoring. The response further details covers two major themes: the use of DLT to build trusted sustainability markets and the energy footprint of various DLT technologies.