Smart Policy for Blockchain and Distributed Ledger Technology
Nilmini Rubin
Oct 03, 2023
by Nilmini Rubin
Chief Policy Officer

Hedera is committed to building a trusted, secure, and empowered digital future for all. The new paradigm for the internet involves the ownership of digital assets as recorded on a distributed ledger or blockchain: genuine ownership of real assets through enforceable digital scarcity and proof of provenance.

Digital assets are regulated and need smart policies going forward that understand, natively, both their promise and its peril. Better regulation, through Congressional action, can improve protection, innovation and inclusion. We believe the goals of smart regulation, for consumers and the industry, should be as follows:

  1. Protection. Prevent illegal activities such as money laundering and fraud. The lack of regulation in the crypto market has led to a number of scams and Ponzi schemes, where investors have lost significant amounts of money.
  2. Innovation. Address the fundamental differences in crypto assets from traditional securities. Crypto assets rarely provide ownership rights over a company, voting rights for that company, or rights to profits from a company. Rather, they represent ownership of tokens that can, among other things: pay for digital transactions to be processed by the ledger; provide proof of ownership of works of tangible resources such as art and real-estate; and provide access to digital services.
  3. Inclusion. Provide regulatory clarity to increase the adoption and use of cryptocurrencies as a legitimate form of payment and investment. At its root, crypto is a dramatically pro-consumer, pro-competition, pro-individual idea, which can enable direct ownership of huge swaths of assets. Having regulations in place will attract institutional investors and traditional businesses to the crypto market but will also empower new small business initiatives that otherwise would have been impossible.

Ultimately, good regulation of the crypto industry can support sustainable economic growth and financial inclusion around the world. Policy makers have the opportunity to shape the crypto industry so that it enables a better future for us all. We believe legislators should embrace the following five policy principles in determining the right legislation for the industry:

  • Permit the Base Layer (DLT) of Web3 To Grow.

  • Ensure Tokens Can Be Easily Used As Crypto-Fuel for Web3

  • Create Fair and Equal Access To The Economic Benefits of Web3

  • Create Incentives To Grow Web3 Across All Economic Sectors

  • Empower Regulators To Experiment with DLT

Hedera believes these policy principles help ensure a U.S. regulatory framework for DLT/blockchain that will provide proper consumer protection, technological innovation, and financial inclusion, and will be focusing our policy efforts on driving forward the principles laid out above.

As part of these policy efforts, from time to time, Hedera will also respond to Requests for Information (RFIs) from various government agencies, with the hopes of further educating policy makers and influencers on the technological benefits and differences of various distributed ledger technologies. To date, Hedera has responded to the following RFIs:

1) The White House Office of Science and Technology Policy
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.

2) U.S. Treasury on Responsible Development of Digital Assets (Markets)
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.

3) Department of Commerce on Developing a Framework for Competitiveness in Digital Assets
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.

4) U.S. Treasury on Responsible Development of Digital Assets (Illicit Finance)
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.

5) Digital Assets Research and Development (White House OSTP and NSF)
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.

6) CFTC RFI on Climate-Related Financial Risks
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.

7) SEC RFC on the Notice of Proposed Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange”
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 consensus nodes, 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 consensus nodes from message recording systems to intermediaries of network activities, extending liability for securities exchange activities to infrastructure providers, such as DLT network consensus nodes.

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.