Rep. Soto: DeFi isn't really on Congress's radar, but proposed bills set the stage for action

Lawmakers and policymakers around Capitol Hill who are knowledgable about cryptocurrency and blockchain remain the exception rather than the rule — doubly so when it comes to decentralized finance, or DeFi.

As previously reported, much of Congress's attention has focused on tax-related issues in addition to taxonomy —that is, how blockchain applications, tokens, and cryptocurrencies are defined and categorized. It's a reflection of an institution that skews older and, as a result, isn't necessarily quick to learn about bleeding-edge innovations in the realm of finance.

But there is tangible movement taking place. Early this month, Representatives David Schweikert, Bill Foster, Tom Emmer and Darren Soto wrote a letter to Internal Revenue Service (IRS) Commissioner Charles Rettig, calling on the U.S. tax authority to not impede cryptocurrency tech that includes staking.

It's here that members of Congress took their first step — a baby step among baby steps — toward advancing policy measures that could make an impact DeFi, the realm of decentralized exchanges, peer-to-peer lending, yield farming and tuber-themed governance tokens.

On Thursday, The Block interviewed Rep. Soto, who emphasized that legislators are still working to define what these technologies in a legislative context and suggested that it could be years before more concerted actions on this front are undertaken.

"Congress hasn't engaged much on this topic yet," Soto told The Block. He went on to note that "[r]ight now, we're still at a state where we're literally trying to define the cryptocurrency definitions as well as jurisdictions overall." He highlighted two bills specifically — the Token Taxonomy Act and the Digital Taxonomy Act — that seek to lay down the basic statutory struts that could then factor into future legislation.

"So we're not quite into the point of look at decentralized finance," he continued. "And for the moment, that's a good thing. These nascent markets need time to grow."

Soto also spoke to the work being done on the government agency level and the degree to which Congress has pushed those entities to police for fraud and malicious activity.

"We haven't had new assets defined in federal law in decades. So right now, our agencies are tasked with painfully trying to pigeonhole different aspects of cryptocurrency in different jurisdictions." 

Such answers may not satisfy those who want more specifics on how, precisely, Congress may come to engage with these technology applications. But the particulars of the Digital Taxonomy Act focus on "digital tokens" and "digital units," and could be the vehicle by which governance tokens — the veritable product of yield farmers — come under the purview of Congress. "Digital units" are defined as those that are "a representation of economic, proprietary, or access rights ... stored in a computer-readable format." It's not hard to see that definition extending to something like a governance token.

The bill also calls for the Federal Trade Commission (FTC) to submit annual reports to Congress detailing its work in this area, including "any actions taken by the Commission relating to unfair or deceptive acts or practices in transactions relating to digital tokens." It's possible that such a report could come to be seen as the FTC's version of DAO Report — the 2017 publication that set the stage for the Securities and Exchange Commission (SEC)'s subsequent regulation and enforcement of initial coin offerings, or ICOs.

But again, those hoping for quick answers might be disappointed. For starters, 2020 is an election year. Unlike the lightning-fast "crypto time," Congress time tends to move much more slowly.