Rep. Davidson: DeFi 'gets at the heart' of debate on financial regulation

Last week, The Block reported that decentralized finance or DeFi really hasn’t made much of an impression in the halls of Congress — at least, not yet.

In a new interview, Rep. Warren Davidson of Ohio — another of Congress's blockchain boosters — reiterated as much: This particular corner of the digital asset ecosystem is largely flying under the radar in Washington.

But Davidson’s went further. Even though it isn't getting much air time yet, DeFi speaks to a broader — and bipartisan — battle of ideas playing out on Capitol Hill, he said. That argument hinges the question of whether central authorities should exist between those who transact between one another.

There are “two camps” on the question of central authorities, he said. Some Congressional representatives are more hesitant than others to embrace a model in which some kind of oversight body is removed. And it’s here, said Davidson, where DeFi comes into play.

“DeFi really gets at the heart of it, in terms of do we want a future that’s got a third-party between every transaction or do we want a future that’s got a decentralized structure with some — you know, if you make use of a blockchain, for example, an auditable ledger that gives some level of transparency but also some level of privacy. Not real secrecy, because, you know, it is auditable,” he told The Block.

He added: “So that’s the heart of the debate right now and there are bipartisan people that feel they want the central authority and there’s bipartisan folks that don’t want the central authority.”

In that context, Davidson highlighted the Token Taxonomy Act, a piece of legislation that he and Rep. Darren Soto introduced last spring. Included in the measure is definitional language for “digital tokens” as well as firmer mandates for agencies like the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) to regulate cryptocurrency. Davidson said that the bill grew out of discussions that started in 2018, with a particular eye toward some kind of bipartisan approach.

The Token Taxonomy Act will provide “the right legislative text to have that discussion,” Davidson argued.

Meanwhile, recent developments suggest that a bipartisan approach to crypto-specific legislation is possible. For example, two Republicans and two Democrats — one of them Rep. Soto — sent a letter to the Internal Revenue Service (IRS) earlier this month, calling for a more proactive policy stance on the question of staking. All four signatories are members of the Congressional Blockchain Caucus, which is itself bipartisan in nature.

According to Davidson, Congress should be taking crypto more seriously — if for no other reason than for the sake of consumer protection. Federal action so far has not been enough to, as he put it, combat the kind of fraud that could actually set back the advancement of the technology. He was particularly critical of what he called a lack of sufficient action on the part of the FTC. “Consumers, investors, entrepreneurs are all at greater risk because Congress is failing to take action,” he said.

Davidson went on to say:

“Right now, it’s kind of the Wild West and we have to pass some level of clarity, and I tell you, the good capital in this space is for regulatory clarity. They want to root out the fraudsters more than most. And certainly, that’s a big part of the support that Darren [Soto] and I have seen for the Token Taxonomy Act, from people that know that their whole field is having reputational damage by bad actors.”

“Part of making sure that we do right by the good actors is by passing a law that provides that clarity that helps the good actors flourish and provides no sanctuary for the bad actors,” he concluded.