Congress battles over DeFi, while Trump’s silence speaks volumes

As Democrats and Republicans argue over DeFi, what message does Trump’s silence send to the crypto community? Is it a sign of apathy or strategic neutrality?

DeFi has become the center of attention

On September 10, the first Congressional hearing on decentralized finance took place, marking a significant moment in the evolution of this technology.

The hearing, titled “Coding DeFi: Dismantling the Future of Decentralized Finance,” was led by Congressman French Hill and lasted approximately two and a half hours.

US lawmakers have gathered to discuss the potential benefits, as well as risks, that DeFi could bring to the financial system.

The hearing revealed a clear divide among lawmakers, with Republicans, led by Hill, optimistic about DeFi’s ability to disintermediate and transform financial markets.

As Hill puts it, “by replacing autonomous, self-executing code with intermediaries, decentralized finance could change the way financial markets and transactions are currently structured and managed.”

Meanwhile, Democratic lawmakers have voiced concerns, focusing on the potential abuse of DeFi, particularly its role in facilitating criminal activity. Republicans have called for lighter regulations, while Democrats have advocated for tighter oversight, citing risks of illicit use.

What does this hearing mean for the future of DeFi and the broader crypto market, especially with the US presidential election approaching?

Conflicting perspectives on DeFi

The hearing became a battleground of opinions, with lawmakers’ perspectives on DeFi sharply contrasting. Subcommittee chair Hill kicked off the discussion by focusing on the opportunities that DeFi and tokenization could present to finance.

But not everyone saw it that way. Democratic Congressman Brad Sherman of California took a more critical stance, expressing concerns that DeFi could be nothing more than a tax evasion tool, especially for the ultra-wealthy.

Here we have an effort to save billionaires from paying income taxes. When a billionaire manages to evade taxes, a member of the Freedom Caucus earns his wings.

In response to Sherman’s concerns, Peter Van Valkenburgh, director of research at Coin Center, offered a counterargument, acknowledging that tax evasion is a crime but noting that DeFi’s transparent, decentralized ledger makes it harder for malicious actors to hide their activities.

Tax evasion is a crime. It should be aggressively regulated. However, I do not believe that tax evasion and its existence require a financial system that is 100% monitored and controlled.

Van Valkenburgh also noted the confusion surrounding the IRS’s tax guidance, arguing that many crypto users want to comply with tax laws but lack clear instructions on how to do so.

One difficult area in the cryptocurrency sector has been getting clear tax guidance from the IRS on how Americans can pay their taxes when they earn capital gains, or perhaps wages, in these networks.

He added that criminals are more likely to use traditional financial systems rather than transparent blockchain networks to hide illicit funds.

Mark Hays, senior policy analyst at Americans for Financial Reform, on the other hand, painted DeFi in a less positive light, describing the space as volatile and rife with scams where investors often face devastating losses.

Hays emphasized that DeFi should not be left so free and that existing securities laws should also be applied to decentralized systems to protect investors.

Meanwhile, Amanda Tuminelli, chief legal officer at DeFi Education Fund, took a different approach, emphasizing DeFi’s potential to democratize finance. According to Tuminelli, traditional financial systems often rely on middlemen who act as gatekeepers.

“Large banks can and do deny access to the system for discriminatory reasons or no reason at all,” he said, comparing it to the open-access nature of DeFi. He said anyone with an internet connection can use DeFi, calling it “the epitome of financial inclusion.”

Tuminelli argued that treating DeFi like traditional finance is not the right approach because the underlying structures are fundamentally different, suggesting that regulations should take into account the self-custodial nature and transaction anonymity of decentralized systems.

Cryptocurrencies not in the spotlight of presidential debates

Vice President Kamala Harris and former President Donald Trump faced off in the second presidential debate of the 2024 election on September 10. Despite Trump’s known pro-crypto stance, crypto was completely absent from the debate.

Instead, the focus was on traditional economic issues, with no reference to crypto, blockchain or broader financial technology issues.

Harris’ strong performance in the debate appeared to have unsettled Trump, who has struggled to defend his stance, especially on controversial issues such as abortion.

All of this seems to have affected the crypto market, as Bitcoin (BTC) dropped from around $58,000 to $56,000 after the controversy. As of September 11, it has recovered slightly and is hovering around $56,800.

Ethereum (ETH), the second-largest cryptocurrency by market cap, also saw a small drop of around 0.5% during the same period, trading around $2,340.

In a surprise twist for Trump, who has long positioned himself as a champion of deregulated financial markets, his chances of winning have fallen from 52% before the debate to 50% as of this writing, according to online betting platform Polymarket.

Meanwhile, a CNN snapshot poll reflected Harris’ dominance, with 63% of viewers saying she outperformed Trump. However, most respondents said the debate would not impact their vote in November.

As the campaign continues and demand for a third debate grows, it remains to be seen whether crypto will finally take center stage.

What to expect next?

Throughout the Biden administration, Democrats have been consistently skeptical of crypto, highlighting the risks and pushing for stronger regulation, while Vice President Kamala Harris has remained silent on the issue and made her stance unclear.

Meanwhile, Trump, once vehemently opposed to crypto, has shifted his tone to appeal to pro-crypto voters. In recent months, Trump has shown greater openness to blockchain and crypto in several instances.

But like Harris, he has remained silent during the most important moments, such as the Twitter space chat between Trump and Musk in August and the noticeable absence of crypto from the second presidential debate.

The future of crypto and DeFi in the US remains uncertain. With the upcoming election, how the next administration handles this growing sector could have a lasting impact on both innovation and regulation in the financial space.