Federal Preemption or States' Rights? Crypto Advocates Clash Over Regulatory Approaches

The panel, which also featured MIT professor and former Commodity Futures Trading Commission Chairman Gary Gensler, was on crypto regulation, and the main point of contention was whether it is better done on the federal or state level.

The tension over the boundaries of federal vs. state authority has informed American politics since the foundation of the republic.

In the realms of commerce and finance, a relative balance was achieved when the states assumed jurisdiction over the "Consumer-facing" commercial law while the agencies of federal government came to oversee operations with more specialized, "Institutional" financial instruments - such as securities, futures and options, and broad financial crimes.

The crypto community seems to be divided over not just the bill itself but the very idea of a Congress-enacted, binding definition of a digital token with a claim of federal preemption.

Others, including Caitlin Long, argue that it is not the federal government's business altogether, and an attempt by Congress to introduce such a taxonomy would amount to an infringement on states' rights.

In Long's opinion, not only are states in a better position than the federal government to ensure both, but they have the priority to do so.

Coin Center's Van Valkenburgh responded that his uneasiness with state-level crypto regulation comes from the fact that, in many cases, it boils down to states applying archaic money transmitter laws and licensing requirements to crypto businesses.

When MIT's Gensler attempted to dwell on the consumer protection side for a little longer, Van Valkenburgh retorted that state-level regulation is not the sharpest tool to combat things like money laundering, either: When it comes to financial crimes, states cooperate with the federal regulator, FinCEN, who applies federal legislation - i.e., the Bank Secrecy Act.

Coin Center's Van Valkenburgh also argued that managing custodial risks on the state level is not a great idea, since such processes are better handled by specialized federal authorities, such as the SEC or CFTC. In sum, Van Valkenburgh contended that it is better to have a clear-cut, uniform federal regulation than a host of disparate, state-specific regulatory regimes.

"That is putting the convenience of large financial institutions in this sector ahead of reality that property laws are purview of the state. It is very unlikely, to be honest, that there's going to be a federal money transmission statute, because states are going to fight it. It usurps their long-established supremacy over property law and long-established supremacy over commercial law."