Sep 16, 2022 - Economy

The consensus for crypto-specific regulation is growing

SEPTEMBER 15: Securities and Exchange Commission (SEC) Chair Gary Gensler testifies before the Senate Banking, Housing, and Urban Affairs Committee, on Capitol Hill, September 15, 2022

Securities and Exchange Commission (SEC) Chair Gary Gensler testifies before the Senate Banking, Housing, and Urban Affairs Committee, on Capitol Hill, September 15, 2022. (Photo: Kevin Dietsch/Getty)

The position of the U.S. Securities and Exchange Commission (SEC) with regard to cryptocurrencies — that existing regulations and guidances are adequate to cover this asset class — appears to be losing ground in Washington.

Driving the news: The White House released a series of reports this morning describing its Comprehensive Framework for Responsible Development of Digital Assets. In comments to reporters, the administration seemed to indicate it disagreed.

  • "One of the recommendations was that regulators will issue new rules and guidance to resolve confusion, and close gaps related to existing financial regulations application to cryptocurrency. So that's a recognition that we see work needed in this space," a senior administration official said. "That's a clear recommendation coming out of the studies that were done."

Why it matters: The cryptocurrency industry has gotten big, but it remains volatile. The combined market capitalization of all cryptocurrencies fell from $2.8 trillion in November to less than $1 trillion today.

  • Much of that loss was born by normal people, many of whom were overextended as they made risky bets on a financial future that has not yet — and might never — arrive.

Of note: Regulators like the SEC, while appointed by the White House, are independent of the administration.

State of play: The SEC Chair has repeatedly stated that existing regulations are adequate, mainly enforcing those regulations with enforcement against crypto firms and a few "no action" letters.

  • Just last week, SEC Chair Gary Gensler again broke down the ways in which his agency has already provided guidance, asserting that more rules specially designed for cryptocurrency (or distributed ledger technology, as they prefer to discuss it in D.C.) would not be forthcoming.
  • On Thursday, before the Senate Banking Committee, he seemed to warn legislators against paying too close heed to the industry's calls for blockchain-specific legislation, saying in his prepared testimony, "Let’s ensure that we don’t inadvertently undermine securities laws underlying $100 trillion capital markets."
  • The SEC's approach has received the most criticism from Republicans, and has largely been applauded by Democrats. However the gentle nudge from the White House could signal some kind of shift in mood.

What they're saying: In Q&A with senators after his testimony, Sen. Mike Rounds (R-ND) said, "I've heard from a variety of companies who claim they try to work with you but then you turn around and hit them with enforcement actions or you slow walk the process."

  • "Not liking the answer doesn't mean there is not guidance," Chair Gensler replied.

Zooming out: At the same time as the Senate Banking hearing, the Senate's Agriculture Committee had a hearing on Sen. Debbie Stabenow's (D-MI) Digital Commodities Consumer Protection Act, which provides for a definition of a "digital commodity" that would place many cryptocurrencies under the purview of the Commodities Futures Trading Commission (CFTC).

  • "The volatility in the market, and its impact on retail customers — which may only worsen under current macroeconomic conditions — emphasizes the immediate need for regulatory clarity and market protections," Rostin Behnam, the CFTC's chairman said in prepared testimony.
  • Similarly, staff from groups like Citadel Securities and the Center for American Progress attended to make a similar case.

Yes, but: In his testimony Thursday, Gensler seemed to indicate he saw some room for customizing existing approaches, reiterating that he wants crypto firms to register their tokens and coins as securities.

  • This time, however, he granted that "given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements."
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