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This summer has seen a tsunami of regulatory action aimed at the fintech and crypto worlds. The highest wave was the insider trading case against a former Coinbase (COIN) executive and two associates, which was covered last week. A growing group of US Senators is seeking to crack down on Zelle—the digital payment system owned by a consortium of large banks—because of rampant fraud. There is also the joint action between the Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve, demanding that crypto broker Voyager Digital stop representing itself as having FDIC protection. (Even without the regulatory headache, Voyager Digital is a deeply wounded company, having declared bankruptcy earlier this month and rejected a rescue effort from FTX.) And of course there is the ongoing battle between Coinbase and the Securities and Exchange Commission (SEC), over whether the platform is illegally offering securities to American customers, which we’ll come back to.
Yet for all the regulatory roaring, the prospect of fundamental change or clarity in how the United States regulates crypto seems not much closer today than at the beginning of the year.
The “Responsible Financial Innovation Act” cosponsored by Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) made a big splash even before it was formally introduced. It would give primary responsibility for crypto markets to the Commodity Futures Trading Commission (CFTC), as well as provide clearer definitions of which digital assets are to be defined as securities and which wouldn’t. However, no one ever expected the bill to pass in this Congress.
Politico reported back in early June that Senators Debbie Stabenow (D-MI) and John Boozman (R-AR) were writing their own bill to regulate crypto, which is presumed to be narrower in scope but to preserve the idea of CFTC authority over crypto spot markets. Lobbyists believe that this bill has a better chance to pass, because its authors are the chair and ranking member of the Senate Agricultural Committee. However, the bill has yet to be formally introduced, and the Senate goes on recess in a few days; it’s very hard to believe there could be action on this before the November election. Over on the House side, The Block reports that the Financial Services Committee missed a key deadline on its pending stablecoin legislation, and nothing will happen until after the August recess.
Some had predicted that the $30 billion meltdown of the Terra-LUNA system would force Congress to act, but so far it hasn’t played out that way. An increasingly vocal group of Washington insiders is griping that even after roller-coaster markets and numerous hearings, the Senate simply isn’t equipped to tackle crypto as an issue.
At a Bloomberg Summit earlier this month, Gillibrand said:
This is a very broad and full bill that very few members of the Senate have the time, interest, or investment of understanding of all components of this bill….Cynthia and I…really delved into this area to become subject matter experts, and there’s not many others that have expressed interest in doing that.
This week, in an interview on Bloomberg TV, SEC Commissioner Hester Peirce said: “In Washington, there’s been a bit of a desire to see crypto just disappear.”
And at a conference held by Solidus Labs this week at the New York Stock Exchange, former CFTC chairman Christopher Giancarlo said that Washington’s “septuagenarian leadership” simply couldn’t understand the complexities involved in modernizing financial regulation.
Despite such hurdles, the crypto lobbyists do seem to have created a loose consensus around the idea that the CFTC should be the primary regulator. Giancarlo offered a schematic distinction: the SEC oversees entities involved in capital formation—stocks, bonds—whereas the CFTC is involved with risk transfer. Most cryptocurrencies, it is assumed, behave more like commodities than securities.
But this only brings us back to the SEC and Coinbase. In the civil complaint issued on July 21, the SEC maintained that at least nine of the coins involved in the insider trading case at Coinbase were securities that required registration. The company vehemently denies it. Nonetheless, this week Bloomberg reported that even before the insider trading case, the SEC was investigating Coinbase for improperly allowing securities to be traded.
Therein is the sticking point: the SEC is not going anywhere. There are thousands of cryptocoins out there, some of which are plausibly close enough to securities to persuade a judge or jury, should the question ever get that far. All the regulatory enforcement possible won’t change the fact that no government regulator will ever be able to give a definitive ruling on which are or might be securities, and Coinbase’s vetting process is also clearly inadequate. The only way to regulate effectively is to establish clearer rules, as the Gillibrand-Lummis bill tries to do. But if Congress can’t or won’t pass it, everyone is left in a very hazy limbo.