Senate Banking Committee Considers Approaches to Crypto Regulation
Commentary by Steven Lofchie
In a full committee hearing, the Senate Banking Committee assessed various approaches to cryptocurrency regulation, addressing stablecoin/decentralized finance ("DeFi") regulation, investor protections, and collaboration between the SEC and CFTC.
In opening statements, Committee Chair Sherrod Brown (D-OH) said that recent turmoil in crypto markets exposed digital assets as "speculative products run by reckless companies that put Americans' hard-earned money at risk." He said that cryptocurrencies remain a threat to the "real economy" and called for both Congress and regulators to consider how to protect consumers from unregulated digital assets. Ranking Member Tim Scott (R-SC) urged SEC Chair Gary Gensler to appear before the Committee to answer for the lack of accountability that currently exists in the crypto space.
Lee Reiners, Policy Director at the Duke Financial Economics Center, argued that the SEC should be the primary regulator of crypto exchanges, noting that crypto exchanges in the United States are currently not regulated at the federal level. Mr. Reiners agreed with SEC Chair Gary Gensler's assertion that most crypto assets are securities, but said that some cryptocurrencies, like Bitcoin, should be considered commodities. Mr. Reiners said he supported a comprehensive approach to digital assets that "carve[s] out cryptocurrency from the definition of a commodity in the Commodity Exchange Act and recognize[s] cryptocurrencies as securities under a special definition to the securities laws." Mr. Reiner's testimony also touched on regulating DeFi and stablecoins, saying that forcing stablecoin issuers to become banks could improve the credibility of the product.
Linda Jeng, Chief Global Regulatory Officer of the Crypto Council for Innovation, focused on developing web3 technology, warning that the United States risks getting "left behind" in innovation if it does not pursue web3 development. She observed that if cryptocurrencies were fully "de-banked," the industry would naturally shift off-shore to other countries or into shadow banking where regulators would lose the ability to monitor and regulate digital asset activities. Ms. Jeng also emphasized the need for regulators to (i) use rulemakings to regulate the crypto space and (ii) not engage in regulation by enforcement.
Yesha Yadav, Associate Dean at Vanderbilt Law School, proposed establishing a self-regulatory organization ("SRO") to govern the crypto industry. She said establishing an SRO would (i) encourage the rapid creation of a crypto oversight regime, (ii) make the industry assume the cost of its own governance and (iii) provide an opportunity to prove that the industry can regulate itself. In addition, she said the SRO would need to be thoroughly vetted before becoming the governing body for crypto assets, which would assess the firm's "internal governance, risk management, legal and compliance, technical architecture for surveillance, customer monitoring, and systems for protecting customer assets."
Commentary
This is going nowhere.
For whatever reason, the Administration appears bent on killing off digital assets. For all the problems with digital assets, the assertion that they are a threat to the real economy seems overdone. Digital assets just lost at least two thirds of their value and it didn't impact the real economy (see FRB Governor Waller’s recent remarks, which touch on the "lack of spillovers" to the rest of the financial industry). Regulated financial institutions are not speculating or investing in digital assets.
The notion of giving the SEC full authority over digital assets would likewise kill the industry, given that the SEC is not interested in developing a governance structure that is suited to digital assets. The approach of the SEC is to (1) say that digital asset issuers must comply with rules that are completely ill-suited to the product, and then (2) protest when issuers do not comply.
As for establishing an SRO, that sounds well meaning, but it is not realistic. An SRO could possibly work in a situation where there is a small closed club of members that have some association and ties of common interest, but that is definitely not the case with the digital asset industry. It is effectively made up of a bunch of unrelated startups located all over the world. There is no possibility of them joining in an SRO structure; an SRO would have no mechanism to adopt rules and certainly no mechanism to enforce them.
If this were a business school case study in how government works, one might conclude that the government is not able to respond quickly to change.