Crypto slammed in Senate hearing

Irresponsible. Speculative. Rule skirt. These were just some of the salvos that Senate Banking Committee Chairman Sherrod Brown lobbied against the crypto industry as he rolled out a Capitol Hill hearing that featured experts testifying that digital assets need more oversight, just days after a wave of regulatory actions against cryptocurrency firms.

Speculative products run by unscrupulous companies

“Fortune does not favor the brave,” Brown, a Democrat, said in his opening statement. “It favors the wealthy insiders.“

He went on to call digital assets “speculative products driven by reckless companies” that put American money at risk, saying it was not surprising from “an industry that was created to go outside the rules. We need a comprehensive framework to regulate crypto products to protect consumers and our financial system.”

The regulatory rhetoric comes in the wake of the collapse of the crypto exchange FTX. Its demise and a series of failures and bankruptcies at other crypto firms have left many investors’ assets stranded and led to a plunge in crypto into what has been called a “crypto winter.”

Today’s hearing came days after the Securities and Exchange Commission’s (SEC) $30 million settlement with Kraken and the New York Department of Financial Services’ (NYDFS) order that crypto platform Paxos stop minting Binance USD (BUSD), a stablecoin pegged to the value of American dollar.

Security, commodity or something else?

One reason for creating rules for cryptocurrencies has proven challenging: They do not exist within a clear regulatory bucket. Whether cryptocurrencies are securities, and therefore should be regulated by the SEC, is at the heart of the debate.

While most cryptocurrencies are securities, some, like bitcoin, are commodities, according to Lee Reiners, policy director at the Duke Financial Economics Center. “The best and most feasible path forward is for Congress to separate cryptocurrency from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws,Reiners testified.

Cryptocurrencies undermine economic security, jeopardize climate goals and undermine national security by facilitating terrorist financing, Reiners said. – It is clear that the costs outweigh the benefits.”

Crypto is far from dead

Bitcoin prices rose to more than $20,000 in 2017, before crashing to below $3,500 in 2019, then topping $60,000 in 2021 and recently falling to around $21,000. That doesn’t mean the market can’t bounce back: Coinmarketcap says thousands of cryptocurrencies have a combined market capitalization of more than $1 trillion.

“The number of full-time developers in the crypto space grew by 8% year-over-year in 2022, despite a 70% price decline,” Linda Jeng, chief global regulatory officer and general counsel for the crypto advocacy group Crypto Council for Innovation, said in her testimony.

“While the collapse has had devastating effects, we must also remember that crypto is meeting some very real needs around the world,” she testified. “A nuanced and global view is the key.“

Is self-regulation the answer?

The SEC has come under fire from the crypto industry and from within as well for its approach to regulation through enforcement. SEC Commissioner Hester Pierce issued a sharp dissent against the regulator’s action against Kraken last week.

This raises the question: Can self-regulation be the solution?

“I advocate the creation of a public mandate for private self-regulation, where cryptocurrency exchanges, as self-regulatory organizations (SROs), are tasked by regulators with writing rules for, monitoring and disciplining the market,” Yesha Yadav, a professor at Vanderbilt University Law School, said in her testimony.