The Blockchain Association wants crypto to fight regulators through Congress and the courts

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(Kitco News) – After the surprise announcement of the NYDFS action against stablecoin issuer Paxos and Binance by proxy, and amid the steady stream of leaked SEC investigations into major US firms, the entire crypto ecosystem is walking on eggshells, unsure of what is regulated, what is illegal and what is illegal. next.

The reactions of company executives to the SEC’s regulatory enforcement have ranged from surrender (Kraken), defiance (Coinbase), obfuscation (Binance), and confusion (everyone). Now the industry’s associations and policy experts are starting to weigh in.

“The latest wave of activity is jarring, but it’s not a surprise, and it doesn’t spell doom for crypto in the US,” Jake Chervinsky, Chief Policy Officer of the Blockchain Association, said in a February 14 tweet. thread. “Far from it: we have champions in key roles across government and our industry is strong and ready to fight.”

Chervinsky called 2022 “the worst year in crypto history from a political perspective, by far,” and perhaps “the worst year in DC for any industry in recent memory.”

He acknowledged that the collapse of FTX, the second largest crypto exchange, did “massive damage” to the reputation of the nascent asset class. “For many decision makers, Sam Bankman-Fried was the name and face of crypto,” he wrote. “His fraud burned many of them and cast doubt on the entire industry.”

Chervinsky pointed to the makeup of the US Congress as a key reason why regulators like the SEC, CFTC and NYFSA feel so empowered to intervene in the cryptosphere.

“For the past few years, key government bodies like the FSOC and the PWG have said that Congress — not the agencies — must determine crypto regulation,” he said. “That hasn’t happened, and now we have a divided Congress, which makes an agreement on crypto legislation seem unlikely, given the ideological gap between House Republicans and Senate Democrats.” He sees the regulatory agencies “stretching their authority beyond recognition to ‘get things done’ without Congress, whether the law allows it or not.”

Chervinsky identified the “two most active groups” to watch in the US government as the bank regulators, including the Fed, FDIC and OCC, and the financial market regulators, the SEC and CFTC.

“Crypto supporters and skeptics both agree that last year’s market turmoil did not affect the traditional financial system,” he writes. “The banking regulators want to ensure that it can never do that, no matter how harsh or extreme the measures they decide to take.”

Referring to the Jan. 3 joint statement by bank regulators asking banks not to engage in “crypto-asset-related activities,” including the issuance and holding of crypto, which the Fed formalized as a “final rule” on Feb. 7, Chervinsky said “It is bad policy: technology discrimination that limits consumer choice and restricts competition without public process.” But he said this does not mean banks will be forced to close regular bank accounts for crypto firms.

“The banking regulators are focused on stopping banks from conducting crypto-related activities,” he wrote. “Stopping banks from providing dollar-denominated accounts to crypto-related customers is very different.”

After the hopeful assessment of the banking part of the equation, Chervinsky turned to the more contentious group: the financial market regulators.

“The SEC has been crypto’s main antagonist for years,” he said, summarizing their position on crypto in two core beliefs: “every asset with a market price is a value” and “every commercial service is a securities transaction.”

“I wish this was more of an exaggeration,” he lamented.

Chervinsky said the SEC’s approach to these positions is “regulation by enforcement.” An example of this was last week’s labeling of Kraken’s stake service as a security.

“It’s frustrating, but it doesn’t change much for anyone else,” he said. “Settlement is not the law and each set of facts is unique. Others will fight.”

Chervinsky believes that regardless of how many enforcement actions against Kraken and Paxos the SEC or CFTC choose to take, they remain bound by the law. “Neither has the authority to regulate crypto, neither can get it through any kind of enforcement, and neither ever will without an act of Congress.”

He then shared his top five action points to “resist this current onslaught and promote good policy for the long term.”

First, he said crypto needs to make their voices heard in public processes. “Regulators must consider public comments before finalizing new rules, and enough well-written comments can delay, change or kill a bad rulemaking proposal.”

Second, Chervinsky suggested “taking the agencies to court if they fail to comply with due process, exceed their authority, or violate constitutional rights.” (Grayscale’s lawsuit against the SEC over the rejection of its Bitcoin ETF is a recent case in point.)

Third, he said the crypto community can educate Congress. “Only Congress can answer big questions like how crypto should be regulated,” he said. “Let’s make sure everyone on the Hill understands what crypto has to offer, and what’s at stake.”

Fourth, Chervinsky wants crypto to engage with Congress directly by contributing to policymaking and by pushing back against regulatory overreach. “We can bring Congress great ideas for laws that actually work for crypto,” he wrote. “We can explain what the agencies are doing and why it’s wrong, so Congress can hold them accountable.”

And fifth, he believes that crypto has “ignored the judiciary for too long,” and to their detriment. “At the core of crypto is a fight for civil liberties, a fight that requires impactful litigation,” he said. “Our best allies may be in the courts. Let’s go find them.”

As the new Congress resumes hearings on FTX and digital asset regulation, the crypto community will have some high-profile opportunities to push these proposals forward.