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This summer has seen a tsunami of regulatory action targeting the fintech and crypto world. The highest wave was the insider trading case against a former Coinbase executive and two associates, which was covered last week. A growing group of US senators is trying to crack down on Zelle – the digital payments system owned by a consortium of major banks – due to widespread fraud. There is also a joint action between the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board, 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 bailout from FTX.) And of course, there’s the ongoing battle between Coinbase and the Securities and Exchange Commission (SEC) over whether the platform illegally offers securities to American clients, which we will return to.
Still, the prospect of fundamental change or clarity in how the U.S. regulates crypto doesn’t seem much closer today than it did at the start of the year, despite all the regulatory clamor.
The Responsible Financial Innovation Act, sponsored by Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) made a big splash even before it was formally introduced. It will give primary responsibility for crypto markets to the Commodity Futures Trading Commission (CFTC), as well as provide clearer definitions of which digital assets should be defined as securities and which will not. However, no one expected the bill to pass in this Congress.
Politico reported in early June that Senators Debbie Stabenow (D-MI) and John Boozman (R-AR) were writing their own bill to regulate crypto, believed to be narrower in scope but preserving the idea of CFTC authority over crypto . spot markets. Lobbyists believe this bill has a better chance of passing because its authors are the chairman and ranking member of the Senate Agriculture Committee. However, the bill has yet to be formally introduced and the Senate will go into recess in a few days; it is very hard to believe that there can be action on this before the election in November. On the House side, The Block reports that the Financial Services Committee missed a key deadline for 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 worked out that way. An increasingly vocal group of Washington insiders are grasping that even after roller-coaster markets and numerous hearings, the Senate is simply not equipped to tackle crypto as an issue.
At a Bloomberg summit earlier this month, Gillibrand said:
This is a very broad and rich bill that very few members of the Senate have the time, interest, or investment in understanding all the components of this bill….Cynthia and I…really immersed ourselves in this area to become subject matter experts, and not many others have expressed interest in doing so.
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 go away.”
And at a conference held by Solidus Labs this week at the New York Stock Exchange, former CFTC chairman Christopher Giancarlo said Washington’s “septuagenarian leadership” simply could not understand the complexities involved in modernizing financial regulation.
Despite such obstacles, crypto lobbyists seem to have created a loose consensus around the idea of the CFTC being the primary regulator. Giancarlo offered a schematic distinction: The SEC oversees entities involved in capital formation — stocks, bonds — while the CFTC is involved in risk transfer. Most cryptocurrencies, it is believed, behave more like commodities than securities.
But this just 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 strongly rejects this. Nonetheless, Bloomberg reported this week that even before the insider trading case, the SEC was investigating Coinbase for improperly allowing securities trading.
There’s the sticking point: The SEC isn’t going anywhere. There are thousands of cryptocurrencies out there, some of which are plausibly close enough to securities to persuade a judge or jury, should the question ever come that far. All possible regulatory enforcement will not change the fact that no government regulator will ever be able to make a final determination of what is or can be securities, and Coinbase’s vetting process is also clearly inadequate. The only way to effectively regulate is to establish clearer rules, as the Gillibrand-Lummis bill attempts to do. But if Congress can’t or won’t pass it, everyone is left in a very murky limbo.
