Washington goes back and forth with crypto

• The US government is stepping up efforts to regulate virtual currencies stemming from FTX’s implosion.
• The Senate Virtual Assets Committee hearing hinted at the direction of incoming regulatory policy.
• Investigative efforts and recent enforcement actions by the SEC have rattled crypto traders in the United States

Washington officials have continued to view cryptocurrencies with skepticism, and things could get grimmer for the new asset class.

The US Senate Committee on Banking, Housing and Urban Affairs recently met in open session to conduct a hearing on digital assets in response to the turbulence plaguing the markets. The hearing, titled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets” was anchored by Senators Sherrod Brown and Tim Scott.

Both senators expressed concern about the lack of decisive action by the Securities and Exchanges Commission (SEC) to prevent the spate of disasters that plagued the industry. A common theme in their statements was the potential for virtual currencies to be used by bad actors and touched on “the greater fool theory.”

Lee Reiners, policy director at the Duke Financial Economics Center testified before the House, offering several suggestions for the way forward to regulate the asset class. Reiners proposed crystal-clear disclosures for digital asset service providers and legislation preventing firms from commingling clients’ funds with their holdings.

Other witnesses include Professor Linda Jeng and Professor Yesha Yadav, who both came up with the proposal to establish self-regulatory organizations (SROs) as a way out of the debacle of controlling the virtual currency industry.

Previous hearings on cryptocurrencies have delineated between fostering innovation and increasing regulatory and enforcement activities. A hearing back in late 2021 with leading cryptocurrency executives seemed to indicate that the US was poised to become a virtual currency haven, but 12 months later a different tune is ringing out.

Strikes down

The SEC has put its stake in the crosshairs following the $30 million settlement reached with crypto exchange Kraken. According to the SEC, Kraken’s betting program amounted to offering unregistered securities to the public, a decision that could set a new precedent for the virtual currency industry.

There are fears that the SEC may designate Ethereum (ETH) as a security on the heels of the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). In the event that the SEC designates the asset as a security, exchanges will be forced to register with the commission before listing ETH.