Will Congress Let Crypto Choose Its Regulator?

While the broad financial market has recouped most of the recent losses, crypto has collectively lost around a trillion dollars this year. Marquee cryptocurrency Bitcoin, now valued at around $24,000, is down around 50 percent for the year and nearly two-thirds from its November 2021 peak of nearly $67,000.

The industry wants Congress to give all crypto regulation to the relatively weak and understaffed Commodity Futures Trading Commission. The CFTC mainly regulates futures and some financial derivatives in wholesale markets, but has no proven capacity to regulate the kind of retail transactions and retail investor abuse typical of crypto.

Moving crypto regulation to the CFTC would change existing law for the worse. Currently, the far stronger Securities and Exchange Commission is able to regulate most types of crypto under established law, on the reasonable assumption that most crypto vehicles are securities.

There are a few rings to this circus, and they also include competition in Congress and the executive branch over turf. One involves a type of crypto known as stablecoins. These are supposedly guaranteed to hold their value, except sometimes they don’t because they aren’t always backed by cash or cash equivalents.

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Stablecoins are mainly used in other crypto transactions. No one uses them to pay bills or make traditional investments. Some in the administration, notably Nellie Liang, a top deputy to Treasury Secretary Janet Yellen, are big fans of stablecoins, which they see as benign financial innovation. Other regulators and consumer groups see stablecoins as pure financial engineering with no legitimate function not already played by more traditional forms of money, and an invitation to speculation, fraud, bubble and collapse.

Until a couple of weeks ago, sponsored rep. Maxine Waters (D-CA), the usually progressive chair of the House Financial Services Committee, legislation to regulate and regulate stablecoins. The bill would allow both banks and non-banks to issue stablecoins, allegedly with safeguards. But the measure would provide backdoor access to non-banks into the banking system, raising an entirely different set of risks and regulatory dilemmas.

Waters had a co-sponsor in the ranking Republican on the Financial Services Committee, Representative Patrick McHenry of North Carolina. She also worked closely with the leading corporate Democrat on her committee, Josh Gottheimer of New Jersey. But McHenry and Gottheimer called for too many provisions drafted by the crypto industry meant to further weaken regulation. Even the Treasury had some concerns, and Waters withdrew his own bill.

An even more dangerous measure is sweeping and lax crypto regulation proposed in a bill with the Orwellian title of the Responsible Financial Innovation Act, sponsored by Republican Senator Cynthia Lummis and Democrat Kirsten Gillibrand, and drafted by the crypto industry. The bill, which covers not only stablecoins but the entire industry, would create several new tax loopholes and expand the definition of commodities to include almost all digital assets, removing regulatory jurisdiction from the stronger SEC and giving it to the weaker CFTC.

In the face of massive pushback from other regulators, consumer groups, even banks, and skepticism from Democratic senators, the industry is now banking on a more modest power grab in the form of a bill introduced in early August by Democrat Debbie Stabenow of Michigan, who leads The Senate Ag Committee, and the committee’s ranking Republican, John Boozman of Arkansas, called the Digital Commodities Consumer Protection Act.

Moving crypto regulation to the CFTC would change existing law for the worse.

While not as bad as the Lummis-Gillibrand version, this bill explicitly gives the CFTC jurisdiction over such forms of crypto as Bitcoin and Ethereum, while leaving the SEC with general oversight of much of the industry. Under the guise of clarifying jurisdiction, the bill sets up conflicts down the road, as crypto players will forum-shop for the weaker regulator and create forms of crypto designed to end the SEC.

Why do this? By shifting jurisdiction to the CFTC, it gives congressional jurisdiction to the Ag Committee Stabenow leaders. The bill would thus create an opportunity for massive campaign fundraising by committee members from the crypto industry. Dennis Kelleher, who heads the reform group Better Markets, compares this “money-soaked feeding frenzy” to the lobbying in the 1990s that ended with the Clinton administration and Congress passing legislation allowing banks to merge into megabanks after repealing Glass-Steagall and Prohibition against regulation of derivatives.

For now, Senator Stabenow has planned a commemoration for September. One key player who has yet to weigh in publicly is Sherrod Brown, the Ohio progressive who chairs the Senate Banking Committee and also serves on the Senate Ag Committee. Brown and Stabenow have a cordial relationship. I’m told Brown believes any bill would have to leave crypto jurisdiction mostly with the SEC.

It is astonishing, but not so surprising, that Congress, led by Democrats no less, would consider far-reaching legislation to legitimize this ruthless industry without first conducting a single investigative hearing on the industry’s structure and history.

A further complication is the role of Rostin Behnam, the former Stabenow employee who now heads the CFTC. Behnam has openly supported the CFTC crackdown promoted by the crypto industry.

In a keynote address at a Brookings Institution event on the future of crypto regulation on July 25 that read as if it could have been written by the industry, at least half of Behnam’s remarks were devoted to arguing that the CFTC should be cryptos. prime regulator. “The CFTC is ready and well placed to address the risks in the digital asset cash markets through direct oversight,” Benham said. In contrast, SEC Chairman Gary Gensler has preferred to work behind the scenes to defend SEC jurisdiction and stronger regulation of crypto.

With Congress now in recess and other priority bills awaiting floor action in September, the clock has probably run out on crypto legislation in this Congress. That’s good news in that it slows down the crypto industry’s lobbying steamroller — but not so good news if you think Republicans will control the next Congress, in which case the industry will likely get its preferred regulatory license to wreak havoc on financial markets sanctioned by the government . .