Federal Agencies Signal a Renewed Focus on Cryptocurrency Regulation
- Despite the explosion in popularity of cryptocurrency in recent years, the industry remains largely unregulated.
- SEC Chairman Gary Gensler, who has referred to the cryptocurrency market as “the Wild West,” has expressed intent to utilize existing securities laws to regulate cryptocurrency.
- Crypto markets have become prime targets for fraud with estimated losses due to fraud exceeding $7 billion in 2021.
- Congress has introduced several pieces of legislation that would enhance regulatory oversight of cryptocurrency, but so far these efforts have stalled.
In recent statements, SEC Chairman Gary Gensler has analogized the crypto market to the “Wild West,” and has called on Congress to enhance investor protections and regulatory oversight of the crypto industry. Gensler’s remarks, along with similar sentiments expressed by other government agency officials and lawmakers, signals a renewed focus on developing an effective regulatory framework for cryptocurrency that won’t stifle innovation.
Cryptocurrency and Decentralized Finance
Cryptocurrency is a form of decentralized finance. Decentralized finance, or “DeFi,” allows anyone, anywhere in the world, with an internet connection to buy and sell cryptocurrency without an intermediary financial services provider. Due to the decentralized nature of these markets and the lack of an industry-specific regulatory framework, these transactions are conducted with essentially no government oversight. While most lawmakers, regulators, and industry participants seem to agree that some form of regulation is needed, there is currently no consensus on the scope of a regulatory framework.
Opponents of regulation have argued that crypto exchanges should not be regulated because they do not hold assets. They also argue that crypto cannot be effectively regulated because it is built on open-source software that is not controlled by any one person, company, or government. Industry leaders have also vocalized concerns that overregulation could backfire by impeding innovation and hampering growth.
In contrast, proponents of regulation have argued that the decentralized nature of cryptocurrency exchanges make them more susceptible to fraud and abuse, making government oversight necessary. Moreover, there is no way to reverse a fraudulent transaction conducted in cryptocurrency, making it difficult, if not practicably impossible, to hold bad actors accountable. They point to staggering losses from crypto scams that cost investors over $7.7 billion last year alone.
Regulatory Agency Authority
Chairman Gensler is a longtime regulator and an expert on cryptocurrency, having taught a course on the topic at the Massachusetts Institute of Technology. He believes that the authority for his agency to regulate cryptocurrency already exists under current law. Underpinning his argument is the notion that that “stablecoins” or “tokens” (which are digital assets pegged to the value of national currencies) meet the definition of securities or investment companies, which already fall under his agency’s jurisdiction.
Last November, a US Treasury-led working group recommended that Congress pass a law limiting the issuance of stablecoins to financial institutions whose deposits are insured. Other government agencies, including the Federal Trade Commission (FTC) and the US Financial Crimes Enforcement Network (FinCEN), have also prioritized addressing consumer protection issues.
Congress has yet to reach consensus on how and to what degree the federal government should regulate cryptocurrency. While several bills that would specifically address the use and taxation of cryptocurrencies were recently introduced in Congress, none of them seem likely to become law.
While lawmakers continue to wrestle with this issue, industry leaders have seized upon the opportunity to help preemptively shape the regulatory landscape. On December 8, 2021, senior executives from six cryptocurrency companies testified before the House Financial Services Committee in a hearing that lasted nearly five hours. As reflected by their testimony, industry leaders recognize the need to impose some degree of regulation on cryptocurrency but remain cautious against overly aggressive regulation that could stifle innovation and slow growth.
Alesia Haas, Chief Financial Officer at Coinbase Global (COIN), suggested that public buy-in be part of the legislative process. According to Haas, “without tailored legislative solutions that are openly debated with public participation, the United States risks unnecessarily onerous and chilling laws and regulations.” Jeremy Allaire, CEO of Circle Internet Financial, said that “stablecoins and internet-native capital markets are now too big to ignore.” He also recommends that “policy frameworks … support an open and competitive playing field and allow new technologies to flourish.”
One obstacle to establishing a specialized regulatory mechanism for cryptocurrency may be a general lack of understanding of this complex and relatively new technology, not only by regulators and lawmakers but by the general public as well. Other challenges that remain include determining who would be subject to regulatory oversight given the decentralized nature of the crypto and how to best implement regulatory changes that enhance consumer safeguards while supporting innovation.
The attorneys at Johnston Clem Gifford routinely advise companies on issues related to securing capital and regulatory compliance. Our Financial Services team works with the world’s largest institutions as well as smaller and middle-market firms. Contact us online or by calling (214) 974-8000.