Things are changing fast in the crypto world.
Prices soared to dizzying heights in November, then came the crash. In just a few weeks in May, cryptocurrencies lost over half a trillion dollars in market value.
The most spectacular implosion was a cryptocurrency called TerraUSD. It was a stablecoin – meaning its value was supposed to be pegged to the US dollar via a complicated algorithm.
Instead, it collapsed and is now virtually worthless.
This crash has rekindled calls for new rules to govern a cryptocurrency market that is still something of a wild frontier. And now we have perhaps the biggest step towards new crypto regulation.
Two senators – a Republican and a Democrat – teamed up to unveil a sweeping new regulatory bill last week. But skeptics are already warning that this is a step backwards and far too crypto-friendly.
Let’s unpack what’s going on and why a big question is who would regulate crypto.
What is the current configuration?
Almost everyone thinks the crypto industry needs some sort of regulation.
New cryptocurrencies are born on time – and with them, a lot of scams and frauds. The industry is currently overseen by a patchwork of federal and state regulations, which have not always evolved as quickly as technology.
The Securities and Exchange Commission (SEC) has filed dozens of crypto-related enforcement actions over the past few years. Thus has the Commodity Futures Trading Commission (CFTC).
After the May crash, Treasury Secretary Janet Yellen called on Congress to pass “comprehensive” regulation on stablecoins in particular.
Democratic Senator Kirsten Gilibrand of New York said this phase in the evolution of the internet – along with cryptocurrency and other technologies known collectively as Web3 – poses similar risks to the early days of social media – sometimes called Web2.
“Congress has failed to regulate Web2“, she said. “We have failed to create a regulatory agency on various platforms that are currently causing extreme harm to our young people and dividing this country. We’re not going to make the same mistake with Web3.”
So what is this new bill?
It was introduced earlier this month by Senator Gillibrand and Senator Cynthia Lummis, a Republican from Wyoming.
It establishes a framework to regulate the crypto industry.
This includes tax requirements for various digital assets and the imposition of stricter requirements for stablecoins, which Gillibrand says would have banned the TerraUSD coin which imploded in May.
It also contains provisions on cybersecurity, the possible creation of a self-regulatory body and certain disclosure requirements. And it includes provisions directing the Federal Energy Regulatory Commission to study the energy impact of the cryptocurrency industry.
But perhaps most importantly – and what worries skeptics the most – is that the bill defines most cryptocurrencies as goodswhich would be overseen by the Commodity Futures Trading Commission (CFTC), instead of securitieswhich would fall to the much larger Securities and Exchange Commission (SEC).
The SEC is headed by Gary Gensler – one of crypto’s sharpest critics, who has said the crypto industry is “filled with frauds, scams, and abuses.” He bolstered the SEC’s cryptography enforcement team in early May, and after the crypto crash, Congress demanded more funding, saying the team was still “outstanding”.
But Senator Gillibrand said it made sense for the CFTC to do the heavy lifting.
“It would be inappropriate for the SEC to regulate some of these markets because they don’t operate like securities,” she said. “President Gensler has already said…the words that ‘Bitcoin is a commodity,’ because he understands it’s a form of value the same way gold is a form of value, the same way oil is. is a form of value, and that it is better placed under the CFTC.”
Both senators are optimistic about the future of crypto. Lummis bought his first Bitcoin in 2013 and had over $100,000 as of his last financial disclosure. She said this bill tries to find the “sweet spot” when it comes to regulation.
“So the people who are innovating in this space know the rules of the road and the people who are consuming the ultimate products know that the consumer protection elements are there,” Lummis said.
The bill is still far from becoming law. In terms of timing for a floor vote, Lummis said, “We’re talking months.” She has previously acknowledged that the sweeping bill could ultimately be split into several parts to go through the relevant committees.
What the critics say
A number of technology and finance experts say that cryptocurrency is a purely speculative and useless asset.
And this month, a group of them wrote a letter to congressional leadersasking that they: “Ensure that individuals in the United States and elsewhere are not vulnerable to predatory finance, fraud, and systemic economic risk in the name of technological potential that does not exist.
One of the signers was Molly White, a software engineer who runs the blog Web3 is doing great, which documents cases of fraud and disaster in the crypto universe. And she’s not a fan of the new bill.
“That’s really what I think the cryptocurrency industry was hoping to see from regulators, which is a very limited set of regulations applied to the industry,” she said.
Some in the industry have responded positively so far. The Crypto Council for Innovation called it a significant step forward, and the Blockchain Association called it a “marking moment.”
One of the biggest problems White has with the legislation is precisely that it gives most of the regulatory power to the CFTC instead of the SEC.
White says cryptocurrencies aren’t like traditional commodities like wheat or oil, so the CFTC shouldn’t be the main regulatory muscle.
“Cryptocurrencies are more like securities because people typically invest money in them expecting a return on their investment,” White said. “And when someone commits to something as an investment, that’s a good sign that they should go to the SEC.”
Additionally, White said the CFTC was simply not equipped to handle the workload — even though the bill allows the CFTC to impose fees on digital asset exchanges to help fund its important role.
“It would take a major shift in the amount of resources allocated to the CFTC for it to suddenly be able to tackle this huge and much broader set of problems than it has faced in the past,” he said. she stated. “And the SEC is frankly just more experienced in this area already.”