Confused Cryptocurrency Regulation Needs Congressional Intervention

Current U.S. law is ill-equipped for the age of digital assets, as federal financial regulators remain divided on whether cryptocurrency is a security or a commodity, lawmakers and lawyers said Wednesday at a joint hearing of U.S. House committees.

“What we decide to do in this Congress will shape whether the digital-asset ecosystem has the opportunity to thrive in the United States,” said Rep. French Hill, R-Arkansas and chair of the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion.

“But right now, there is not a workable framework in place for digital asset issuers and intermediaries to be regulated by the SEC or CFTC,” Hill added, referring to the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission.

“I’ve heard a few members in this room say that the status quo of existing laws is enough, that crypto firms are just willfully avoiding compliance with the law, and that Republicans are embarking on a partisan pursuit of sweeping digital-asset legislation,” he said. “But the reason I know this can’t just be a partisan exercise is because my Democratic colleagues have been telling me they support common-sense legislation for months.”

Hill spoke at a joint hearing of the House Agriculture and Financial Services committees on “The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital-Asset Markets.” The hearing included a proposed House resolution calling on Congress to pass legislation to guide the SEC and CFTC on regulating the crypto sector.

The SEC’s “current disclosure regime, intended for securities issued by traditional public companies, does not adequately capture the information and features of digital assets which are necessary for individuals to make an informed purchasing decision,” the proposal states. “While the Commodity Futures Trading Commission has existing enforcement authority over digital spot-market transactions, neither the Commodity Futures Trading Commission nor the Securities and Exchange Commission has direct regulatory authority over intermediaries in the non-security digital asset, or digital commodity, spot market.”

The SEC and CFTC have both proposed rules on digital assets, but the crypto industry claims those proposals must be clarified amid uncertainty over whether the tokens are securities, regulated by the SEC, or commodities under the CFTC’s purview.

“For example, last month, the CFTC brought an enforcement action against the trading platform Binance, asserting Binance’s BUSD stablecoin is a commodity,” an analysis by the two House committees’ Republican staff said. “Separately, the SEC asserts the same stablecoin is a security in its investigation of another digital-asset firm. Furthermore, in its complaint, the CFTC refers to bitcoin, ether, and litecoin as commodities.”

Rep. Stephen Lynch, the ranking Democrat on the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion, said lawmakers are facing an ongoing debate over whether the primary regulator of those assets should be the SEC or the CFTC. But Lynch, of Massachusetts, said the industry’s claims that regulation of digital assets lacks clarity is “fueled” by the sector’s narrative.

“I believe that industry advocates make these claims because they know that the current prevailing business models for crypto are not compatible with orderly markets or investor-protections law,” Lynch added. “The problem is not regulatory ambiguity; it is mass noncompliance with existing laws.”

Congress is exploring a new regulatory structure to cover digital assets, which Lynch fears will “likely undermine well-established laws and regulations.

“I encourage my colleagues to not get locked in a debate over whether individual tokens are securities or commodities,” he added. “Instead, we should take a step back and examine the intermediaries that facilitate these tokens, such as the exchanges, lenders, and wallet holders.”

Earlier this year, SEC Chair Gary Gensler stated that all digital assets other than bitcoin are considered securities.

Timothy Massad, a research fellow at the Harvard Kennedy School Mossavar-Rahmani Center for Business and Government, stated that Gensler’s view—that most tokens are securities and the problem is a lack of compliance with existing regulations—conflicts with the industry’s concerns about a lack of clarity in the rules with regard to crypto.

“Meanwhile, trading and lending platforms claim they are only dealing in tokens that are not securities—thereby avoiding direct federal oversight,” Massad stated in written testimony. “As a result, investor protection on crypto trading and lending platforms is woefully inadequate.”

Rep. Dusty Johnson, who chairs the House Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development, said that “there are times where it’s just clear, even to Congress, that action is appropriate and needed.”

The South Dakota Republican added that “there is a lack of clarity within existing law that is holding back innovation in the marketplace,” and “it is holding back America’s ability to be competitive in this development space. And it is not properly protecting consumers and the broader marketplace.”

Meanwhile, the European Union and the United Kingdom have set regulatory frameworks specifically for digital assets, which one industry leader said might drive bitcoin companies to keep their focus away from the United States.

“I can only speculate what others will do,” Daniel Schoenberger, chief legal officer at the Switzerland-based Web3 Foundation, said. “But if the foundation perceives it that way, that it might be better to be somewhere else, others might think that too.”

From: The National Law Journal