Things change quickly in the world of cryptocurrencies.
prices reached dizzying heights in November, and then came the crash. In just a couple of weeks in May, cryptocurrencies lost over half a trillion dollars in market value.
Reading: Is bitcoin regulated
The most spectacular implosion was a cryptocurrency called terrausd. It was a stablecoin, meaning its value was supposed to be pegged to the US. uu. dollar through a complicated algorithm.
Instead, it collapsed and is now practically useless.
That collapse reignited 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 yet towards new crypto regulation.
Two senators, one Republican and one Democrat, teamed up to introduce a sweeping new regulatory bill last week. but skeptics already warn that it is a step backwards and that it is too compatible with cryptocurrencies.
let’s unpack what’s going on and why a big question is who would regulate cryptocurrencies.
what is the current configuration?
Almost everyone believes that the cryptocurrency industry needs some form of regulation.
every hour new cryptocurrencies are born and along with them, many scams and frauds. the industry is currently overseen by a patchwork of federal and state regulations, which have not always evolved as fast as technology has.
The Securities and Exchange Commission (SEC) has filed dozens of crypto-related enforcement actions in recent years. so has the commodity futures trading commission (cftc).
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After the May crash, Treasury Secretary Janet Yellen called on Congress to pass “comprehensive” regulations on stablecoins in particular.
Democratic Senator Kirsten Gilibrand of New York says this phase of the Internet’s evolution, with cryptocurrencies and other technologies known collectively as Web3, presents risks similar to the early days of social media, sometimes called Web2.
“Congress couldn’t regulate web2,” he said. “We failed to create a regulatory agency over various platforms that are now causing extreme harm to our youth and dividing this country. We are not going to make the same mistake with web3.”
what is this new bill then?
was introduced earlier this month by senator gillibrand and senator cynthia lummis, a republican from wyoming.
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, according to gillibrand, would have rejected the terrausd coin that imploded in May. it also has provisions on cybersecurity, the possible creation of a self-regulatory organization, and some disclosure requirements. and includes provisions directing the federal energy regulatory commission to study the energy impact of the cryptocurrency industry.
But perhaps more importantly, and what worries skeptics the most, is that the bill defines most cryptocurrencies as commodities, which would be overseen by the Commodity Futures Trading Commission ( cftc), rather than securities, which would fall to the much larger securities and exchange commission (sec).
The SEC is led by Gary Gensler, one of the sharpest crypto critics, who has said that the cryptocurrency industry is “riddled with fraud, scams, and abuse.” He beefed up the SEC’s crypto enforcement team in early May and, after the crypto crisis, asked Congress for more funding, saying the team was still “outmatched.”
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 function like securities,” he said. “chairman gensler has already said… the words that ‘bitcoin is a commodity,’ because he understands that it is a form of value in the same way that gold is a form of value, in the same way that oil is a value form, and that it is more appropriate to place it under the cftc”.
Both senators are optimistic about the future of cryptocurrencies. lummis bought his first bitcoin in 2013 and owned more than $100,000 as of his most recent financial disclosure. she said this bill tried to find the “sweet spot” when it comes to regulation.
“so that the people who are innovating in this space know the rules of the road and the people who consume the best products know that the elements of consumer protection are there,” said lummis.
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The bill is still far from becoming law. in terms of time for a plenary vote, lummis said: “we are talking about months”. she has previously acknowledged that the sweeping bill could ultimately be broken up into parts to go through the appropriate committees.
what the critics are saying
There are a number of technology and finance experts who say that cryptocurrency is a purely speculative asset and has no real purpose.
and this month, a group of them wrote a letter to leaders in congress, asking them to: “ensure that people in the us and elsewhere are not left vulnerable to predatory finance, fraud and systemic economic risks in the name of technological potential that does not exist.”
one of the signatories was molly white, a software engineer who runs the blog web3 is going just great, which documents instances of fraud and catastrophe in the crypto universe. and she’s not a fan of the new bill.
“It’s very similar to what I think the crypto industry expected to see from regulators, which is a very limited set of regulations applied to the industry,” he 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 “historic moment.”
one of the biggest problems that white has with the legislation is precisely that it gives most of the regulatory power to the cftc instead of the sec.
white says that cryptocurrencies are not like traditional commodities like wheat or oil, so the cftc should not be the main regulatory muscle.
“Cryptocurrencies are more like securities because people generally invest money in them hoping to get a return on their investment,” White said. “and when someone is committing to something like an investment, that’s a good sign that they should go to the sec.”
Furthermore, White said the CFTC was simply not equipped to handle the workload, even if the bill allows the CFTC to impose a fee on digital asset exchanges to help fund its large role.
“There would have to be a major shift in the amount of resources going to the CFTC for them to suddenly take on this huge and much broader set of issues than they’ve dealt with in the past,” he said. “and the sec, frankly, already has more experience in this field.”
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