Reckless. Speculative. Rule-skirting. Those were just some of the salvos that Senate Banking Committee Chair Sherrod Brown lobbed at the crypto industry as he rolled out a Capitol Hill hearing that featured experts who testified that digital assets need more oversight, just days after a spate of regulatory actions against cryptocurrency firms.
- Lawmakers call for greater cryptocurrency regulation to protect investors in FTX fallout.
- While there was agreement on a need for better regulation, what form that regulation should take was up for debate.
- Today's Senate hearing comes just days after several regulators cracked down on crypto firms.
Speculative Products Run by Reckless Companies
“Fortune doesn’t favor the brave," Brown, a Democrat, said in his opening statement. "It favors the wealthy insiders.”
He went on to call digital assets "speculative products run by reckless companies" that are putting American money at risk and said it wasn't surprising from "an industry that was created to skirt the rules. We need a comprehensive framework to regulate crypto products to protect consumers and our financial system."
The regulatory rhetoric comes in the wake of the collapse of crypto exchange FTX. Its downfall and a string of failures and bankruptcies at other crypto firm have left many investors' assets stuck and led to a slide in crypto to that's led to what's termed a 'crypto-winter.'
Today's hearing came days after the Securities and Exchange Commission's (SEC) $30 million settlement with Kraken and New York Department of Financial Services' (NYDFS) order that crypto platform Paxos stop minting Binance USD (BUSD), a stablecoin pegged to the value of the U.S. dollar.
Security, Commodity or Something Else?
One reason rule-making for cryptocurrencies has proved challenging: They don't exist within a clear regulatory bucket. Whether cryptocurrencies are securities, and therefore should be regulated by the SEC, is at the crux of the debate.
While most cryptocurrencies are securities, some, like bitcoin, are commodities, according to Lee Reiners, policy director at the Duke Financial Economics Center. "The best, and most feasible, path forward is for Congress to carve out cryptocurrency from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws,” Reiners testified.
Cryptocurrencies undermine economic security, jeopardize climate goals, and undermine national security by facilitating terrorist financing, Reiners said. “It is clear that the costs outweigh the benefits.”
Crypto Is Far From Dead
Bitcoin prices soared to more than $20,000 in 2017, before crashing to below $3,500 in 2019, then topping $60,000 in 2021 and more recently slumping to about $21,000. That doesn't mean the market can't rebound: Coinmarketcap says thousands of cryptocurrencies have a combined market cap of more than $1 trillion.
"The number of full-time developers in the crypto space grew 8% year-over-year in 2022, despite a 70% decline in prices," Linda Jeng, the chief global regulatory officer and general counsel for crypto advocacy group Crypto Council for Innovation, said in her testimony.
"While the collapse has had devastating effects, we must also keep in mind that crypto is servicing some very real needs around the world," she testified. "A nuanced and global outlook is key.”
Is Self-Regulation the Answer?
The SEC has come under fire from the crypto industry and from within as well for its approach of regulation through enforcement. SEC Commissioner Hester Pierce issued a scathing dissent against the regulator's action against Kraken last week.
That begs the question: Could self-regulation be the solution?
“I advocate for the creation of a public mandate for private self-regulation, where cryptocurrency exchanges, as self-regulatory organizations (SROs), are tasked by regulators to write rules for, supervise as well as discipline the marketplace," Yesha Yadav, a professor at Vanderbilt University Law School, said in her testimony.