Washington grapples with how to expand crypto oversight

The cryptocurrency explosion has forced Washington to adapt federal financial rules to a quickly growing and changing industry.

Americans have poured billions of dollars into cryptocurrencies and a wide array of blockchain-based financial platforms over the past year as the pandemic triggered an investment boom. While the crypto market has picked up steam steadily over the past decade, a surge of interest in the space and the rapid rise of decentralized financial networks has drawn fresh attention from regulators and lawmakers.

Democrats, Republicans and industry advocates largely agree that the current patchwork of state and federal rules covering cryptocurrencies and technologies is no longer feasible. The Securities and Exchange Commission, Commodity Futures Trading Commission (CFTC), the Treasury Department and state money transmission licensers all share overlapping jurisdiction over parts of the crypto industry, which often leaves firms unsure about their regulatory obligations.

Ron Hammond, director of government relations for the Blockchain Association, said two forces have driven a regulatory awakening in D.C: a growing understanding among crypto critics that the industry is here to stay, and the industry accepting the necessity of working with Washington.

“You can’t get around D.C.,” Hammond said. “D.C. is a huge — in most cases — obstacle and in some cases an opportunity, and it’s important to educate members of Congress and to get the narrative right. Otherwise, you can find yourself on the wrong end of things.”

With the notable exception of former President Trump, most Republicans see promise and opportunity in the growing cryptocurrency space. Several GOP lawmakers have compared the emerging industry to the internet and have warned against stifling rules that could prevent crypto from expanding financial access and independence. 

Some Democrats see cryptocurrencies as nothing more than another venue for speculation and money laundering, and intense climate impact of cryptocurrency mining and a general political weariness of Big Tech has also posed obstacles for acceptance of the industry.

Even so, the growing prominence of cryptocurrencies has forced critics to focus on how to make them safer and more transparent.

Digital tokens straddle lines between different financial products set by some of the earliest attempts to regulate markets, and many of the platforms used to trade and store them are not subject to federal oversight. The resulting overlap has forced the SEC and other agencies to regulate by enforcement while jockeying for more authority. 

“What I think is really complicated is you’re talking about old statutes, and old case law that just never contemplated this,” said Michael Liftik, partner at Quinn Emanuel and leader of the law firm’s SEC enforcement practice.

“What the industry and, quite frankly, the lawyers working on this are clamoring for is clarity. You cannot have an innovative, creative, cutting-edge technology that has the power to transform for good so much of how finance and other industries are conducted with the regulatory uncertainty that we have today.”

The SEC and CFTC have focused primarily on crypto firms and offerings that clearly violate general investor protection and anti-fraud laws. Each agency, occasionally in collaboration, has cracked down on misleading or fraudulent crypto offerings, platforms that shirked registration requirements, and old-school scams such as Ponzi schemes rebooted with novel technologies.

SEC Chair Gary Gensler, who taught a class on blockchain technology at the Massachusetts Institute of Technology, said the agency will consider ways it can expand oversight and transparency requirements for crypto issuers and exchanges under its jurisdiction.

Democratic lawmakers and regulators in both parties have also expressed particular concerns with “stablecoins,” tokens tied to cash or other safer assets held by the coin’s issuer.

The relative stability of stablecoins compared to highly volatile tokens has made them a popular medium for payments and loan products. Yet there are no specific transparency requirements for stablecoins, and many of their critics are concerned that the collapse of a popular stablecoin could cause broader market disruptions if holders rush to deem them for cash or other safer assets.

“If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options,” wrote a group of White House officials and financial regulators in a November report on stablecoins.

“If stablecoin issuers do not honor a request to redeem a stablecoin, or if users lose confidence in a stablecoin issuer’s ability to honor such a request, runs on the arrangement could occur that may result in harm to users and the broader financial system,” they wrote.

Liftik said it will likely require legislation to clearly delineate which federal agencies — or perhaps a new one devoted exclusively to digital assets — are responsible for overseeing which parts of the cryptocurrency industry.

“Once you have the rules of the road, it’s easy to tell who’s following them. You can catch the speeders, you can catch the people who run red lights, and everyone knows those are the rules and so they can abide by them or not,” he said.