House Passes — Over SEC Objections — Long-Awaited Bill Carving Out a Cryptocurrency Regulatory Framework

The bill is likely to stir renewed debate in the Senate, which has several proposals of its own regarding how to supervise the monetary innovations. 

AP/Kin Cheung, file
An advertisement for Bitcoin cryptocurrency at Hong Kong, February 17, 2022. AP/Kin Cheung, file

Crypto proponents have for years been asking for something that many other industries try to avoid — regulation. With a vote in the House on Wednesday, they finally got their wish. 

The House’s approval of a bill that provides guidelines for the Securities and Exchange Commission’s regulatory authority over cryptocurrency is likely to stir renewed debate in the Senate, which has several proposals of its own regarding how to supervise the monetary innovations. 

Congressman French Hill, a Republican from Arkansas and one of the bill’s backers, said before the House vote that the legislation is needed to prevent the SEC from pursuing what he called an agenda of “regulation by enforcement.” The uncertainty, he said, now leaves cryptocurrency firms “fearing that they’ll be subject to litigation at a moment’s notice if they continue to operate” in America.

Late Wednesday, the House voted 278 to 136 to pass the measure. President Biden has said he will not veto the bill if it gets through the Senate and lands on his desk.

The House’s framework would result in most digital currencies and coins being placed under the regulatory authority of the Commodity Futures Trading Commission, which has taken a more accommodating approach to cryptocurrencies than the SEC. Skeptics are likely to argue that regulation in and of itself doesn’t protect the value or stability of a currency.

They are likely to point to the United States Federal Reserve Notes that are legal tender yet have shed more than 99 percent of their value just since the end of the Bretton Woods agreement. A dollar at the time had a value of a 35th of an ounce of gold. Today the value of a one-dollar Federal Reserve Note has plunged to less than a 2,500th of an ounce of gold.

In any event, the bill on cryptocurrencies would define several exceptions to the SEC’s jurisdiction of assets defined as securities — such as Stablecoins, cryptocurrencies whose value is pegged to another asset such as fiat currency or a commodity — and instead places them under the purview of the commodities regulation agency. 

The chairman of the SEC, Gary Gensler, denounced the bill on the grounds that it “would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk,” he said in a statement hours before the House vote. 

Mr. Gensler noted that “the crypto industry’s record of failures, frauds and bankruptcies is not because we do not have rules or because the rules are unclear.” 

As it stands currently, the SEC contends that cryptocurrencies are subject to the agency’s regulation if they qualify as an investment contract. The definition, known as the Howey test, comes from a 1946 Supreme Court ruling about orange grove sales. 

Following several high-profile cryptocurrency platform bankruptcies in 2022, the SEC stepped up its scrutiny of cryptocurrencies and their exchanges, bringing 46 enforcement actions against 124 defendants, the highest number since 2013. 

The SEC’s regulatory actions include lawsuits against two of the largest crypto exchanges, Binance and Coinbase, for failing to register with the agency. Both cases, which are pending in court, hinge on whether cryptocurrencies classify as securities and are thus subject to the SEC’s regulation. 

“The SEC under Gensler is dead set on enforcing rules that, if followed, would kill off almost all of crypto,” warned an adjunct professor at Columbia Business School, Omid Malekan. 

The Heritage Foundation’s lobbying arm, Heritage Action, has criticized the federal regulatory agencies’s approach to cryptocurrency. The SEC and CFTC “have had more than a decade to promulgate rules governing digital assets, yet the SEC has utterly failed to do so and the CFTC has provided only minimal guidance,” Heritage Action says, according to a report in Politico. “Instead, both agencies have chosen regulation by enforcement — and have done it poorly.” 

Frustration over the status quo has been similarly voiced by a coalition of over 50 digital asset companies, including Coinbase, Kraken, and Andreessen Horowitz, which issued a joint statement in support of the bill. 

“Currently, digital assets firms are instructed to somehow comply with U.S. securities laws that were designed nearly 100 years ago without consideration of the technological advances of today, including the ability for transactions to move at the speed of the internet,” they wrote. 

Ahead of Wednesday’s vote, Congresswoman Maxine Waters, the ranking member on the House Financial Services committee, called the bill “the worst, most awful, regulatory proposal in a long time.” 

Ms. Waters argues that adequate laws are already in place to regulate cryptocurrencies. “Our securities laws ​​— which have worked for every other industry for 90 years — can also work for crypto firms,” she said in a 2023 committee hearing on digital assets. 

The head of a state regulatory body, the Idaho Securities Bureau, John Yaros, tells the Sun that there is lingering confusion over which cryptocurrencies fall under the category of securities and are thus subject to the SEC’s jurisdiction. 

“Nobody really knows when something is a security, when something is a commodity, when something is a bank product, such as a payment type tool or anything else along those lines,” he says. 

The lack of a regulation framework, he adds, leaves many businesses confused over which rules they are supposed to abide by and thus “always concerned” about being a “target” of regulatory action. Without clear regulatory perimeters, Mr. Yaros says, businesses “are left in a no-man’s land.”

This bill joins other digital currency proposals in the Senate, including a bipartisan proposal from Senators Lummis and Gillibrand that, they contend, “appropriately balances consumer protections while allowing innovation to continue.”

Their proposed bill “places crypto assets within the regulatory perimeter,” the senators said in a statement, while requiring “all crypto asset exchanges to register,” and addressing the issue of “decentralized finance.”

The legislation, in what could set up a point of contention with the House-backed bill, also “codifies the criteria to determine which crypto assets are securities or commodities.”

The two senators are also pushing a separate bill to “establish a regulatory framework for stablecoins, a cryptocurrency whose value is pegged to another asset.”

The New York Sun

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