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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.
The most spectacular implosion was a cryptocurrency called TerraUSD. It was a stablecoin, meaning its value was supposed to be pegged to the US dollar through a complicated algorithm.
Instead, it collapsed and is now practically useless.
That crash 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, a Republican and a Democrat, teamed up to introduce a sweeping new regulatory bill last week. But skeptics are already warning that it is a step backwards and too friendly to cryptocurrencies.
Let’s unpack what’s going on and why it’s a great question who would regulate cryptography.
What is the current configuration?
Almost everyone believes that the crypto industry needs some form of regulation.
Every hour new cryptocurrencies are born and along with them many scams and frauds. Currently, the industry is overseen by a patchwork of federal and state regulations, which have not always evolved as quickly 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).
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 – poses risks similar to the early days of social media – sometimes called Web2.
“Congress did not 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?
It was introduced earlier this month by Sen. Gillibrand and Sen. Cynthia Lummis, R-Wyoming.
It establishes a framework to regulate the crypto industry.
This includes tax requirements for various digital assets and imposing stricter requirements on stablecoins that Gillibrand said would have rejected the TerraUSD coin that imploded in May.
It also contains provisions on cybersecurity, the possible creation of a self-regulatory organization, and some disclosure requirements. And it includes provisions directing the Federal Energy Regulatory Commission to study the energy impact of the cryptocurrency industry.
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But perhaps more importantly, and what worries skeptics the most, is that the bill defines most cryptocurrencies as raw Materialswhich would be overseen by the Commodity Futures Trading Commission (CFTC), rather than valuesthat 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 crypto industry is “riddled with fraud, scams, and abuse.” He beefed up the SEC’s crypto enforcement team in early May and, after the crypto crash, 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 form of security, and that it is more appropriately placed under the CFTC”.
Both senators are optimistic about the future of cryptocurrencies. Lummis bought the first Bitcoin from him in 2013 and owned over $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 the people who are innovating in this space know the rules of the road and the people who are consuming the best products know that the elements of consumer protection are there,” Lummis said.
The bill is still far from becoming law. In terms of time for a floor vote, Lummis said, “We’re talking months.” He previously acknowledged that the sweeping bill could ultimately be broken up into parts to go through committees.
What the critics say
There are a number of technology and financial 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 congressional leaders, asking them to: “Ensure that people in the US and elsewhere are not left vulnerable to predatory finance, fraud, and systemic economic risks in name of the technological potential that does not exist.”
One of the signatories was Molly White, a software engineer who runs the blog. web3 is great, which documents cases of fraud and catastrophe in the crypto universe. And she’s not a fan of the new bill.
“It’s a lot that I think the cryptocurrency 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 “landmark moment.”
One of White’s biggest problems with the legislation is precisely that it hands over 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 put money into them hoping to get a return on their investment,” White said. “And when someone commits to something like an investment, that’s a good sign that they should go to the SEC.”
Additionally, 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 problems than they’ve dealt with in the past,” he said. “And the SEC, frankly, already has more experience in this field.”