When Congress reconvenes later this month, one of the items that it may consider is the regulation of cryptocurrency. Sen. Pat Toomey (R-PA), the ranking member of the Senate Banking Committee, has been particularly eager to have this issue addressed.
“Rather than trying to ignore or suppress cryptocurrency and related technologies, regulators and legislators alike need to recognize that open, public networks are here to stay,” said Toomey in a press statement. “Our laws and regulations must adapt to these developments.”
Sen. Elizabeth Warren (D-MA), the committee’s chairwoman, has faulted the U.S. Securities and Exchange Commission for not proactively pursuing cryptocurrency regulation.
“While demand for cryptocurrencies and the use of cryptocurrency exchanges have skyrocketed, the lack of common-sense regulations has left ordinary investors at the mercy of manipulators and fraudsters, wrote Warren in a letter to SEC Chairman Gary Gensler. “These regulatory gaps endanger consumers and investors and undermine the safety of our financial markets. The SEC must use its full authority to address these risks, and Congress must also step up to close these regulatory gaps and ensure that every investor has access to a safe cryptocurrency marketplace.”
But Gensler has insisted that Congress needs to give the SEC the authority to take the lead on the issue rather than expect his agency to act unilaterally.
“If we don’t address these issues, I worry a lot of people will be hurt,” he said.
Cryptocurrency is hardly a new concept, yet federal regulation of this sector has failed to keep up with its expanding popularity. This raises two questions: Why has the government been slow to regulate cryptocurrency and can the crypto sector expect Washington to take action in the near future?
The Regulatory Slow Walk: Capitol Hill’s lethargy in regulating cryptocurrency could be partially blamed on a generational gap, with much of the congressional leadership being out of touch with investing trends embraced by their younger constituents.
“A lot of the politicians are older folks in general,” observed Mark DiMichael, partner in the forensic, litigation and valuation services department at Citrin Cooperman. “I think they're just not grasping how big it's becoming in the world, and they're not sure what to do with it.”
Steven Steele, host of the crypto-focused YouTube talk show “Steven Steele Live,” concurred with DiMichael about older legislators confused over changing times.
“When I hear them talk about cryptocurrency, it reminds me of listening to parents in the 1980s that were involved with the Parents Music Resource Center warning about the dangers of heavy metal music,” he quipped. “There's just a lot of hyperbole and disinformation that they don't even understand the nature and the basic fundamentals of cryptocurrency. It can be kind of scary that many of those people are dictating legislative decisions surrounding it.”
Steele added that not every legislator is unwilling to learn, noting that “some of our elected leaders are starting to make an effort now to learn more about it, and we're seeing some progress in that way.”
Nonetheless, the federal government has a tradition of being reactive rather than proactive on changing trends, especially those with a high-tech angle.
“The cryptocurrency market is almost, by definition, the cutting edge of tech,” observed Greg King, CEO of Osprey Funds, a digital asset investment firm whose offerings include the Osprey Bitcoin Fund OBTC. “Historically, it has been difficult for government to keep up with the pace of innovation, so they're always going to be a little bit behind.”
And complicating matters is the nature of the subject in this spotlight. Unlike the regulation of specific financial institutions or products, there is no Bitcoin Inc. or Dogecoin LLC that can answer to regulatory concerns.
“I think it's very hard to regulate something like Bitcoin, specifically, because it is the most decentralized of the cryptocurrencies,” said Zachary Cummings, founder of NY Crypto Consulting. “There's no leader, there's no one to really go after if you have an issue with the protocol.
“That being said,” Cummings added, “I could see regulations applying to exchanges, the centralized places where people exchange cash for Bitcoin and, to some extent, already follow existing regulations concerning money transmitters.”
“They're not going to be able to completely regulate it,” stated David Noble, director of Peter J. Werth Institute for Entrepreneurship and Innovation and associate professor at the University of Connecticut. “What they are going to be able to regulate is the on- and off-ramps, from fiat to crypto and crypto to fiat. They are going to be able to regulate how other regulated parties interact with crypto.
Taking The Reins: Whichever regulatory agency takes charge of regulating cryptocurrency, it will most likely not answer the political agendas of Congress or the White House.
“That work is done by independent regulators,” said Peter Morici, professor emeritus of the Robert H. Smith Business School at the University of Maryland and former director of the Office of Economics at the U.S. International Trade Commission, who explained that while the president may appoint people to serve on the SEC, “the White House doesn't have that much control over regulators once it appoints them.”
But that leads to questioning which agency is going to be in charge of regulations. As mentioned earlier, the SEC has been cited as being responsible for this task, but it might not be entirely within its bailiwick.
Alan Konevsky, interim CEO and chief legal officer and board secretary of the blockchain technology provider tZERO Group Inc. TZROP questioned whether the Commodities Futures Trading Commission would seek a leadership role, or if the Department of the Treasury would try to advocate for the creation of a new agency specifically focused on cryptocurrency regulations.
“I think it's a bit of a mix,” Konevsky said. “You're going to see existing regulators flexing their jurisdiction and you're probably going to see some new authority coming into place – but whether that ends up with an existing regulator or a new agency or something else is an open question.”
“It's been definitely being split among multiple agencies,” stated Citrin Cooperman’s DiMichael, noting the sector covers such diverse considerations as payment processes, investments, assets and technology that it is not easily categorized in a single definition. “It's so broad that it's not being monitored or regulated in any kind of centralized way, at least here in the United States.”
DiMichael added that if cryptocurrency oversight was placed within existing agencies, the nature of the transactions doesn’t fit traditional transactional regulations.
“If you're a bank and the customer comes in with $50,000 cash, you have to fill out a Suspicious Activity Report and a Currency Transaction report,” he said. “But there’s nothing like that for cryptocurrency. You don't need a big duffel bag of Bitcoin – you just keep it up a little thumb drive. So, they are going to be requiring recording of transactions of $10,000 or more going forward, and they're doing this for tax and IRS purposes.”
Osprey Funds’ King stated that potential regulation could place less heavy emphasis on cryptocurrency users because they already have a mission of protecting investors and more on “the Internet infrastructure players, the providers of services, the money transmitters, the exchanges, the lenders –there's some responsibility on the creators of each cryptocurrency as well.”
Welcome, Regulators: Unlike the examples set by some industries that fight vigorously against federal regulation, King doesn’t see a great wave of opposition from the crypto sector against Washington’s oversight.
“I do see a push from parts of the industry itself,” he said. “At some point, a thing gets so big that it needs to be dealt with, and cryptocurrencies and digital assets have certainly passed that point.”
Steven Steele believed the crypto audience was less worried about the notion of regulation and more concerned about having it applied in a sledgehammer style.
“I think a certain degree of regulation is necessary to push for further mass adoption,” he said. “It's about having that balance with a certain degree of regulation that will help adoption and is necessary to cover the basics for consumer protections, but without the overreach that would stagnate the flourishing of the crypto markets.”
But whether any serious movement will occur during the remainder of this year and into the 2022 midterm election year remains to be seen. The Werth Institute’s Noble is skeptical the current political environment is ready for such action.
“I'm going to clearly and transparently state my biases here: I don't see the federal government functioning at a very high level,” he said. “I don't see it moving forward faster than the legislation around marijuana and the financial industry. My biases because of the polarization of the parties, there's very little initiative to work together and, and effectively govern the nation.”
But TZero’s Konevsky predicted cryptocurrency regulation will occur, though maybe not as soon as some people would hope.
“It's never too late to regulate, right?” he laughed.
Photo: Pete Linforth / Pixabay.
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