The US crypto business is having an identity crisis, which could become an existential one. Are cryptocurrencies commodities, like gold and pork bellies? Or securities, like stocks and futures? The Securities and Exchange Commission, America’s top financial regulator, is so convinced that cryptocurrencies are the latter that it’s suing one of the world’s largest crypto exchanges, Coinbase, for breaking securities laws. The SEC has instigated an aggressive campaign of “regulation by enforcement,” going after companies for all kinds of alleged violations and insisting that they register with the agency—something crypto businesses say is all but impossible.
But another regulator, the Commodity Futures Trading Commission, has also sued one of the industry’s biggest players, Binance, alleging it has broken commodity trading laws.
The confusion over what crypto is and who sets its rules has left the industry on edge. On Wednesday, senators Cynthia Lummis and Kirsten Gillibrand—a Wyoming Republican and New York Democrat, respectively—will unveil a new version of their proposed regulatory regime for the fintech industry, which hopes to settle the question.
While there’s plenty new in the revamped Lummis-Gillibrand Responsible Financial Innovation Act, its centerpiece is a measure that would classify most cryptocurrencies as commodities, putting them under the purview of the CFTC. It’s a clear rebuke to the SEC, which, Lummis and others say, is stifling innovation in financial technologies.
“The domestic industries really are trying to comply, for the most part, and they’re just getting the cold shoulder,” Lummis says. “That’s not how we regulate in this country.”
The content of the legislation seeks to prevent a repeat of the apparent failings in the crypto industry, which led to a series of high-profile collapses in the industry over the past two years that have left many investors with losses.
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According to a person with knowledge of the act, the legislation, if passed, would compel crypto exchanges to keep their customers’ assets in third-party trusts and stop them from so-called “proprietary trading”—essentially, trading with their own funds on their own exchange. It would also give the CFTC the power to supervise “material affiliates” of exchanges—such as Alameda Research, the sister company of the collapsed FTX exchange, whose founder, Sam Bankman-Fried, is awaiting trial on fraud charges. FTX allegedly lent large amounts of customer funds to Alameda to cover its investment losses, ahead of a liquidity crisis on the exchange that led to its downfall.
The act also bans “rehypothecation,” which essentially outlaws lenders’ ability to finance digital assets with collateral already pledged for different loans, the person says.
The SEC and other agencies were consulted on the content of the legislation, according to Lummis, who still worries they’ll try to kill the measure. “They have seen it. We asked them to tweak it, and we’ve incorporated some of their changes,” she says. “After all of our efforts to reach out to them and work with them, I do not want them to come in at the last minute to put their kibosh on this.”
The proposal comes at a point where there is significant animosity toward SEC chair Gary Gensler within the Republican-controlled House. Republicans have even introduced a bill meant to dilute Gensler’s power by adding a sixth SEC commissioner and killing the chair position altogether. But lawmakers admit that they’ve created the space for the regulator to act—often unilaterally—on crypto because of inaction on the subject in Congress.
“The reason [Gensler] is having this opportunity is because Congress hasn’t acted,” says Senator John Boozman of Arkansas, the top Republican on the Agriculture Committee.
After the senators drop their bill Wednesday, the hard legislative work begins. Digital assets fall under the jurisdictions of numerous committees—Banking (which Lummis serves on), Agriculture (one of Gillibrand’s committees), and Finance. Even the Environment Committee wants a say on crypto mining. That’s just in the Senate.
Each of these committees comes at crypto from a different angle. Take the Senate Banking Committee. Its Democratic chair, Sherrod Brown of Ohio, has focused on risks to consumers, while Senator Elizabeth Warren, a Massachussettes Democrat, has found the issue a bridge to the other side. Last year she teamed up with first-term senator Roger Marshall, a Republican from Kansas, on the Digital Asset Anti-Money Laundering Act of 2022, which would place crypto firms under the Bank Secrecy Act—a 1970 law that requires financial institutions to monitor and report money laundering, among other regulations critics say would crush the crypto industry.
That measure hasn’t been introduced in this 118th Congress, possibly because Gensler and the Department of Justice are all but implementing the bipartisan legislation in real time. Even as industry leaders, investors and their congressional allies accuse the SEC of crippling crypto, what’s become clear in recent months is, if Congress fails to act, again, securities regulators will aggressively go it alone.
CORRECTION: Updated 3:15 ET to correct a reference to staking.