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U.S. dropped the ball on crypto regulation


WASHINGTON — The U.S. has dropped the ball on crypto regulation, in keeping with Securities and Exchange Commissioner Hester Peirce, and he or she says the knock-on effects of that failure keep her up at night.

“There’s loads of fraud on this space, since it’s the new area of the moment,” Peirce told CNBC on the sidelines of the DC Blockchain Summit this week. “The opposite piece that does concern me is the way in which that we have form of dropped the regulatory ball.”

She continued, “We’re not allowing innovation to develop and experimentation to occur in a healthy way, and there are long-term consequences of that failure.”

The comments come because the crypto market meltdown continues.

A broad sell-off in digital assets has erased greater than half a trillion dollars from all the market within the space of a number of weeks thanks, partly, to turmoil in a subset of cryptocurrencies dubbed stablecoins.

The name comes from the undeniable fact that these digital currencies are specifically designed to be stable, with values pegged to the worth of real-world assets resembling commodities like gold, or fiat currencies just like the U.S. dollar. The value moves of stablecoins are seldom value mentioning because they don’t seem to be purported to fluctuate much. However the collapse of UST — one among the more popular U.S. dollar-pegged stablecoins — had a contagion effect across all the cryptocurrency ecosystem. Those shock waves have also lit a hearth under lawmakers and regulators.

“We will go after fraud and we will play a more positive role on the innovation side, but we have now to get to it, we have to get working,” said Peirce.

“I have not seen us willing to try this work up to now.”

The SEC’s crypto remit

The SEC’s job description in terms of regulating cryptocurrencies is amorphous.

Wall Street’s top regulator oversees securities, and until recently it was difficult getting Chair Gary Gensler to pin down which of the greater than 19,500 cryptos fall under his jurisdiction, versus the commodity tokens which can be higher left to law enforcers on the Commodity Futures Trading Commission.

But in recent testimony before the House Appropriations Committee, Gensler offered some clarity, saying the SEC has jurisdiction “over probably an unlimited number” of the cryptocurrencies in circulation. The SEC chief also conceded that bitcoin was “perhaps” not under its purview — which, for him, were strong words on the topic.

Gensler’s recent tackle bitcoin’s regulatory jurisdiction runs in parallel to ex-SEC chief Jay Clayton, who previously said that cryptocurrencies are “replacements for sovereign currencies,” and for those who “replace the dollar, the euro, the yen with bitcoin … that variety of currency will not be a security.”

The SEC has spent the previous few months beefing up its roster and broadening its remit with respect to digital asset regulation.

In April, Gensler said Wall Street’s top regulator plans to register and regulate crypto platforms, and earlier this month, the agency announced it could almost double the staff answerable for protecting investors in cryptocurrency markets — bringing its Crypto Assets and Cyber team as much as 50 dedicated positions.

“The crypto exchanges should are available and register,” continued Gensler on Capitol Hill last week, “Or, frankly, we’ll proceed to bring, use what Congress has given us, in our enforcement and examination functions.”

Gensler also recently told House lawmakers that the principles are “actually quite clear.” For those who are raising money from the general public and the general public anticipates a profit based on the efforts of that sponsor, that is a security, in keeping with the SEC chair. Gensler says that differs from a commodity, which each lacks an issuer and in addition has no public buyer anticipating a return based on the efforts of the one party behind the product.

A call for more clarity from Congress

But loads of participants would welcome more clarity from lawmakers. The SEC’s Peirce tells CNBC that while the SEC is already acting using the authority that it has, she thinks “it could be helpful if Congress got here in and said, ‘SEC, here’s the role we predict you have to be playing. CFTC, here’s the role for you.'”

“One could argue that the SEC can be a very good regulator of retail exchanges, if we resolve to have a federal regulator, but again, that is really as much as Congress to make that decision,” continued Peirce, who noted that there’s loads of work to be done inside existing authorities since traditional financial institutions wish to become involved in crypto. “They need regulatory clarity from us to be able to try this.”

Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., are aiming to supply that clarity with a bill that lays out a comprehensive framework for regulating the crypto industry and divvies up oversight amongst regulators just like the SEC and CFTC. Lummis tells CNBC that they hope this regulatory blueprint for digital assets “hits the sweet spot between regulation that is evident and understood, and doesn’t stifle innovation.”

But until Congress passes some hard and fast rules around the way to regulate crypto, the dynamic will remain regulation by enforcement.

Because the SEC launched a unit dedicated to crypto asset oversight in 2017, it has brought greater than 80 enforcement actions against crypto asset offerings and platforms.

The agency’s lawsuit against San Francisco-based start-up Ripple could possibly be a bellwether court battle.

In 2020, the SEC alleged that Ripple, its CEO Brad Garlinghouse and the corporate’s executive chairman violated securities laws when it sold $1.4 billion value of XRP, the world’s sixth-largest cryptocurrency. Amid the broader sell-off, XRP is down 42% within the last 30 days, in keeping with CoinGecko.

Ripple says its token will not be a security — and so goes the continued confusion over which digital coins fall into which regulatory bucket.

The anomaly at one point also prolonged to ether, the world’s second-biggest cryptocurrency by market cap, when in 2018, an SEC director said that “the Ethereum network and its decentralized structure, current offers and sales of Ether usually are not securities transactions.”

How the Ripple legal battle plays out could possibly be an indication of things to come back — and will potentially force the SEC’s hand on defining which of the nearly 20,000 crypto tokens fall under its jurisdiction.

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