While we understand the Biden Administration’s approach to crypto regulation is in the process of being defined, we have yet to see any definitive proposals or policy statements that will bring clarity and consistency.
What we have glimpsed through statements by Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell, and from recent congressional hearings, appears defensive and reactionary. It also appears to be influenced more by recent ransomware attacks, China’s policy regarding central bank digital currencies (CBDC), environmental issues and El Salvador's adoption of bitcoin as legal tender than any effort to clarify markets and assist the industry's growth. It appears agencies that are responsible for crypto regulation have shifted to national security concerns instead of competitive markets and products. The lack of progress is disappointing.
This state of affairs contrasts starkly to the increasing institutional adoption of crypto currency assets, the approval of exchange-traded funds (ETF) by Canada, Brazil and states in Europe and the movement among states here (especially Wyoming, Texas and New York) to create comprehensive legal frameworks for crypto-digital assets and the widespread crypto ownership by the public.
Securities and Exchange Commission Chairman Gary Gensler advocated during his recent U.S. Senate testimony about the creation of a multi-agency task force approach, which requires authorization by Congress. A transparent collaboration with the Commodity Futures Trading Commission, Department of Treasury and the Office of the Comptroller of the Currency would be laudable, but will take considerable time and thus will not add clarity anytime soon. That the SEC’s published 2021 agenda does not include crypto digital assets, to the disappointment of many including Commissioners Hester Peirce and Elad Roisman (as noted in their joint statement), means enforcement will continue to be favored over regulation.
Furthermore, recent enforcement actions/settlements around the 2017 initial coin offerings are not instructive in the current environment where decentralized finance (DeFi) projects with VC backing operate without apparent regulatory oversight. A recent plenary meeting of selected DeFi projects and regulators happened behind closed doors, giving the public and other projects little guidance. The action brought against Ripple and other associated entities is only in the discovery stage, so it is doubtful that any outcome will occur in 2021 that might provide greater legal clarity. There are no cases likely to lead to judge-made law suggesting when a token is or is not a security, still the number one issue of regulatory confusion among several of them.
Chairman Gensler recently stated “...This (crypto) is quite volatile, one might say a highly volatile asset class, and the investing public would benefit from investor protection on crypto exchanges.” The emphasis on a federal framework for exchange regulation is, in our opinion, long overdue as we advocated in our CoinDesk article in response to Peirce’s Safe Harbor Proposal 1.0. But more certainty is needed, whether that certainty is the result of judge-made law, a binding rule promulgated by the SEC or a new law created by Congress.
The beginning of the Gensler tenure doesn’t bode well for the crypto market, which is still seeking clarity on existing products, much less an ETF product with as many as nine proposals before the SEC for consideration. ETFs are popular with retail investors who currently have little or no access to regulated bitcoin products, thereby “forcing” them into more risky unregulated altcoin alternatives.
The recent CBDC hearings on Capitol Hill, most notably that of Massachusetts Sen. Elizabeth Warren’s subcommittee and the committee of Rep. Maxine Walter of California, both Democrats, have demonstrated a dual-pronged approach to protect the dollar’s hegemony. The committees proposed task forces to study a digital dollar and restrictive crypto regulation aligned with national security and crime concerns. In our opinion, this is the wrong approach because it is based on the lack of understanding of the environmental impact of bitcoin, and underplays the need to move quicker on the adoption of CBDCs to be globally competitive while simultaneously protecting citizen privacy. At the same time, a U.S. dollar CBDC might reduce reliance on stablecoins like tether, which were recently labeled by a federal official as a short-term financial destabilizer.
Yellen and Powell have highlighted concerns with crypto regarding know-your customer/anti-money laundering (KYC/AML) rules, the Bank Secrecy Act (BSA) and terrorist crimes as major concerns. They have even cited national security in their comments about crypto. Most U.S.-facing regulated exchanges are basically compliant with Financial Action Task Force’s (FATF) “Travel Rule” (a requirement that targets the anonymity of wire and crypto transactions to address money laundering) but global DeFi exchanges and protocols are not compliant. FATF’s latest proposal includes extending certain requirements to DeFi, but implementing the final version was recently postponed to October 2021.
Michael Hsu, OCC’s acting comptroller, is reconsidering previous guidance by former Comptroller Brian Brooks (who is now running Binance.US). Hsu has requested a review of all the federal bank regulator’s pending matters, interpretative letters and guidance, including issues around digital assets and cryptocurrencies. The OCC move is another step backwards for the U.S. in global innovation and leadership for digital assets.
Technology and regulations usually are not fully synced, but it is about time for the U.S. to step forward and build a competitive crypto-focused regulatory approach across many agencies, thereby allowing for industry to operate with clarity and consistency. It does not appear, at the moment, that the Biden administration shares this important goal.