A hearing Wednesday of the House Subcommittee on Oversight and Investigations showed just how difficult it is to regulate the cryptocurrency and crypto asset markets.
There were the usual differences in opinion about regulation between Democratic and Republican members of the subcommittee, which is a unit of the House Financial Services Committee, although at least one Republican member noted the need for more clarity about regulations. More striking were the discussions about all the components of the crypto market and the limits of current federal regulation, which may require legislation to expand.
It's Complicated
There are multiple cryptocurrencies like Bitcoin and Ethereum and many more; also stablecoins such as Tether, which are supposed to be pegged to external currencies but don't always perform that way — Tether failed that test — and initial coin offerings (ICOs), used by startups to raise funds to develop crypto products or services.
In addition, there are crypto exchanges for trading of these assets and crypto custodians for storage, which now include traditional financial firms like Fidelity; and major banks like Morgan Stanley and Goldman Sachs are developing ways for their clients to invest in cryptocurrency.
Some of those assets are regulated, at least partially by federal agencies. The Securities and Exchange Commission, for example, regulates most ICOs but, according to SEC Chairman Gary Gensler, does not have the authority to regulate crypto exchanges. The Commodity Futures Trading Commission oversees Bitcoin futures, but it has limited antifraud and anti-manipulation authority over spot and forward markets of cryptocurrencies, including Bitcoin.
Crypto exchanges are subject to rules from the Treasury Department's Financial Crimes Enforcement Network (FinCEN), which oversees anti-money laundering (AML) and know-your customer (KYC) obligations. State agencies can also impose AML and KYC obligations, which is what the New York Department of Financial Services has done for New York businesses involved in the crypto market and firms that sell crypto assets to New York residents.
The Regulatory Picture
There are regulatory gaps concerning cryptocurrencies and assets.
SEC Chairman Gary Gensler has said the SEC lacks the authority to regulate crypto exchanges and Congress needs to provide it.
At the House subcommittee hearing, attorney Christine Parker, a partner at Reed Smith who specializes in regulatory matters related to digital assets, commodities and derivatives, noted, "As a commodity and unlike a security, the purchase and sale of Bitcoin (i.e., spot/cash and forward trades) is largely unregulated at the federal level."
Sarah Hammer, a managing director of the Stevens Center for Innovation in Finance at the Wharton School, said, "While the SEC has applied securities regulation to dozens of ICOs based on the Howey test [a test that determines what qualifies as an "investment contract," based on Supreme Court decision], there is still a lack of clarity as to whether it applies to a number of cryptocurrency transactions that currently do not comply with SEC registration and disclosure obligations."
She supports the development of "clear, sufficient and appropriate" regulatory framework for cryptocurrencies developed under the leadership of the Financial Stability Oversight Council, which is led by the Treasury secretary and includes heads of major financial and banking agencies, including the SEC, CFTC, Federal Reserve Board and FDIC, in coordination with state regulators and consultation with international standard-setting bodies.
