Tuesday’s Rising Regulatory Chorus On Crypto

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This past Tuesday, September 21, the chorus calling for more regulation over crypto reached a sort of crescendo.

The SEC

Earlier, in September 14 testimony before the Senate Banking Committee [1], former CFTC and current SEC Chair Gensler noted that cryptocurrencies sit astride several different regulatory regimes, posing broad risks:

“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.”

Gensler suggested that the SEC has broad regulatory authority in the area, but needs to step up its enforcement efforts in coordination with other agencies.  Some Senators pushed back on the lack of clarity in the SEC’s “investment contract”-based efforts thus far, echoing similar criticisms from SEC Commissioner Hester Peirce and others.

Gensler expanded on those themes in a September 21 interview with The Washington Post [2], suggesting heightened enforcement to address investor-protection, AML, tax and system stability risks posed by cryptocurrencies and other decentralized-finance activities.  Calling the technology and its prospects “interesting,” Gensler nevertheless cautioned about its ultimate sustainability:

  “I don’t think there is a long-term viability for five- or six-thousand forms of private money.  History tells us that.”  [Referring to the private-money schemes in the mid-1800’s after President Andrew Jackson dissolved the Second Bank of the U.S. in 1833].

Gensler’s remarks come on the heels of a recent settled enforcement action as digital platform Poloniex, LLC as an unregistered exchange and a threatened enforcement action leading Coinbase to pause its proposed crypto-lending program.

 Banking

As Gensler spoke with the Post, Acting Comptroller of the Currency Hsu told the Blockchain Association on September 21 that the industry reminds him of the “fool’s gold rush” he witnessed as an SEC official in the run-up to the financial crisis of 2008, and it “may be on the cusp of another with cryptocurrencies and decentralized finance.” [3]  Hsu asked whether many of de-fi and crypto innovations actually addressed real substantive problems, saying “financial innovation should be anchored in purpose.”  Hsu’s remarks came as the European Banking Authority warned that regulators were not up to speed on the rapidly-advancing interaction of banking and digital marketplaces. [4]

The day before, the Global Financial Markets Association and related trade groups objected to a June proposal that would extend full Basel capital-reserve requirements to crypto.  The groups noted the severe volatility of crypto and that tight capital ratios would be counter-productive and push crypto back into the shadows by forcing banking institutions to stay on the sidelines.  Instead, the banking trade groups noted that (a) blockchain and digital ledger technology show great promise, especially for efficiencies in clearing and settlement, (b) banks and similar institutions can play a self-regulatory and normalizing role in digital-asset markets, and (c) customers wanted digital assets as part of their banking relationships. [5]

AML

Also on September 21, the Biden Administration started to make good on its promise to ratchet up the combat against cyber-criminals.  The Treasury Department added SUEX – a Russian digital currency platform – to its OFAC list as a sanction for allegedly laundering ransomware payments. [6]

Meanwhile, the Peoples Bank of China announced it plans to launch a non-blockchain, intermediated digital Yuan in time for the 2022 Winter Olympics there.

Crypto still has an innovation-for-its-own sake wild-west feel that far exceeds its alleged use-cases, so the regulators are coming for it — even as they struggle to allow innovation to meet those legitimate use cases.  It’s likely, though, that standards will remain murky with enforcement front-running rule-making as the regulatory regimes crank into action.

 

[1]        Gensler’s Sept. 14 testimony is here:  https://business.cch.com/srd/GenslerTestimony9-14-21.pdf

[2]        The Washington Post Interview with SEC Chair Gensler, is here:  https://www.washingtonpost.com/washington-post-live/2021/09/21/path-forward-cryptocurrency-with-gary-gensler-us-securities-exchange-commission-chair/

[3]        Acting Comptroller Hsu’s remarks are here:  https://www.occ.gov/news-issuances/speeches/2021/pub-speech-2021-101.pdf

[4]        The EBA warning was reported by Reuters, here: https://www.reuters.com/business/regulators-lack-understanding-banks-digital-marketplaces-eu-watchdog-says-2021-09-21/

[5]        The GFMA Basel comment letter is here:  https://www.gfma.org/wp-content/uploads/2021/09/joint-trades-bcbs-prudential-treatment-of-cryptoasset-exposures-response.pdf

[6]        Treasury Release re: SUEX, is here:  https://home.treasury.gov/news/press-releases/jy0364

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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