OpinionPolicy & Regulations

State of Crypto: Yes, We’re Still Talking About Regulatory Clarity

An expressed desire for regulatory clarity in the U.S. isn’t new. But there’s increasing pressure for lawmakers and regulators to define just what sorts of digital asset activities are all right.

A subcommittee within the House Financial Services Committee held a hearing on recent trading and volatility within the crypto markets last week that largely appeared to be a fact-finding mission and exploration of this relatively young marketplace. Interestingly enough, witnesses both from the crypto industry and from outside the space agreed some form of increased regulatory clarity is needed.

What is regulatory clarity anyway?

The narrative

We keep seeing the phrase “regulatory clarity” come up during congressional hearings around crypto investing, central bank digital currencies and what possible regulations around this industry could look like. But what does that phrase actually mean?

Why it matters 

Businesses and proponents within the crypto industry see vague regulations as a major issue preventing startups from succeeding in  the U.S. Lawmakers are hearing this, too. It’s not yet clear what the result will be, though.

Breaking it down

I’ve talked about regulatory clarity a few times in this newsletter. In the U.S. at least, it’s sort of this ideal framework in which companies in the industry know what qualifies as a security versus what is for sure a commodity or what circumstances would allow a company to sell tokens or pay employees using cryptocurrency, etc. In other words, regulatory clarity would entail companies knowing what exactly they are allowed to do. 

So why aren’t we there yet? The chief issue is there isn’t a single federal regulator that can provide this oversight (or is willing to). The Securities and Exchange Commission (SEC) regulates securities, the Commodity Futures Trading Commission (CFTC) regulates everything else, the Office of the Comptroller of the Currency regulates banks and national trusts and individual states decide to which exchanges to give licenses, etc. (this is a bit of a simplification).  

The witnesses at a House Financial Services Committee hearing on the crypto market last week advocated differing approaches to this issue, but the overall conclusion is clear: Regulators need to actually issue some sort of concrete guidance around what activities are allowed, or legislators need to give one entity the authority to do so. 

We’re seeing this refrain more and more, especially with the recent bull market. 

“One regulator says that a crypto asset is a currency. Another said that it is a security. And the outcome of that is incredibly harmful to retail customers,” said Christine Parker, one of the witnesses at the hearing. “This lack of clarity stifles innovation in the U.S. and frankly drives retail customers to foreign exchanges. So how do we better regulate cryptos?”

Parker, a partner at Reed Smith LLP, advocated for Congress to require the SEC and CFTC to provide clearer rules.

“I don’t know if there’s a right way or wrong way but we need to do something,” said Perianne Boring, the founder and president of the Chamber of Digital Commerce, after the hearing.

The solution may lie within existing laws, but with better and more consistent enforcement, said Rep. Tom Emmer (R-Minn.).

Peter Van Valkenburgh, director of research at Coin Center and one of the witnesses at the hearing, indicated that some regulators have already begun demonstrating how existing laws apply to the digital asset industry.

“Cryptocurrencies like bitcoin and ethereum are commodities but many crypto assets meet the flexible definition of an investment contract and are therefore securities which means their issuance and their trading are regulated by the SEC. Cryptocurrency derivatives are regulated by the CFTC,” he said.

Still, the tone of the hearing was generally positive, industry insiders said.

“Today’s hearing was a good example of months of education on Capitol Hill. Both Democrats and Republicans asked good pointed questions in regards to securities law, regulatory clarity, consumer protection, ransomware and fostering innovation in the U.S.,” said Ron Hammond, director of government relations at the Blockchain Association. “This hearing was unique in terms of the number of Members of Congress who were vocally supportive of the technology and application of cryptocurrency versus those who were skeptical.”

Boring noted that Rep. Maxine Waters’ (D-Calif.) participation in the hearing is “a strong signal” that the overall committee is continuing to focus on crypto. 

“It did seem more like a fact-finding mission,” she said.

In a statement, Coin Center Director of Communications Neeraj Agrawal said the think tank was “pleased to see that so many members of Congress” have continued researching the sector.

“Our best bet for sound policy outcomes is a broad understanding of these technologies,” Agrawal said. “The growing number of policymakers knowledgeable about cryptocurrency is a good sign.”

Biden’s rule

Changing of the guard

Still nothing has really happened this week.

Elsewhere: 

  • China’s Longest-Running Crypto Exchange Closes Bitcoin Business Following Crackdowns: BTC China shut down after 10 years in response to a tightening regulatory climate in China.
  • Huobi Reveals Countries Where It Has Halted Derivatives Trading: Huobi has barred customers from the U.S., Canada, Hong Kong and several other countries, and barred existing customers in a number of other nations from trading derivatives. It’s this last bit – derivatives trading – that I think is really worth watching as FATF guidelines continue to be implemented and regulators investigate this sort of activity.

Outside Reacon news:

  • (Financial Times) “A growing number of banks” are thinking about issuing bonds using blockchain, reports the Financial Times.
  • (FATF) The Financial Action Task Force published its second 12-month review of how nations are implementing its virtual asset guidance. My colleague Ian Allison already reported on the highlights after the FATF plenary session ended last month, but the full document is worth a read as well.

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