Crypto regulation: 2 big questions loom in 2023 after a chaotic year for digital assets

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This has been a critical year for the crypto industry, which has seen the highly publicized collapses of Terra/Luna and crypto exchange FTX, as well as over $2 trillion wiped from the total crypto market. since its all-time high in November 2021.

As a result, there is more pressure on regulators to closely monitor the industry and create strong regulation. Here are some big questions that remain before progress is made:

Is cryptography a commodity or a security?

Currently, there is no comprehensive plan to regulate cryptocurrencies, and one of the big questions that remains is how exactly to classify crypto, said Edward Moya, senior market analyst at OANDA.

According to Gary Gensler, Chairman of the Securities and Exchange Commission, cryptography is security. The Howey test, which stems from a 1946 Supreme Court decision in SEC v. WJ Howey Co., defines securities as money invested in a joint venture with the expectation of profits from the efforts from others.

In a statement in September, Gensler said promoters were trading and the investing public was buying most of these tokens, touting or anticipating profits based on the efforts of others, in which case the cryptos would be registered with the SEC.

The SEC has already taken some steps. In May, it announced it would crack down on crypto by doubling the size of its crypto assets and cyber unit.

Others in the industry believe that cryptocurrencies act more like commodities, in which case they would fall under the jurisdiction of the Commodity Futures Trading Commissions.

The advantage of the CFTC is that due to their experience with other derivatives, they are in a position where they are able to work better with what is driving the crypto, Moya said.

Coming to a consensus on what the categorization of crypto should be is extremely difficult, said Yesha Yadav, professor of law and associate dean of diversity, equity and community, at Vanderbilt University, in a interview with MarketWatch. Congress will have to come to a conclusion because getting clarity on how to categorize crypto will lead to clearer answers about what regulation may look like, Yadav said.

What are the legislative options?

When it comes to bills of which there are several, it’s hard to say which one will trump the others, Yadav said, because they were all crafted before the dramatic collapse of the crypto exchange. FTX, which filed for bankruptcy in November after billions of dollars in customer deposits disappeared.

See: New charges link Bankman-Fried to damning FTX allegations with testimony from ex-girlfriend Ellison and her co-founder

A Senate bill sponsored by Debbie Stabenow, a Democrat from Michigan, and John Boozman, a Republican from Arkansas, would require all digital product platforms from trading facilities, brokers, dealers and customers to register with the CFTC, which would give it more power in crypto regulation than the latter. It will also require digital product platforms to prohibit abusive business practices, disclose any conflicts of interest, have strong cybersecurity, and report suspicious transactions, among other things.

A bill sponsored by Sens. Cynthia Lummis, a Republican from Wyoming, and Kirsten Gillibrand, a Democrat from New York, would divide digital assets into commodities, securities, and ancillary assets. The bill defines ancillary assets as crypto tokens, which do not provide the holder with a share of profits or revenue or other financial interests, despite fluctuating in value over time.

Under this bill, crypto issuers would be required to make certain disclosures to the SEC. Digital asset issues would be presumed to be a commodity, and therefore subject to CFTC regulation, easing tensions between the SEC and other federal agencies.

It’s hard to predict which bill will win out over another in the coming year, especially since I’d say every agency has its supporters, and a lot of that is somewhat shadowed by the members’ political positions, said Owen Telford, policy researcher at Beacon Policy. Advisors, in an interview with MarketWatch. So I’m not sure there will necessarily be a clear outcome in the coming year on which agency should take the lead.

You have someone like Senate Banking Committee Chairman (Sherrod) Brown questioning crypto regulation in its entirety because he’s not sure you should provide legitimacy to the banking class. assets, Telford said. Brown, a Democrat from Ohio, will be a key player in crafting any type of crypto legislation, and at this time it’s unclear whether he necessarily supports any of them.

So far this year, Bitcoin BTCUSD, +0.30% is down 63.57% and Ethereum ETHE, +0.97% is down 66.88%, both according to data from CoinDesk. The global crypto market capitalization is $811.87 billion, an increase of 1.53% in the past 24 hours, according to data from CoinMarketCap.

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