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

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By Anushree Dave

Congress will consider a series of legislative proposals, but fundamental questions remain

It was a critical year for the crypto industry, which saw the highly publicized collapses of Terra/Luna and crypto exchange FTX, as well as over $2 trillion wiped from the total crypto market since then. its historic peak of November 2021.

As a result, regulators are under more pressure 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 that “sponsors market and the investing public buys 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 Commission.

“The advantage of the CFTC is that because of their experience with other derivatives, they’re in a position where they can work better with what’s driving 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?

As for the bills — 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 crypto exchange FTX, which filed for bankruptcy in November. after the disappearance of billions of dollars of customer deposits.

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 – trading facilities, brokers, resellers and customers – to s ‘register with the CFTC, giving it more power in crypto regulation than the SEC. It will also require digital commodity platforms to prohibit abusive business practices, disclose any conflicts of interest, have strong cybersecurity, and report suspicious transactions, among others.

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 members’ political positions,” said policy researcher Owen Telford. 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, who questions crypto regulation in its entirety because he’s not sure you should be providing class legitimacy. ‘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. “.

Some have wondered if crypto regulation really needs to happen. In a conference hosted by the Brookings Institution, a think tank in Washington, DC, Stephen Cecchetti, an economist and professor at Brandeis International Business School, argued that crypto should not be regulated.

“First, and I think the strongest argument against regulation is to confer legitimacy,” Cecchetti told the conference, adding that crypto does “nothing to support the real economy, so legitimize it. will simply drain creative resources from productive activities.”

Meanwhile, other prominent figures like Democratic Senator Elizabeth Warren, have been calling for tighter crypto regulation after the collapse of FTX.

Crypto exchanges are responding to the uncertain regulatory climate by implementing proof of reserves, to ease investor jitters. Crypto.com, for example, launched a Proof of Reserves page, which shows an overview of its reserve holdings to users. The downside is that it only shows a snapshot in time, not a continuous update of assets.

So far this year, Bitcoin is down 64.05% and Ethereum (ETHE) is down 67.44%, both according to data from CoinDesk. The global crypto market capitalization is $798.11 billion, down 0.15% in the last 24 hours, according to data from CoinMarketCap.

-Anushree Dave

(END) Dow Jones Newswire

31-12-22 1116ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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