SEC fills void left by lack of new U.S. crypto and stablecoin laws

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As U.S. lawmakers grapple with how, or whether, to advance legislation to create new rules in the country regarding digital assets, the Securities and Exchange Commission has filled the “regulatory loophole” identified by the administration. of President Joe Biden.

Although senior US regulators, including Treasury Secretary Janet Yellen, have called for new laws to govern digital assets, one of the industry’s top regulators, SEC Chairman Gary Gensler, reiterated to reporters last week that he saw no need for new laws to regulate space.

If Congress were to act, while I don’t think we need those authorities, not to inadvertently undermine through definitions of what’s in or out, or essentially allow conflicts that we don’t allow, said Gensler following testimony before a House Appropriations subcommittee.

Last fall, the Financial Stability Oversight Council, which is a super committee of US financial regulators that Gensler also sits on, recommended legislation in three areas for stablecoin digital assets, trading companies that integrate different financial activities that go to beyond what a traditional financial exchange does, and direct oversight of spot market trading in bitcoin and other crypto commodities.

The absence of new laws has allowed the SEC to proactively regulate new areas that it had not previously focused on, including stablecoins and companies that combine a number of traditionally separate financial activities.

Maneuvering behind the scenes, finger pointing

Stablecoins have been the source of much of the recent instability in the digital asset industry. The collapse of Terra last year led to multiple bankruptcies, as did the collapse of the FTX token FTT in the fall.

New legislation to create standards for stablecoins has been at the top of Congress’s agenda since Terra’s collapse last spring, and bipartisan talks in the House of Representatives have gone on for months. last year under the current chairman of the House Financial Services Committee, Patrick McHenry, RN.C. ., and House Financial Services Chair Maxine Waters, D-Calif., who remains the top Democrat on the committee, negotiated legislation for a comprehensive framework.

Despite the cooperation of these key policymakers, the talks were stalled by reluctance from the Treasury Department. The department’s support was seen as helpful in gaining support from several Democrats serving on the House Financial Services Committee and the Senate, as well as necessary for a bill to receive presidential signature to become law.

Several people familiar with those deliberations say the SEC pushed the Treasury’s reluctance through constant objections and last-minute requests for revision.

Stablecoin legislation was being drafted over the summer, and the SEC was known to oppose it, said a former government official familiar with the matter. A major objection was that the legislation should only affect payout stablecoins, the person said. But the SEC required such a narrow definition that it wouldn’t apply to existing tokens, the person argued.

I think the real goal was to stop all stablecoin legislation, which interestingly contradicted the stance they took with the Presidents Task Force on Digital Assets report released l last year, said the former official. He has been tracking their activities now, which is basically asserting, through coercive action, that these stablecoins are securities.

A current industry advocate with previous government experience agreed. The SEC was fighting every bill in Congress, period, they said.

A third person familiar with those talks, who also requested anonymity to speak freely, disputed the claim that the SEC actively sought to sink the bill.

The SEC provided technical assistance that dealt with many of the problem definitions, the person said. Sometimes tech support is discordant, the person added. It’s the writers job to take what they want and go with the rest.

SEC cleared

While new legislation is unlikely to completely prevent the SEC from regulating digital assets, the absence of new laws in areas identified as “regulatory loopholes” by the US government has left a vacuum open for the SEC. fill.

In February, the agency sent a letter to Paxos informing the crypto infrastructure company of an investigation into its joint stablecoin project with Binance, BUSD. Paxos says he has since stopped minting the token.

And last week the SEC took action against Beaxy over the way the platform has combined several traditionally separate financial businesses under one company, another area where the FSOC has recommended new laws to create custody. -body.

To protect investors, there are separate registration requirements for exchanges, brokers and clearing agencies, each essentially acting as a check on the other, said Gurbir Grewal, director of the enforcement division of the SEC, in a statement related to the action. When a crypto intermediary combines all of these functions under one roof, as we allege Beaxy has done, investors are at serious risk. The vagueness of duties and the lack of records meant that regulations intended to protect investors were not followed or even recognized by Beaxy.

The move highlights a long-standing criticism of the digital asset space that exchanges combine functions in ways that traditional exchanges or commodity exchanges do not offer by offering investment accounts, market making in a way that leads to trading against their own clients and providing loans. Laws and ethical considerations prevent the mixing of these activities.

But a Commodity Futures Trading Commission complaint against crypto giant Binance last week also showed how exchanges can engage in activities that concern regulators. The company reportedly operated approximately three hundred undisclosed trading accounts on its own platform, in addition to Changpeng owner CZ Zhao owning two investment firms that traded through the company’s platform and two of his own trading accounts. personal. This fact raises questions about possible market manipulation, as the company traded against its own clients with advantages in terms of speed of execution and internal data.

The SEC has yet to publicly announce an investigation into Binance, though the charges the CFTC made last week can likely be applied in a securities law context. The commodity regulator claims Binance is knowingly violating US law by not enforcing its own geofencing for US customers, allowing it to operate illegally in the US. The SEC could claim similar activity related to illegal securities if the agency agrees with the CFTC that Binance is doing illegally in the US market, in addition to other possible violations regarding combining various activities on the same platform.

Although the SEC would not comment on the ongoing investigations, it did acknowledge in court that agency staff viewed Binance as an unregistered stock exchange as part of an effort to block the takeover. Binance.US from Voyager Digital Holdings, a bankrupt digital asset company.

2023 The Block Crypto, Inc. All rights reserved. This article is provided for informational purposes only. It is not offered or intended for use as legal, tax, investment, financial or other advice.

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