[Feature] Looking Into the Senate’s Talk About Crypto Regulatory Clarity

The U.S. Senate Banking Committee held a hearing on Valentine's Day morning titled "Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets.” During the hearing, crypto once again fell under the Senate’s microscope, whose agenda was to examine financial system protections from the dangers seen in digital assets.

Committee Chair Senator Sherrod Brown suggested that "basic, common sense principles" applied elsewhere, should be imposed on the crypto industry. Generally across the board, there was a consensus that proper safeguards are needed for the digital asset market.

As for the United States (U.S.) Securities and Exchange Commission (SEC), it continues its clamp down on crypto and unregistered securities. Other regulators have also stepped up on the aggressive scrutiny over crypto regulations. Find out how SEC has been targeting Gemini, Genesis, Kraken, and more, and as well as the thoughts and actions of some industry leaders in this article.

Vice-president of Luno, Vjay Ayyar, expressed to CNBC on Tuesday that, "We're seeing a lot of scrutiny across various sectors in crypto in the U.S., with the two most recent areas being staking and stablecoins. This is an obvious repercussion of the fallout from FTX, LUNA, and the general contagion in crypto over the last year. The markets might take some time to consolidate here and wait and watch whether there are further events that play out in terms of regulatory crackdown, hence we could see a couple of weeks of sideways action.”

Source: U.S. Senate Banking Committee GOP's twitter

Crypto Council for Innovation Head of Government Affairs Brett Quick, who was present at the hearing, recounted that, "The primary takeaway…is that there is tremendous interest around legislating crypto and an acknowledgement that status quo and the environment of regulations by enforcement, it isn't working for consumers or businesses and it's often failing to protect investors. We heard from both sides, the need to establish regulatory guard rails, the need for financial literacy, for increased disclosure…there's a lot of reasons to be encouraged that this committee can work on legislation and move toward establishing the very badly needed federal regulatory framework that the industry has been asking for.”

Committee Chair Senator Sherrod Brown chastised industry firms in the opening remarks of the hearing and asked for the Committee to find common ground in order to pass cohesive legislation for crypto. He added, "These crypto catastrophes have exposed what many of us already knew. Digital assets, cryptocurrencies, stablecoins, investment tokens are speculative products run by reckless companies...”

Ranking Member Tim Scott criticised the SEC's attempts at regulatory enforcement during last year's market crash, "The SEC has failed to take any meaningful, preemptive action to ensure this type of catastrophic failure does not happen again.”

He pointed out that investors need to know the reason behind SEC’s lack of action before FTX’s collapse and why millions of dollars of crypto investments can no longer be recovered. "If they have the tools they need, were they just asleep at the wheel? If they don't, why aren't they here to tell us what they need?… We'd be happy to have chairman Gensler testify sooner, much sooner than later," Scott expressed and noted SEC chair Gary Gensler's absence during the hearing despite making other public appearances.

Scott wondered why regulators were more focused on "progressive social issues" rather than improving financial literacy among those more likely to be victimised by the collapses of digital assets.

As for Senator Elizabeth Warren, she took particular issue with decentralised finance (DeFi) offerings which are typically more complicated to regulate than centralised firms. Warren called for more robust anti-money laundering requirements and said that "The rules should be simple. The same kind of transaction, same kind of risk needs the same kind of rules.”

Along with Senator Roger Marshall, Warren intends to reintroduce a bill to crack down on crypto money laundering.

During the hearing, three witnesses, Policy Director at the Duke Financial Economics Center Lee Reiners, Vanderbilt University Law School Professor Yesha Yadav, and Georgetown Institute of International Economic Law Professor Linda Jeng, also gave their statements.

Reiners concurred with Gensler that most tokens are securities but believes others like Bitcoin (BTC), are commodities. He noted that most Americans do not care whether digital assets are regulated by the SEC or the Commodity Futures Trading Commission (CFTC).

His suggestion for Congress is to "carve out cryptocurrency from the definition of 'commodity' in the Commodity Exchange Act and recognise cryptocurrencies as securities under a special definition to the securities laws." It means that this would bring all the regulation of digital asset under the SEC which "simply has more expertise, more resources and more appetite for enforcement" than the CFTC. In addition, he mentioned that "unlike the CFTC, the SEC has a statutory mandate to protect investors." Read Reiner's written testimony here.

Professor Jeng pointed out that losses caused by the failure of legitimate projects and fraud committed against customers transacting in digital assets in the past year, have caused significant damage. There seems to be an "urgent need to establish formal federal oversight and demonstrate the inadequacy of regulating solely by enforcement.”

She expressed that the failure to put in place a new digital asset-specific regulatory arena "risks offshoring innovation and putting American businesses, consumers, and the economy at a competitive disadvantage to our foreign peers. It could also jeopardise an important national security lever of the U.S. government: the pre-eminence of our financial system." Read Jeng's written testimony here.

As for Professor Yadav, her answer to the "regulatory dilemma would be to give digital asset exchanges the authority to act as 'self-regulatory organisations (SRO)', building on a model that has long been applied to traditional stock exchanges.”

This SRO model is not a substitute for government regulation but would be a complement to those efforts, according to Yadav. Read Yadav's testimony here.

The testimonies given by the speakers did not focus on the recent and ongoing high-profile actions like Kraken's staking service or Paxos' BUSD.

With more regulatory scrutiny over digital assets and the dangers it poses, it is imperative that there is regulatory clarity and uniformity moving forward. There needs to be a consensus or a common solution, so to speak. So will the digital asset market's future be bleak due to gradual influx of regulations or will this once free-wheeling industry have proper guidelines that are beneficial to all parties? Only time will tell.