House Passes – despite SEC reservations – The long-awaited act defining the regulatory framework for cryptocurrencies

Cryptocurrency supporters have been asking for something that many other industries try to avoid for years – regulation. Thanks to a vote in the House on Wednesday, they finally got their wish.

The House’s approval of a bill providing guidance for the Securities and Exchange Commission’s cryptocurrency regulator is likely to spark renewed debate in the Senate, which has several proposals of its own on how to oversee monetary innovation.

Congressman French Hill, an Arkansas Republican and one of the bill’s supporters, said before the House vote that the legislation was needed to prevent the SEC from pursuing what he called a “regulation through enforcement” agenda. The uncertainty, he said, makes cryptocurrency companies “fearful that they will be taken to court at any moment if they continue to operate” in America.

Late Wednesday, the House voted 278 to 136 in favor of the measure. President Biden has said he will not veto the bill if it passes the Senate and lands on his desk.

The framework adopted by the House would bring most digital currencies and coins under the regulatory authority of the Commodity Futures Trading Commission, which has taken a more favorable approach to cryptocurrencies than the SEC. Skeptics will likely argue that regulation in itself does not protect the value or stability of the currency.

They will likely point to US Federal Reserve Notes, which are legal tender and yet have lost more than 99 percent of their value since the end of the Bretton Woods Agreement. At that time, a dollar was worth 35 ounces of gold. Today, the value of a $1 Federal Reserve note has fallen to less than 2,500 ounces of gold.

In any case, the cryptocurrency bill would define several exceptions to the SEC’s jurisdiction for assets designated as securities – such as Stablecoins, cryptocurrencies whose value is tied to another asset such as fiat currency or a commodity – and instead place them within the purview SEC commodity regulatory agency.

SEC Chairman Gary Gensler condemned the bill, saying it “would create new regulatory loopholes and undermine decades of precedent in the supervision of investment contracts, exposing investors and capital markets to immeasurable risk,” he said in a statement. hours before the vote in the House.

Gensler noted that “the crypto industry’s history of failures, frauds, and bankruptcies is not due to a lack of rules or because the rules are unclear.”

As it stands, the SEC says cryptocurrencies are subject to the agency’s regulation if they qualify as an investment contract. The definition, known as the Howey test, comes from a 1946 Supreme Court ruling regarding the sale of orange groves.

In the wake of several high-profile bankruptcies of cryptocurrency platforms in 2022, the SEC has stepped up its scrutiny of cryptocurrencies and their exchanges, bringing 46 enforcement proceedings against 124 defendants, the highest number since 2013.

The SEC’s regulatory actions include lawsuits against two of the largest cryptocurrency exchanges, Binance and Coinbase, for failing to register with the agency. Both cases pending in court hinge on whether cryptocurrencies qualify as securities and are therefore subject to SEC regulation.

“The SEC, under Gensler’s leadership, is committed to enforcing rules that, if followed, would destroy almost the entire cryptocurrency market,” warned Columbia Business School assistant professor Omid Malekan.

The Heritage Foundation’s lobbying arm, Heritage Action, has criticized federal regulatory agencies’ approach to cryptocurrency. A report published in Politico found that the SEC and CFTC “had more than a decade to promulgate regulations governing digital assets, yet the SEC completely failed to do so and the CFTC provided only minimal guidance.” “Instead, both agencies chose to regulate through enforcement – ​​and they did it poorly.”

Frustration with the status quo was similarly expressed by a coalition of more than 50 digital asset companies, including Coinbase, Kraken and Andreessen Horowitz, which issued a joint statement in support of the bill.

“Currently, digital asset companies are instructed to somehow comply with U.S. securities laws that were developed almost 100 years ago, without taking into account today’s technological advances, including the ability to transact at Internet speeds,” they wrote.

Ahead of Wednesday’s vote, Rep. Maxine Waters, ranking member of the House Financial Services Committee, called the bill “the worst, scariest regulatory proposal in a long time.”

Ms. Waters argues that adequate regulations already exist to regulate cryptocurrencies. “Our securities laws — which have worked for every other industry for 90 years — can also work for crypto companies,” she said during a 2023 committee hearing on digital assets.

The head of the state regulator, the Idaho Bureau of Securities, John Yaros, tells The Sun that confusion persists over which cryptocurrencies fall under the securities category and therefore fall under the SEC’s jurisdiction.

“No one really knows when something is a security, when it is a commodity, or when it is a banking product, like a payment tool or anything like that,” he says.

He adds that the lack of a regulatory framework means that many companies are confused about the rules they have to follow and therefore “always fear” of becoming a “target” of regulatory action. Yaros argues that without clear regulatory boundaries, companies are “left in no man’s land.”

This bill joins other digital currency proposals in the Senate, including a bipartisan proposal from Senators Lummis and Gillibrand, which they say “appropriately balances consumer protections while allowing innovation to continue.”

Their proposed bill “places crypto assets in the regulatory arena,” the senators said in a statement, while also requiring “registration of all crypto asset exchanges” and addressing the issue of “decentralized finance.”

The legislation, which could be a point of contention with the House-backed bill, also “encodes criteria for determining which crypto assets are securities and which are commodities.”

The two senators are also pushing a separate bill to “establish a regulatory framework for stablecoins, a cryptocurrency whose value is pegged to another asset.”