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Regulating Crypto: Cryptocurrency Executives Head to Capitol Hill – JD Supra

A recent study found that 16 percent of Americans have invested in, traded or used cryptocurrencies such as Bitcoin and Ether. This widespread use, coupled with the cryptocurrency industry having limited to no regulatory oversight, has caught the attention of lawmakers and regulators alike.
C-level executives from six cryptocurrency companies recently testified before the House Financial Services Committee regarding concerns raised by lawmakers and regulators with the growing use and acceptance of cryptocurrencies. From the opening statements and responses made by the executives to the questions posed by lawmakers, it was clear that there are strong ideological differences between both Republicans and Democrats, and politicians and the cryptocurrency companies alike. While history has proven that the tension between these ideological interests will likely, at some point, result in compromise, the road to regulatory oversight is expected to be bumpy and unpredictable.
This congressional hearing appears to be motivated, in part, by recent comments and actions undertaken by the Securities and Exchange Commission (SEC) which demonstrate the agency’s clear interest in trying to regulate the industry. The chair of the SEC, Gary Gensler, has argued that the cryptocurrency market is the Wild West that does not provide adequate protections for consumers. While Gensler has argued that the SEC has jurisdiction under the existing regulations, Gensler also has pushed for more robust restrictions or to widen the SEC’s jurisdiction. In late December, Gensler hired a senior advisor specializing in cryptocurrency, Corey Frayer, to advise on crypto policy.
The rift between the SEC and cryptocurrency businesses is nothing new. A report published by Cornerstone Research, titled “SEC Cryptocurrency Enforcement,” notes that since the SEC brought its first cryptocurrency-related enforcement action in July 2013 through December 31, 2020, the SEC brough a total of 75 enforcement actions and 19 trading suspension orders against market participants.
In response to the SEC’s comments and enforcement actions, the cryptocurrency industry argues that financial regulations which have governed historical financial instruments are outdated and necessitate a complete rewrite of financial regulations that govern cryptocurrency. These businesses argue that a separate, single, agency should enforce and supervise businesses that are involved in the cryptocurrency market. One of the executives who recently testified before Congress, Coinbase CFO Alesia Haas, showed a strong desire for a regulatory framework that was outside of the SEC’s purview. Other executives, such as Bitfury Group CEO Brian Brooks, described the SEC as hindering the growth of cryptocurrency startups by insisting on regulatory oversight control, yet offering no guidance in return.
Last month, Ohio Senator Sherrod Brown, the Democratic chairman of the Senate Banking Committee, called a hearing on stablecoins entitled “Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?” These hearings suggest that lawmakers and regulators will remain focused on cryptocurrency for the days, weeks and years to come.
While much attention is being given to cryptocurrencies, some pundits do not expect substantial change in the existing rules until there is a crypto-linked financial crisis. In the meantime, investors, individuals and businesses who invest or trade using cryptocurrencies should familiarize themselves with the uncertainty created by the current regulations and pay special attention to how regulators and the courts craft solutions and remedies accordingly.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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