The U.S. crypto crackdown started at the top, but the sector’s fractures were bottom-up.
Some of the digital asset industry’s biggest names, like Coinbase and Binance, found themselves afoul of U.S. federal agencies like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) after the highly publicized implosion of players like Three Arrows Capital, TerraUSD and many more, as well as the exposure (and collapse) of the allegedly criminal and fraudulent operations at Celsius and FTX.
These weren’t just small-time grifters and predatory scammers, they were — and are — some of the most important names in the entire crypto ecosystem. Only they turned out to be, for the most part, alleged grifters and scammers.
For the bulk of crypto’s existence to date, Web3 firms enjoyed a Wild West-esque market landscape with little to no regulatory oversight — a lack observers believe was grounded by a trust in the industry’s well-intentioned spirit of innovation.
Now, that’s about to change.
Underscoring the need for comprehensive legislation, the U.S. Government Accountability Office (GAO), the country’s top federal watchdog, issued a politely critical report expressing dissatisfaction with federal agencies’ ability so far to work together on regulating crypto.
But a landmark ruling earlier this month (July 13) in the SEC’s case against cryptocurrency Ripple defeated many crucial elements of the agency’s ongoing existential threat to the crypto industry in America and added a new backdrop to the prospect of policy guardrails.
Taking their cues from other tech trailblazers like Uber and Airbnb that “moved fast and broke things,” crypto companies made an implicit bet that if they could grow large, influential and popular enough, they could force regulators’ hands in adapting the rules to accommodate them.
“The crypto community believed and had a real conviction what they were doing was so new that existing laws could not possibly apply to them,” Amias Gerety, Partner at QED Investors, told PYMNTS. “Once you have that conviction, then you start searching for excuses not to comply.”
That pervasive culture of noncompliance, which saw crypto firms keen on avoiding or minimizing the impact of regulations on their operations, is now running into an upcoming regulatory wall — and not just in the US.
The world’s largest crypto exchange and one of its most embattled, Binance, has already exited three European markets, Germany, the Netherlands and Cyprus, rather than register under the requirements of the EU’s Markets in Crypto-Assets (MiCA) policy framework.
“The situation, both in the global market and regulation, has changed significantly,” a company spokesperson told PYMNTS.
As PYMNTS wrote earlier, there is a will in Congress to create rules for cryptocurrencies, even as the question of how to get there “remains up for debate.”
Now, both the Senate and Congress are coming up with their own views on the matter.
The House Financial Services Committee has prepared a bill, the Financial Innovation and Technology (FIT) for the 21st Century Act, that would delineate when a cryptocurrency is a commodity or security and assign oversight appropriately between the CFTC and SEC. A second bill would provide regulations for stablecoins.
“Today’s introduction of the Financial Innovation and Technology for the 21st Century Act marks a significant milestone in the House Committees on Agriculture and Financial Services efforts to establish a much-needed regulatory framework that protects consumers and investors and fosters American leadership in the digital asset space,” said Chairman Glenn Thompson (R-Pennsylvania).
“The digital asset space is muddled with regulatory uncertainty, lack of authority and a lacking framework for core operating principles,” said Rep. Dusty Johnson (R-South Dakota) added in a statement. “Our collaborative bill gives both the CFTC and SEC a seat at the table.”
The FIT legislation is scheduled to go before the financial services committee Wednesday (July 26), with the House Agriculture Committee taking up the matter Thursday (July 27). Putting the bills on the path to consideration by the full House marks the first time Congress will vote on such crypto regulations.
The bill was advanced primarily by House Republicans, and it remains unclear how much bipartisan support they will be able to garner.
But another bill, the bipartisan Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act, shows that Democrats and Republicans alike know the pitfalls and doubts inherent to crypto’s black box business model.