Senate plan will put bitcoin and ether under the watch of commodity regulator

The bill represents the latest hail in a heated battle between federal agencies and the congressional committees that oversee them Who will regulate the encryption. Thirteen years after the creation of bitcoin, cryptocurrencies remain largely unregulated by the federal government, leaving investors without basic protections from fraud and market manipulation.

The competition for jurisdiction has intensified in recent months as the crash in the cryptocurrency markets underscored the need for buffers in the eyes of many policymakers. Competition also reflects the industry Intensify the presence of pressure groups in Washington and push it to reach more major investors through Super Bowl ads and other high-profile marketing initiatives.

“When there is a hot topic like cryptocurrency, everyone wants a seat at the table,” said Aaron Klein, a senior fellow at the Brookings Institution who focuses on financial regulation. “The question is, are we going to be organizationally paralyzed?”

Practically speaking, for federal agencies such as the CFTC, the Securities and Exchange Commission, and the Federal Reserve, adding cryptocurrencies to their jurisdiction would bring greater budgets, greater effect And more job opportunities for Officials who leave public service. For members of the congressional committees that oversee such regulators, the new industry in their sandbox will create another stream of lobbyists and campaign donations.

“We need to take this matter seriously and take our responsibilities seriously to protect consumers,” Ms. Stabeno said in a virtual press conference alongside Mr. Bozeman.

Washington has introduced a flurry of bills in recent months to draw lines of jurisdiction. Senators Cynthia Loomis (R., U.) and Kirsten Gillibrand (D., New York) Unveil a proposal In June, it would create exemptions for cryptocurrency in securities laws, banking laws, and tax laws. In July, leaders of the House Financial Services Committee said they were working on a bill that would give the Federal Reserve a greater role in regulating certain stablecoins, crypto tokens pegged to the dollar and other fiat currencies.

Agencies are also seeking to claim land. CFTC Chairman Rustin Behnam, a former employee of Ms. Stabeno, said last week that his agency was “ready and well-positioned” to oversee the spot markets for some cryptocurrencies. People familiar with the matter say he worked with his former boss for several months to help draft legislation that would allow the CFTC to do so.

Meanwhile, SEC President Gary Gensler has repeatedly demanded that cryptocurrency exchanges like

Coinbase Global a company

Registration with the agency as stock exchanges similar to the New York Stock Exchange or Nasdaq. In May, the Securities and Exchange Commission Almost double the number of employees Enforcement unit focused on cryptocurrency.

“Four years ago when I started this business there were some people who thought this thing was going to explode and go away, and that this was kind of a passing fad,” said Kristen Smith, CEO of the Blockchain Association, a trade group representing crypto companies.

Now, she said, “we have all of these regulators all of a sudden vying for control.”

After the Securities and Exchange Commission argued in an insider trading case in July that at least seven cryptocurrencies listed on Coinbase must be registered as securities, Republican CFTC Commissioner Carolyn Pham accused the SEC of “regulation through enforcement.”

“The Securities and Exchange Commission does not work with the CFTC,” Ms Pham said in an interview. “They are going one-sidedly trying to create a precedent that will dramatically reshape the landscape in terms of what is security and what is a commodity.”

Mrs. Pham has posted her pictures

Twitter

An account about herself posing alongside lobbyists and crypto executives including Sam Bankman-Fried, billionaire founder of the FTX trading platform.

One area she focuses on, Ms. Pham said, is coding, “I take pictures with everyone. Like, literally, everyone.”

At the heart of the war for influence are questions about how cryptocurrencies fit into the definition of securities, the legal classification that includes stocks and bonds.

A 1946 Supreme Court case created a test that focused on whether investors were buying an asset in the hope of profiting from the efforts of others. If so, the issuer is required to register with the Securities and Exchange Commission and disclose to the public any information that may be material to the price of the security.

Although bitcoin and ether investors rely on a network of users and programmers to validate transactions and perform software updates, crypto enthusiasts insist that these groups are too decentralized to regulate assets such as securities. Instead, they say, assets should be considered commodities, which have a broader definition and do not have a full-time regulator.

Companies like Coinbase, FTX and Ripple have spent millions of dollars over the past year to lobby Congress to create a new category of digital commodities and enable the CFTC to regulate it. The agency has roughly one-sixth the number of Securities and Exchange Commission chairs, and the industry considers its rules easier to comply with than the securities laws.

“When you ask the people in the industry … almost everyone feels that the regulator should basically be the CFTC,” said Mr. Bozeman. “The fact that they are somewhat united in that makes it easier on the members.”

Crypto skeptics worry that creating a new legal concept of cryptocurrency could create an alternative to listing securities for a variety of assets.

“People who take action that undermine our securities law are playing with fire,” said Dennis Keeler, president of investor advocacy group Better Markets. “You may love or hate the SEC, but transparent disclosure, clear rules… and enforcement is what builds confidence in our markets.”

The legislation unveiled Wednesday will seek to exclude securities from the definition of digital goods, making them narrower in scope than other crypto-related securities that have been introduced in recent months, such as the Lummis-Gillibrand proposal.

Ms. Stabeno said she expected the Agriculture Committee to hold a hearing on the bill as early as September.

The bill would require any entity operating as a digital commodity platform — including crypto exchanges such as Coinbase and FTX — to register with the CFTC as trading facilities, dealers or brokers. Exchanges will have to monitor trading, protect investors from abuse and offer assets that resist market manipulation, among other requirements.

Platforms will also be required to disclose certain information about the assets they list, such as operating structure and conflicts of interest. Such information would likely fall short of the comprehensive disclosures required by the Securities and Exchange Commission.

Derivative markets currently regulated by the CFTC are dominated by professional investors, such as banks and hedge funds. By contrast, cryptocurrency markets attract large numbers of small investors who are more vulnerable to scams.

If the agency wins jurisdiction over bitcoin and ether, the CFTC will have to write rules from scratch to protect these investors.

“How strong is it and how long will it take?” asked Tyler Gelash, CEO of the Health Markets Association, a trade group for investors.

write to Paul Kiernan at [email protected]