The US cryptocurrency business has an identity crisis, which can become an existential crisis. Are cryptocurrencies commodities, such as gold and pork belly? Or securities, such as stocks and futures? The Securities and Exchange Commission, America’s top financial regulator, is so convinced that cryptocurrencies are last that it is suing one of the world’s largest crypto exchanges, Coinbase, for violating securities laws. The SEC has launched an aggressive campaign of “regulation by enforcement,” prosecuting companies for a variety of alleged violations and urging them to register with the agency — something crypto companies say is virtually impossible.
But another regulator, the Commodity Futures Trading Commission, has also sued one of the biggest players in the industry, Binance, for violating commodity trading laws.
The confusion over what crypto is and who sets the rules has put the industry on edge. On Wednesday, Senators Cynthia Lummis and Kirsten Gillibrand — a Republican from Wyoming and a Democrat from New York, respectively — will unveil a new version of their proposed regulation for the fintech industry, which hopes to resolve the issue.
While there is a lot of news in the updated Lummis-Gillibrand Responsible Financial Innovation Act, the most important part is a measure that would classify most cryptocurrencies as commodities, putting them under the purview of the CFTC. It is a clear rebuke to the SEC, which, according to Lummis and others, is stifling innovation in financial technologies.
“For the most part, the domestic industries are really trying to comply, and they just get the cold shoulder,” says Lummis. “That’s not how we regulate it in this country.”
The content of the legislation seeks to avoid a repeat of the crypto industry’s apparent failings, which have led to a series of high-profile industry collapses over the past two years, leaving many investors with losses.
According to a person with knowledge of the law, the legislation, if passed, would force crypto exchanges to hold their customers’ assets in third-party trusts and stop them from so-called “proprietary trading” – essentially trading with their own money . on their own stock exchange. It would also give the CFTC the power to oversee “material affiliates” of exchanges, such as Alameda Research, the sister company of the collapsed FTX exchange, whose founder, Sam Bankman-Fried, is awaiting trial for fraud. . FTX reportedly lent large amounts of client money to Alameda to cover its investment losses ahead of a stock market liquidity crisis that led to its downfall.
The law will also restrict the “re-hypothecation” of crypto assets, essentially banning certain profitable but high-risk crypto services such as “staking,” and will impose standards on new tokens before they are listed on exchanges, the person says.
The SEC and other agencies have been consulted on the content of the legislation, according to Lummis, who still fears they will try to kill the measure. “They saw it. We asked them to change it and we made some of their changes,” she says. “After all our efforts to reach them and work with them, I don’t want them coming in at the last minute to put their kibosh on this.”