Cryptocurrency
continued
REGULATION, OVERSIGHT & ENFORCEMENT
For all the reasons outlined here, we must demand tight regulation, oversight, and enforcement. Without a doubt, this is going to be a huge fight. For one, crypto champions have billions of reasons to lean hard on the U.S. Congress – like the crypto-oriented political action committee Fairshake did in the 2024 election, to the tune of $172 million. Even after spending that much on lobbying, they still had over $54 million left in the bank to kick-off the 2026 election cycle.
Plus, we now have a president in Donald Trump who is convinced that, as he told the audience at a Nashville bitcoin conference in July 2024, “the United States will be the crypto capital of the planet and the bitcoin superpower of the world.” In a sign of things to come, when Bitcoin broke $100,000, Donald posted on Truth Social: “CONGRATULATIONS BITCOINERS!!! $100,000!!! YOU’RE WELCOME!!! Together, we will Make America Great Again!” He even chosen Paul Atkins, a crypto-advocacy group advisor, to lead the Securities and Exchange Commission (SEC).
This matters – A LOT – because the United States is one of the world’s largest holders of bitcoin thanks to crypto that has been seized from cybercriminals and darknet markets. Currently, this cryptocurrency is held in encrypted, password-protected storage devices known as hardware wallets, and the hardware wallets are typically controlled by the Justice Department, the IRS, or another government agency. However, President Trump wants to change this by creating a “strategic national bitcoin stockpile” that would hold the tokens the U.S. government owns and/or acquires (crypto advocates have always wanted this sort of reserve – much like America’s gold reserve – to give the industry legitimacy and stabilize prices).
This would be a mistake of gargantuan proportions. In addition to all the reasons we have already laid out, another reason the U.S. government must stay out of the crypto market is that, if we were to get in, the crypto marketplace would become just another battlefield. Iran, Russia, North Korea and China would have the perfect opportunity to compromise us by interfering in the crypto markets. One example of the potential damage is a 51% attack. A 51% attack is an assault on a cryptocurrency blockchain by an entity that controls more than 50% of the network. If a party gains 51% control of any given network, it has the power to alter the blockchain, allowing them to, among other nefarious things, halt payments between users and double-spend coins. Imagine if that entity happened to be China, or North Korea.
Already, foreign players allegedly participated in a scheme that laundered tens of millions of dollars in fraudulently obtained U.S. unemployment benefits. The suspects allegedly used cryptocurrency to buy tens of thousands of prepaid debit cards that were loaded with U.S. unemployment benefits, made possible by them stealing the identities of Americans.
On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement on the risks crypto assets pose to banking organizations. The list includes:
Risk of fraud and scams among crypto-asset sector participants.
Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
Contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.
Risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
The most important point they make in the statement is this: “It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system....Based on our current understanding and experience to date, the agencies believe that issuing or holding as principal crypto assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”
< These guys should know because we’ve all seen this play before. Remember the 2007-2009 Financial Crisis? >
When debating the scope of possible regulations, the main goal is to make certain that the traditional $100 trillion capital markets don’t get dangerously entangled with the cryptocurrency markets. Recognizing that the “crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure,” the Financial Stability Oversight Council set forth several recommendations as a place to start.
While “large parts of the crypto-asset ecosystem are covered by the existing regulatory structure,” the Council believes the following actions are necessary to address regulatory gaps:
The passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto assets that are not securities.
Steps to address regulatory arbitrage including coordination, legislation regarding risks posed by stablecoins, legislation relating to regulators’ authorities to have visibility into, and otherwise supervise, the activities of all the affiliates and subsidiaries of crypto-asset entities, and appropriate service provider regulation.
A study of potential vertical integration by crypto-asset firms.
Bolstering its members’ capacities related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities.
Judging from the crypto legislation that has been put before Congress so far, we have a long way to go. On May 22, 2024, the U.S. House passed H.R. 4763, the Financial Innovation and Technology for the 21st Century Act (FIT21). FIT21 would amend existing securities and commodity regulatory statutes to facilitate the use of digital assets – however, the bill’s fate in the U.S. Senate looks far from certain.
One key provision in the legislation is the invention of a new digital asset category called “digital commodities,” which would be exempted from SEC oversight if a firm or person self-certifies it as such (the SEC would have only 60 days to object).
This potentially exposes the crypto market to shady shenanigans like wash trading, where traders simultaneously (and illegally) buy and sell the same security to manipulate market prices. A paper from the National Bureau of Economic Research found that 70 percent of all wash trading – which can involve trillions of dollars every year – happens on unregulated exchanges.
The perceived gaps in the FIT21 legislation led the U.S. Securities and Exchange Commission – chaired by Gary Gensler, a “sworn enemy” of the crypto world (in their eyes anyway) – to issue this statement:
The self-certification process contemplated by the bill risks investor protection not just in the crypto space; it could undermine the broader $100 trillion capital markets by providing a path for those trying to escape robust disclosures, prohibitions preventing the loss and theft of customer funds, enforcement by the SEC, and private rights of action for investors in the federal courts. It could encourage non-compliant entities to try to choose what regulatory regimes they wish to be subjected to – not based on economic realities but potentially based on a label. What if perpetrators of pump and dump schemes and penny stock pushers contend that they’re outside of the securities laws by labeling themselves as crypto investment contracts or self-certifying that they are decentralized systems?
History has shown for 90 years that robust securities regulation both creates trust in markets and fosters innovation. There are countless examples of American companies across many industries that have made world-changing innovations while also registering their securities. It is through the securities laws that we get full, fair, and truthful disclosure that arms investors with the information they need to make investment decisions and enables regulators to guard against the types of fraud we’ve seen in the crypto field.
The crypto industry’s record of failures, frauds, and bankruptcies is not because we don't have rules or because the rules are unclear. It’s because many players in the crypto industry don’t play by the rules. We should make the policy choice to protect the investing public over facilitating business models of noncompliant firms.