The writer is a professor at the American University Washington College of Law
Regulatory pressure is increasing on the crypto world in the largest and most important market, the US.
The Securities and Exchange Commission this week began a enforcement action against crypto exchange Coinbase for failing to meet securities registration requirements. This followed on the heels of Monday’s action against the Binance exchange.
The Binance complaint is full of scathing allegations about its business model, including the now-famous quote attributed to a senior compliance officer: “We operate like a fking unlicensed securities exchange in the USA bro.”
After the failures of crypto operations Terra/Luna, Celsius and FTX, most consumers are now aware of the dangers of crypto investments. According to a recent questionnaire75 percent of Americans who have heard of cryptocurrencies are not confident in their safety and reliability. The crypto industry’s parade of fraud and failure may even be starting to wear down its formerly stalwart venture capital advocates: there are a few indications that some crypto venture capital investors are shifting their focus to artificial intelligence.
In this context, it is particularly shocking to see Republican congressmen to suggest a giant piece of bill that is a beautifully packaged gift to the crypto industry. These members of Congress seem determined to legislate a cryptocurrency market that the industry itself struggles to sustain. To paraphrase the Regina George character in the movie Mean girlsshould legislators stop trying to make crypto happen.
This latest proposal repeats many of the problems from previous crypto law proposals. It takes jurisdiction over many crypto assets away from the Securities and Exchange Commission and gives it to the Commodity Futures Trading Commission (which is much smaller and has limited experience regulating retail-dominated markets). Like previous proposals, this could also create opportunities for traditional financial assets to circumvent existing financial regulations by simply recording ownership on a public blockchain.
What is particularly striking about this proposed legislation, however, is its staggering complexity. The proposal is 162 pages long and peppered with extremely dense and complicated definitions. This type of legislation would quickly become obsolete because it is so closely tied to how the crypto industry and the underlying technology operate at this particular point in time. Its complexity would no doubt also create many loopholes for the crypto industry to exploit.
As economists Andy Haldane and Vasileios Madouros wisely advised, “just as you don’t fight fire with fire, don’t fight complexity with complexity”. Blunder, simpler rules are a more effective way to protect the public from harm — but the crypto industry intends to convince lawmakers that blockchain technology needs its own tailored, highly exploitable rulebook.
This proposal is also notable for being particularly hostile to the SEC. It creates legal presumptions that favor the industry and are difficult for the regulator to refute. And it requires the SEC to implement tailored exemptions that expose retail investors to the crypto industry’s harms. Perhaps most blatantly, section 504 of the proposal provides a new weapon for the industry — not just the crypto industry, but any company under SEC jurisdiction — to challenge its regulations.
The SEC was created to protect investors from harm, but this legislation requires it to also review whether its regulations “promote innovation.” This superficially neutral claim can be used as a weapon requirements to do a cost-benefit analysis of rule changes for it. Litigants would ask courts to strike down SEC rules on perceived barriers to innovation.
In reality, there is a lot of financial innovation designed to serve the innovator, not the public. If SEC regulation enables private sector innovation in the way this draft legislation is intended to, it will fundamentally undermine the regulator’s investor protection mission.
FTX’s Sam Bankman-Fried supported previous US legislative proposals; Binance’s Changpeng Zhao supported the EU Regulation Markets in Crypto Assets, which will come into force in 2024. Proposal after proposal seems designed to legitimize crypto as an investment option. If this current proposal became law, traditional finance would inevitably become intertwined with the world’s FTXs and Binances, with all the instability that entails.
And for what? Blockchain technology has extremely limited utility. And the crypto industry built on that technology can never deliver on his promises. The rest of the world is becoming increasingly aware of these limitations – Congress needs to wake up too and stop trying to make crypto happen.
