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- Crypto legislation not a priority in Congress
- Federal agencies will step up and enforce existing laws
- Additional agencies to enter the enforcement arena
- DeFi, NFT may attract lawmakers’ attention
Congress is unlikely to legislate crypto in the U.S., but there is likely to be increased enforcement activities from regulators that was not expected, experts tell VIXIO.
As the value of the crypto market soured to new heights during the pandemic, 2021 saw policymakers starting discussions on how regulation and supervision are working in this space to make sure investors are protected and cryptocurrencies do not become a tool for financial crime.
The key policy document in the U.S. in these efforts was a November stablecoin report, in which federal financial regulators laid out a joint vision on how to regulate private stablecoins, a crypto-asset that has the potential to grow big enough to pose systemic risks to the payments market.
Inter-agency cooperation instead of competition
In the stablecoin report, the federal financial regulators set out a list of recommendations to Congress, including a proposal to establish a bank-like oversight of stablecoin issuers.
They also warned that “in the absence of Congressional action, which is urgently needed to address the prudential risks inherent in payment stablecoins, the agencies recommend that the Financial Stability Oversight Council [composed of the federal regulators] consider steps available to it to address the risks outlined in this report.”
The report was signed at the top level by Treasury secretary Janet Yellen but also independently by all the main federal financial regulatory agencies, which means they are all endorsing the ideas of the report on stablecoins, Gene Grant, CEO of crypto platform VRBex/Levelfield, stressed.
That includes the idea of Congress taking action, a single regulator for cryptocurrencies at the federal level, and the possibility of the regulators taking action on their own if Congress does not do something, he explained.
“We know with a fair degree of certainty there is very little appetite in Congress to undertake a new law. It is not something that the Biden administration is prioritizing,” according to Grant.
“The odds of a new law being passed in the next two years is a negligible percentage.”
Instead, as outlined in the report, the federal regulators are more likely to come together and take steps on their own in a concerted action.
Crypto companies are subject to a complex regulatory landscape in the United States. Since cryptocurrencies started to proliferate in the U.S., several federal agencies have stepped forward, trying to stretch their regulatory reach to various aspects of the product.
The list of agencies with regulatory powers and interest in cryptocurrency markets includes numerous federal agencies, starting with: the Securities and Exchange Commission (SEC); the Commodity Futures Trading Commission (CFTC); the Office of the Comptroller of the Currency (OCC); the Federal Deposit Insurance Corporation (FDIC); the Treasury’s Financial Crimes Enforcement Network (FinCEN); and the Federal Reserve.
The list does not end here.
There are also security commissions and banking regulators in each of the individual states a crypto company operates. In addition, the U.S. Attorney General and each state’s attorneys general have powers to enforce the law against these firms.
In recent years, the SEC has come out as the most fierce regulator of the crypto industry, partly because of the sheer number of cases it initiated against crypto companies, but also due to the controversial Ripple case that put many crypto firms on alert.
Its sister agency, the CFTC, which regulates commodity derivatives, was also showing an increased interest in crypto supervision last year, not only by number but also by the amount of fines collected. Its largest fine, issued together with FinCEN, saw BitMEX paying a $100m penalty over anti-money laundering failures.
Meanwhile, the Department of Justice set up the first-ever national cryptocurrency enforcement team to tackle complex investigations into the criminal misuses of cryptocurrency, and the number of agencies looking for crypto experts is growing rapidly.
Newcomers in crypto enforcement
In addition to the traditional financial regulators, there are two rarely mentioned agencies whose mandate is to protect consumers: the Federal Trade Commission (FTC); and the Consumer Financial Protection Bureau (CFPB).
Recently-approved FTC chair Lina Khan and CFPB director Rohit Chopra have been fierce champions of consumer protection and have been known for their anti-bigtech stance.
Shortly after his approval, Chopra initiated an inquiry into bigtechs’ payment plans, he went against buy now, pay later providers, and suspended operations of LendUp, a venture capital-backed fintech.
LendUp had a pattern of violations and it faced enforcement action despite the large amount of investment it received from venture capitalists.
“There are quite a few similarities to the cryptocurrency industry,” Grant said, adding that leading venture capital firms have made significant investments in firms that have long lists of outstanding customer complaints and questionable customer protections.
“The older agencies have powers and activities that are well established and perhaps we can say 'bounded' by precedent over years of actions. That is not necessarily the case with the CFBP.”
“At only a little over ten years old they are potentially a very powerful agency with the overall tone of enforcement set by the head,” Grant noted.
“Cryptocurrency participants and the non-bank payment companies do not recognize these agencies as powerful entities, and that is a mistake,” he warned.
2022 is likely to be the year when regulators increase the enforcement of the laws that are already outstanding.
“The individual agencies have more than sufficient powers and authorities to regulate the cryptocurrency markets, and I expect them to step up their game,” Grant added.
“Industry participants are too focused on a small number of regulators, and should be watching the entire field.”
Other areas to watch
Cryptocurrencies are not the only products in the digital asset ecosystem that raised regulatory questions.
One of the areas that requires more consideration is decentralized finance (DeFi), a form of intermediation in crypto markets, which enables transactions on blockchain using automated smart contracts without the need for a centralized, controlling party.
Although most of the entities that currently call themselves DeFi are decentralized in name only, a much deeper thought needs to be put into the space, according to Jim Preissler, managing partner at Tritaurian Capital.
Full decentralization means users, investors and even regulators have no central party to contact in case something goes wrong, providing little protection for the individuals involved.
There is a lot of talk about decentralized applications but typically they are very far away from that. Meanwhile, DeFi warrants more discussions on how to make sure the product is safe for mainstream adoption, according to Preissler.
