Key Takeaway: Tensions continue to rise between lawmakers, regulators, and the crypto industry – but legislation that would provide regulatory clarity remains elusive. In a contentious hearing before the House Financial Services Committee, SEC Chair Gary Gensler emphasized that the industry has sufficient clarity to operate within the securities laws already on the books. Meanwhile, the Treasury Department issued a report that found decentralized cryptocurrency markets threaten national security.
SEC Oversight Hearing: During a House Financial Services Hearing on SEC oversight, Committee Republicans criticized Chair Gensler for regulating by enforcement and failing to bring stability to crypto markets. Committee Chairman Patrick McHenry (R-NC) said that the SEC’s regulatory approach “is driving innovation overseas and endangering American competitiveness.” Further, Chairman Gensler refused to answer whether Ether is a security or commodity, as the SEC and CFTC have taken different stances in the past.
House Majority Whip and Congressional Blockchain Caucus Co-Chair Tom Emmer (R-MN) noted that the SEC has brought over 50 enforcement actions in the crypto space but has not finalized any rules setting the guardrails for compliance. IN response, Chair Gensler reiterated – as he did with many responses – that the rules are already on the books. SEC criticism was bipartisan, as Democrats including Reps. Ritchie Torres (D-NY) and Josh Gottheimer (D-NJ) also questioned whether the SEC’s enforcement priorities are doing more harm than good, stifling innovation, and leading to a riskier marketplace for investors.
In sum, the SEC does not appear to be shifting its enforcement strategy any time soon, despite calls from lawmakers on both sides of the aisle.
Treasury DeFi Report: In new report titled the “Illicit Finance Risk Assessment of Decentralized Finance”, the Treasury department explored how illicit actors are abusing decentralized finance (DeFi) services and identified vulnerabilities unique to DeFi services.
As quick background, DeFi broadly refers to virtual asset protocols and services that purport to allow for some form of automated peer-to-peer (P2P) transactions, often using self-executing code known as “smart contracts” based on blockchain technology.
Overall, the report emphasizes that decentralization does not free a project from the obligation to engage in anti-money laundering (AML) frameworks established by laws like the Bank Secrecy Act (BSA). Further, the report identifies gaps in the current regulatory, supervisory, and enforcement regimes for DeFi – and sets the stage for continued enforcement against non-compliant actors in the DeFi industry.
Stablecoins: The House Financial Services Subcommittee on Digital Assets also held a hearing on stablecoin legislation. While there is bipartisan agreement Congress needs to act on stablecoins, the prospects of legislation passing any time soon remains unlikely. That said, areas of agreement identified in the hearing appeared to include the following components of a stablecoin bill:
- Disclosure requirements on the reserve assets held by the issuer
- Reserve requirements ensuring stablecoins are backed 1-to-1 with cash or highly liquid assets
- Prohibition against the issuer lending out customer funds
- Prohibitions against commingling customer and issuer funds
What’s Next: On April 27, two House Financial Services subcommittees are holding a hearing titled “The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset Market Structure.” Meanwhile, also on April 27, a House Agriculture subcommittee is holding a hearing titled “The Future of Digital Assets: Identifying the Regulatory Gaps in Spot Market Regulation.” Expect more hearings in the coming weeks as Congress continues to pay close attention to the crypto industry.