How the Crypto Meltdown Changed the Regulatory Controversy

1. How has the discussion changed?

The demise of FTX and the criminal fraud charges against its co-founder Sam Bankman-Fried have caused widespread embarrassment among Congress and regulators. He and several other FTX executives donated heavily to Democratic and Republican campaigns and played a leading role in efforts to craft a new regulatory regime that reflected the priorities of some of the crypto community. Regulators have pointed to the fact that the woes of cryptocurrencies have not destabilized traditional financial markets, but have faced criticism for failing to take action to deter the industry’s worst abuses. bottom.

2. What did the cryptocurrency leaders want?

Crypto executives and financial giants like Citadel Securities join the industry movement in 2022 for a Senate bill to give the CFTC, the U.S. oversight body for futures and derivatives trading, powers to regulate cryptocurrency assets. rice field. Currently, the CFTC primarily oversees cryptocurrency futures. The biggest crypto trading platforms have argued that the assets they list should be considered commodities.After the collapse of FTX, CFTC Chairman Rostin Behnam said the implosion meant his institution could trade cryptocurrencies. He said it was an example of why he needed more power to oversee.

3. What about the SEC case?

Many opponents of the Senate bill said the SEC’s rule would offer more protection to small investors. The SEC was founded in the wake of his 1929 market crash and sees as its core mission protecting investors by requiring massive disclosures by financial institutions. SEC Chairman Gary Gensler, former head of the CFTC, responded to criticism that traditional regulations were not aligned with the reality of cryptocurrencies. He said it could be abandoned, and that it could certainly protect investors. If the exchange cooperates with the agency to register.

4. What has the SEC been doing?

We have made it clear that we believe many digital assets are considered securities and look like investor-funded ventures that fall under the rulebook. Anxiety rose among crypto traders when the SEC took the unusual step of identifying nine crypto assets deemed securities in an insider trading lawsuit in mid-2022. In January, the SEC sued crypto brokers Genesis Global Capital and Gemini Trust. Over a program they used to raise billions of dollars by lending deposits to customers in exchange for interest payments, the SEC said this equated to collateral.

5. What do you mean by securities?

The question for the SEC is whether it bears any resemblance to the stock the company sold to raise money. Specifically, the SEC asks whether a venture involves investing money in a company whose profits derive from the efforts of others. This is his four-sided assessment, known as the Howey test, from a 1946 Supreme Court ruling. For example, in 2020 the agency sued Ripple Labs Inc., claiming the company was funding its growth by issuing the XRP digital token to investors, betting that its value would rise. When a token is designated as a security, the person creating it is subject to the same set of rules governing an initial public offering on the stock market, including registration and reporting requirements. For cryptocurrency exchanges, this designation means that tokens that do not meet these requirements cannot be offered for public sale, and it also imposes strict investor protection requirements on the platform.

6. Which coins are considered securities and which are not?

That question has a lot of ambiguity. US regulators agree that Bitcoin, the largest digital asset, is not a security. It was started by an anonymous person named Satoshi Nakamoto and does not exist as a way to raise money for a specific project. In 2018, the second largest token, Ether, was also not considered a security. The Ethereum Foundation initially issued Ether for fundraising, but it has grown to be sufficiently decentralized that it is probably not a security. Officials said — Gensler declined to support. When Ethereum switched to a new system of recording transactions that relied on pooling or “staking” of coins in September, Gensler said the interest offered on such deposits could make staked coins a security. I asked if it was possible.

7. What did banking regulators say?

The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, the top banking regulators in the United States, issued a joint statement on January 3, 2018, addressing the risks posed by digital assets, such as fraud, as well as legal risks. Raised concerns about uncertainty. Custody and misleading statements from crypto companies. In a warning to lenders, they said it was important that no uncontrollable risks were allowed to migrate into the banking system.

8. Is this another issue?

yes. Regulations adopted by the European Union that have not yet come into force seek to regulate tokens that refer to another type of asset or act like digital equivalents of fiat currencies like stablecoins. The UK’s Financial Conduct Authority also regulates digital assets that it considers to be investments with a right of repayment or a partial return. However, “payment tokens” like Bitcoin and “utility tokens” that provide access to services are not regulated in either region. Singapore regulates both types, but with different laws. Coins, which are digital representations of other assets, such as unlisted stocks, are considered securities when offered by an approved exchange. In 2022, the Monetary Authority of Singapore announced a proposal to enhance access to cryptocurrency trading for retail customers following the crash of the digital token market. In Brazil, a new law was enacted in December to create the country’s first cryptocurrency framework, laying down the basic rules for brokerage firms offering cryptocurrencies and the day-to-day use of assets. The Brazilian Congress has taken action after growing interest in introducing regulation after the collapse of FTX.

• Treasury report on issues related to crypto regulation.

• Take a look at the crypto industry’s moves in Washington to circumvent securities regulation.

• Bloomberg Businessweek’s SEC Chairman Gary Gensler’s first interview on cryptocurrencies.

• BGOV OnPoint for cryptocurrency legislation being considered by Congress.

• The 2018 Bloomberg QuickTake shows how long these battles have been going on.

• Executive Order on Virtual Currency Regulation signed by Biden.

• Article on the SEC’s battle with Ripple.

• Breakdown of regulated and unregulated tokens by the UK FCA.

— With help from Ben Bain.

(An earlier version of this article corrected the name of CFTC Chairman Rostin Behnam.)

More articles like this are available at bloomberg.com.