Crypto’s Ripple Effect

The Daily Dish

July 26, 2023

Thomas Kingsley

It took some by surprise when House Financial Services Committee Chair Patrick McHenry named addressing data privacy and digital assets (in addition to capital formation) as a key priority for the committee in the 118th Congress – or, in other words, the single most pressing concerns for the House Financial Services Committee. In fact, McHenry and the committee’s previous chair, Rep. Maxine Waters, had spent three months in mid-2022 negotiating a bipartisan bill on stablecoins, long considered the lowest-hanging fruit for crypto legislation. While the text of that bill never entered wide circulation, Republicans and Democrats were reportedly far from consensus even before the Treasury Department waded in with its own concerns relating to digital wallets – early warning signs that Congress might need a cherry-picker for this supposedly low fruit.

Other crypto-related bills have at least been introduced in Congress, only to fade from existence, including two Senate bills that would establish the Commodity Futures Trading Commission (CFTC) as lead crypto regulator. In March 2022, the Biden Administration announced an executive order embarking on a whole-of-government, comprehensive approach to the regulation of cryptocurrencies and other digital assets. It, too, has amounted to little more than a few reports. Other than a failure to generate meaningful traction, these governmental efforts have also been characterized by difficulty answering the fundamental questions of crypto regulation – whether a cryptocurrency is a security or a commodity, and which federal agency should be the primary regulatory authority, from the Securities and Exchange Commission (SEC) to the CFTC to the Office of the Comptroller of the Currency. How fortunate, then, that the agencies were content to claim this regulatory fiefdom for themselves, most notably the SEC’s Chair Gary Gensler, who seems to be of a mind that anything can be a security if you just squint hard enough.

The implosion of crypto entrepreneur Sam Bankman-Fried’s crypto exchange FTX, a vastly more hostile economic environment caused by the Fed’s interest rate hikes, the collapse of Silicon Valley and Signature banks – both highly exposed to fluctuations in crypto markets – proved both a blessing and a curse for the crypto industry. On the one hand, these crises drew regulatory attention like nothing else; on the other, it has proven challenging for crypto participants to be taken seriously as a result. Significant market players in the crypto industry, including crypto exchange Coinbase, have actively called for the development of regulatory guardrails to allow crypto to grow in a safe, secure, and (perhaps more important to investors) predictable manner.

Last week Chair McHenry was due to introduce markups on two crypto-related bills, one on stablecoins (again) and one on market structure. This timeline was thrown into disarray, however, with the markups postponed to today, by a crypto finding by a federal court in New York. In the view of one judge, Ripple Lab’s cryptocurrency, XRP, represents a security when sold to institutional investors but not when sold to other parties (a dazzlingly new and complicated way of muddying the security versus commodity debate). While the case was seen as something of a rebuke to the SEC’s aggressive annexation of crypto-related guidance-based regulation, the Ripple effect provides a neat example. In the absence of congressional guidelines, development of crypto regulation will necessarily fall to the federal agencies and courts, and the current approach is not working. While it is easy to dismiss the crypto industry, the collapse of Silicon Valley Bank – where depositors attempted to withdraw $42 billion in a single day – shows that if crypto is not systemically important now, that may not be the case for long. Perhaps today the House Financial Services Committee will take the first step in setting out the holistic regulatory framework that crypto needs. Yet if history is any indication, there is little reason to be optimistic.

Disclaimer

As of July 19, the Fed’s assets stood at $8.3 trillion.

Thomas Kingsley is the Director of Financial Services Policy at the American Action Forum.

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Thomas Kingsley is the Director of Financial Services Policy at the American Action Forum.