The US Has an Intragovernmental Turf War to Regulate Digital Assets
Political moves indicate that the excessive crypto legislation could be nullified in the US House of Representatives. At the same time, three different agencies vie for the privilege to oversee cryptocurrencies and DeFi platforms.
Proposed Crypto Regulation Fails to Act as FUD
Over the past couple of months, we have seen the waning power of FUD – Fear, Uncertainty, Doubt. In previous years, before PayPal crossed the psychological milestone of Bitcoin integration, FUD drew its power from three main sources:
- Government regulation – or its looming threat.
- Negative denouncements by prominent and influential personas.
- Rapid price moves and volatility caused by whales.
It is understandable why cryptocurrencies are particularly susceptible to this. As digital assets, they largely rely on adoption rates and acceptance of novel concepts – blockchain technology and decentralization. They also tend to hold small market caps, increasing their odds of displaying volatile activity. However, as we move past these thresholds, the resistance to FUD becomes stronger.
Because of the non-partisan nature of digital assets, when they are accepted by a certain population percentage, it becomes more difficult for politicians to attack them. For instance, in Nigeria, this percentage is well above 30, so harsh bans turned out completely fruitless, prompting even the VP to backtrack. And that’s just the worst-case scenario.
Likewise, the more Elon Musk denounces something or supports it, the more FUD resistance he receives. When it comes to onerous US regulation of the crypto space, we have also seen effectively zero impact in the last 5 days. Both when the outlandish definition of broker was introduced to encompass all blockchain parties, and when the amendment compromises failed to be voted on.
If anything, it seems that this latest legislative initiative only served as a signal that the crypto market is maturing. Furthermore, it appears that multiple factions in the government have divided approaches to crypto regulation.
US House Vote Likely to Overturn the Broker Designation
The week-long attempt to rectify smuggled crypto legislation into the infrastructure bill was abruptly aborted by Sen. Shelby. The House recess ends on September 20, which is when a new opportunity will open to add clarifying amendments. There are already indications this will happen.
Rep. Anna Eshoo (D-CA) wrote a letter to House Speaker Nancy Pelosi (D-CA), pointing out the impossibility of implementing the current legislation. Referring to the expanded definition of “broker” that would include anyone who facilitates the transfer of digital assets. She notes:
“In the decentralized system of cryptocurrencies, these individuals and entities do not know who the buyers and sellers are and would be unable to comply with the broker requirements.”
After this was pointed to the senators who introduced the legislation lobbied for by Janet Yellen, even they agreed and accepted the compromise, only for it to be nullified by Sen. Shelby. Rep. Eshoo seems to exert heavy influence with Pelosi, as Pelosi gave Eshoo glowing support in 2014 to serve as the ranking member on the Energy and Commerce Committee.
In fact, Politico dubbed Eshoo as “Pelosi’s closest friend in Congress”. Likewise, Congressman Patrick McHenry retweeted Jerry Brito on his timeline, a prominent crypto activist. McHenry (R-NC) is a long-time member of the House Financial Services Committee, erring on the side of innovation rather than overbearing restrictions.
However, it is yet unclear if numbers are there for a successful amendment to pass. It may be the case that a few leading Congress members, led by Pelosi, is all it takes for others to follow. After all, the Senate procedure had already demonstrated that many politicians vote on matters they don’t fully understand.
Brewing Internal Conflict Between the CFTC and the SEC
According to insider sources approaching Fox Business, there appears to be a turf war unfolding between two regulatory agencies. The Commodity Futures Trading Commission (CFTC) is in charge of regulating commodities, which cryptocurrencies should fall under by most legalistic reasoning. That is, if Gary Gensler, the SEC Chair doesn’t have other plans.
Gary Gensler has yet to reveal his true opinion on the matter, as recently noted by Jeremy Hogan, an attorney at Hogan & Hogan.
Sen. Elizabeth Warren, a staunch opponent of cryptocurrencies, had previously asked Gary Gensler to conduct a crypto crackdown on July 7th. To which, Gensler responded with a letter on August 5th, seeking additional authority to regulate crypto assets.
“In my view, the legislative priority should center on crypto trading, lending, and DeFi platforms. Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.”
According to the purported insiders, Warren is now actively trying to accomplish just that – give Gensler oversight that would trump CFTC. To confuse the matter further, the Consumer Financial Protection Bureau (CFPB), proposed into existence by Warren, is also seeking its slice of the crypto regulatory pie, according to the same sources.
As it stands now, only Congress can give the SEC the power to classify cryptocurrencies as securities. Current Federal Deposit Insurance Corporation (FDIC) definition outlines security as:
“The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, …”
In other words, a cryptocurrency would have to represent some kind of ownership of an underlying asset to qualify, which is not the case for almost all crypto tokens. Chris Giancarlo, former CFTC Chair and Digital Dollar Project advocate, agrees that the SEC has no business regulating crypto assets as securities.
Even the former SEC Chair Jay Clayton agrees that Bitcoin is not a security, effectively stating that regulation should come from another agency. If this is the case, then it would be easier to bureaucratically achieve than Congress having to give the SEC new powers.
By the looks of it, this intra-government turf war has only just started. If Warren’s side wins, the regulatory burden should be heavier. However, it appears that the wild expansion of the “broker” definition is dead in the water, serving only as a prelude.
Do you think the banking sector will be the deciding factor on how cryptos are eventually classified? Let us know in the comments below.