(Kitco News) -
Following the surprise announcement of NYDFS action against stablecoin issuer Paxos, and Binance by proxy, and amid the steady stream of leaked SEC investigations into major U.S. firms, the entire crypto ecosystem is walking on eggshells, unsure of what’s regulated, what’s illegal, and what’s next.
The reactions of company leaders to the SEC’s regulation by enforcement have ranged from surrender (Kraken), defiance (Coinbase), obfuscation (Binance) and bewilderment (everyone). Now the industry’s associations and policy experts are starting to weigh in.
“The recent flurry of activity is jarring, but it's not a surprise and it doesn't spell doom for crypto in the USA,” said Jake Chervinsky, Chief Policy Officer of the Blockchain Association in a Feb. 14 twitter thread. “Far from it: we have champions in key roles across government, and our industry is strong and ready to fight.”
Chervinsky called 2022 “the worst year in crypto history from a policy perspective, by far,” and perhaps “the worst year in DC for any industry in recent memory.”
He acknowledged that the collapse of FTX, the second-largest crypto exchange, did “massive damage” to the reputation of the nascent asset class. “For many policymakers, Sam Bankman-Fried was the name and face of crypto,” he wrote. “His fraud burned many of them and cast doubt on the entire industry.”
Chervinsky pointed to the makeup of the U.S. Congress as a key reason why regulators like the SEC, the CFTC and the NYFSA feel so empowered to intervene in the cryptosphere.
“In recent years, important government bodies like FSOC and the PWG have said Congress—not the agencies—must decide crypto regulation,” he said. “That hasn't happened, and now we have a divided Congress, which makes a deal on crypto legislation seem unlikely, given the ideological gap between House Republicans and Senate Democrats.” He sees the regulatory agencies “stretching their authority beyond recognition to ‘get things done’ without Congress, whether the law allows it or not.”
Chervinsky identified the “two most active groups” to watch in the U.S. government as the banking regulators, including the Fed, FDIC, and OCC, and the financial markets regulators, the SEC and the CFTC.
“Crypto supporters and skeptics both agree that last year’s market turmoil didn’t affect the traditional financial system,” he writes. “The banking regulators want to ensure it never can, no matter how harsh or extreme the measures they decide to take.”
Referring to the Jan. 3 joint statement from banking regulators directing banks not to engage in “crypto-asset-related activities” including issuing and holding crypto, which the Fed formalized as a “final rule” on Feb.7, Chervinsky said “That’s bad policy: technology discrimination that limits consumer choice and restricts competition with zero public process.” But he said this doesn’t mean banks will be forced to close regular bank accounts for crypto firms.
“The banking regulators are focused on stopping banks from conducting crypto-related activities,” he wrote. “Stopping banks from giving dollar-based accounts to crypto-related customers is very different.”
After that hopeful assessment of the banking part of the equation, Chervinsky turned to the more contentious group: the financial markets regulators.
“The SEC has been crypto's chief antagonist for years,” he said, and summarized their position on crypto in two core beliefs: “every asset with a market price is a security” and “every commercial service is a securities transaction.”
“I wish this were more of an exaggeration,” he lamented.
Chervinsky said that the SEC's approach to these positions is “regulation by enforcement.” An example of this was last week’s labeling of Kraken’s staking service as a security.
“That's frustrating, but it doesn't change much for anyone else,” he said. “Settlements aren't the law, and every set of facts is unique. Others will fight.”
Chervinsky believes that regardless of how many enforcement actions like those against Kraken and Paxos the SEC or the CFTC choose to bring, they remain bound by the law. “Neither has the authority to comprehensively regulate crypto, neither can obtain it through any amount of enforcement, and neither will ever have it without an act of Congress.”
He then shared his top five action items to “resist this current attack and advance good policy in the long term.”
First, he said crypto needs to make their voices heard in public processes. “Regulators have to consider public comments before finalizing new rules, and enough well-written comments can delay, change, or kill a bad rulemaking proposal.”
Second, Chervinsky suggested “taking the agencies to court if they fail to observe proper process, overstep their authority, or infringe constitutional rights.” (Grayscale’s lawsuit against the SEC over the denial of their Bitcoin ETF is a recent case in point.)
Third, he said the crypto community can educate Congress. “Only Congress can answer major questions like how crypto should be regulated,” he said. “Let's make sure everyone on the Hill understands what crypto has to offer, and what's at stake.”
Fourth, Chervinsky wants crypto to engage with Congress directly by contributing to the policymaking process and by pushing back against regulatory overreach. “We can bring Congress good ideas for laws that actually work for crypto,” he wrote. “We can explain what the agencies are doing and why it's wrong, so Congress can hold them to account.”
And fifth, he believes that crypto has “ignored the judiciary for too long,” and to their detriment. “At the core of crypto is a fight for civil liberty, a fight that calls for impact litigation,” he said. “Our best allies may be in the courts. Let's go find them.”
With the new Congress resuming hearings on FTX and digital assets regulation, the crypto community will have some high-profile opportunities to push these proposals forward.
