Viewpoint: Why the US Congress should regulate cryptocurrency

Why the US Congress Should Regulate Cryptocurrency

Author: Hilary Allen, FINANCIAL TIMES; Translation: Matsuyuki, Blocking

In the largest and most important market for cryptocurrencies, the United States, regulatory pressure is increasing.

This week, the US Securities and Exchange Commission began enforcement action against Coinbase for failing to comply with securities registration requirements. This action followed the action against Binance.

The complaints against Binance are full of severe accusations, with a senior compliance officer saying, “Brother, we’re an unlicensed securities exchange in the United States.”

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After the collapse of Terra/Luna, Celsius, and FTX, most investors are now aware of the risks of crypto investments. According to a recent survey, 75% of Americans who have heard of cryptocurrencies have no confidence in their security and reliability. The industry’s string of frauds and failures may even begin to erode its previously staunch venture capital support: there are signs that some crypto risk capital investors are turning their attention to artificial intelligence.

In this context, Republican members of Congress have introduced a massive legislative proposal that is a beautifully packaged gift to the crypto industry–especially disturbing. These members of Congress seem determined to legislate for the cryptocurrency market, which is struggling to sustain itself.

This latest proposal repeats many of the problems of earlier cryptocurrency legislation proposals. It takes over many of the Securities and Exchange Commission’s jurisdiction over many crypto assets and gives it to the Commodity Futures Trading Commission (which is much smaller and has limited experience regulating retail-dominated markets). Like previous proposals, it can also create opportunities for traditional financial assets by simply recording ownership on the public blockchain, thereby avoiding existing financial regulation.

However, what is particularly noteworthy about this proposed legislation is its staggering complexity. The proposal is 162 pages long and is filled with extremely dense and complex definitions. This legislation will soon become obsolete, as it is closely related to the cryptocurrency industry and its underlying technology operates at this particular moment. Its complexity is also undoubtedly creating many loopholes for the cryptocurrency industry.

As economists Andy Haldane and Vasileios Madouros suggested, “Because you don’t fight fire with fire, you don’t fight complexity with complexity.” More direct and simpler rules can protect the public from harm – but the crypto industry intends to persuade legislators that blockchain technology requires its own customized, highly exploitable rulebook.

This proposal has drawn attention for its particular hostility towards the US Securities and Exchange Commission (SEC). It creates industry legal assumptions that are favorable to regulators and difficult to refute. It also calls for the SEC to implement customized exemptions that would leave retail investors vulnerable to the crypto industry. Perhaps most shocking, Section 504 of the proposal provides the industry—not just the crypto industry, but any company under SEC jurisdiction—with a new weapon to challenge its rulemaking.

The SEC was established to protect investors from harm, but this legislation also requires it to consider whether its rulemaking “fosters innovation.” This seemingly neutral requirement can be weaponized just like any other, in order to provide a cost-benefit analysis of rule changes before it. Litigants will petition the courts to strike down SEC rules identified as barriers to innovation.

Indeed, much financial innovation is for the benefit of innovators, not the public. If the SEC’s rulemaking accommodates private sector innovation in the manner intended by this draft legislation, it would fundamentally undermine the regulator’s mission to protect investors.

Sam Bankman-Fried of FTX supported a previous US legislative proposal; CZ of Binance supports EU regulation of crypto asset markets that will come into effect in 2024. The content after the proposal seems to aim to make cryptocurrency a legalized investment option. If the current proposal becomes law, traditional finance will inevitably become intertwined with FTX and Binance in the world, bringing instability.

The practical applications of blockchain technology are extremely limited, and the crypto industry built on top of it will never deliver on its promises. The rest of the world is increasingly aware of these limitations—Congress needs to wake up and stop trying to make crypto a reality.

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