The U.S. Capitol is seen in the distance from the base of the Washington Monument on a stormy morning. December 2019, in Washington. (Getty/Samuel Corum) When Congress enacted the Commodity Futures Modernization Act in December 2000, it exempted a novel financial product—financial derivatives contracts—from “[o]utdated statutes.” 1 With the goals of “promoting financial innovation” and bringing derivatives regulations “into the new century,” Congress declared that the law “modernizes the regulatory structure of the U.S. futures markets and provides greater legal certainty.” 2 Yet immediately, these contracts were used for speculation, and the derivatives markets septupled in size only to collapse fewer than eight years later, plunging the global economy into the most severe financial crisis in nearly a century. 3
Despite the recency of this experience, Congress is again being asked to exempt novel financial products—crypto assets such as cryptocurrencies—from existing statutes. 4 Advocates of these assets argue that because the financial laws are “behind the times” and based on “outdated principle[s],” Congress must act to “[f]oster innovation,” “[b]roaden access,” and provide “[r]egulatory clarity” to these products. 5 With a collective market capitalization peak of $2.9 trillion in November 2021, there is little reasonable debate over whether crypto assets should be federally regulated. 6 Rather, the debate is about how they are or should be regulated.
Crypto assets cannot be easily pigeonholed into one asset class. As with many assets and depending on the context and how they are used, they may be securities, commodities, collectibles, payments, and more. No matter what they are, however, robust federal regulation is necessary to protect investors, consumers, and the financial system. For those crypto assets that are investments or collectibles, investors must be protected from fraud, market manipulation, and theft. For those that are used in payments services—though few, if any, currently are—consumers must be provided avenues to challenge errors. Moreover, if particular classes of crypto assets or activities become sufficiently large, they could be sources of systemic risk that threaten parts of the financial system and the economy. And of course, significant efforts must be undertaken to more effectively combat the use of crypto assets in money laundering, tax evasion, and other criminal activities.
Crypto assets are simply new, digital versions of the traditional financial products and physical assets that have been regulated for generations. The U.S. Securities and Exchange Commission (SEC) can regulate securities, regardless of whether those securities are paper or traded on a blockchain; the Commodity Futures Trading Commission (CFTC) protects against fraud and market manipulation in the commodities and derivatives markets, regardless of whether those commodities are physical or digital; the Office of the Comptroller of the Currency (OCC) and other banking regulators ensure the safety and soundness of banks, whether they provide loans or issue crypto assets; the Financial Crimes Enforcement Network identifies and prosecutes illicit use of the financial system, no matter the assets; and the Internal Revenue Service administers the federal tax system, ensuring that income “from whatever source derived” is reported and taxed appropriately. 7 Crypto assets are simply new, digital versions of the traditional financial products and physical assets that have been regulated for generations. Crypto assets present the very type of situation that spurred Congress to give regulators these authorities in the first place: Unforeseen circumstances arise that require immediate and expert attention from Washington. Time and again, Congress—recognizing that regulatory agencies can frequently act more quickly than it can, as well as with a broader toolkit of both promulgating regulations and bringing enforcement actions—has made the decision to provide regulators broad authority to act within their regulatory ambit to achieve clear, congressionally mandated policy objectives that allow legitimate financial services enterprises to thrive.
With so much at risk, it is no surprise that some members of Congress are intent on enacting legislation to address crypto assets. Nor is it surprising that the crypto industry spent more than $5 million to lobby Congress in 2021 alone. 8 Members of the crypto industry have at times called for Congress to enact legislation providing for a single regulator for crypto asset markets, 9 recognition of crypto market infrastructure as distinct from traditional financial market infrastructure, 10 and simple clarity as to which existing regulator has jurisdiction over which crypto assets. 11 Members of Congress, for their part, have introduced legislation to regulate crypto assets, and more bills are expected as interest in crypto assets grows.
Despite this push for new legislation, regulators already maintain significant authority from decades-old statutes to begin to address the vast majority of […]
source Congress Must Not Provide Statutory Carveouts for Crypto Assets
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