Crypto businesses are worried about SEC’s recent plans to expand oversight to digital assets , which might currently trade outside its supervision. This concern also results from the fact that regulators have been trying to enforce the law on crypto players, even in the absence of perfectly fitting regulation, with the Securities and Exchange Commission (SEC) making it clear that it has its eye on the crypto sector. In November 2021, the SEC Chair Gary Gensler delivered his remarks at the Securities Enforcement Forum and stressed enforcement as a “fundamental pillar in achieving the SEC’s mission” to safeguard investors. Chair Gensler warned financial professionals to “think about the spirit of the law” rather than search for “some ambiguity in the text or a footnote” to justify their actions. He explained that the SEC’s Enforcement Division will be looking at “the underlying economic realities” of products and services with a financial nature to assess whether investors are sufficiently protected. His statements follow comments made in August 2021 when he discussed the SEC’s jurisdiction over crypto assets and technology, recommending that “legislative priority should center on crypto trading, lending, and DeFi platforms” so as to bring “the field of crypto” within regulatory frameworks comparable to those already in place for conventional securities. The SEC has followed up these statements with action. In the last couple of weeks crypto lending firms Celsius Network, Voyager Digital Ltd. and Gemini Trust Co. faced SEC scrutiny focused on whether their offerings are securities, and whether their high-yield products have sufficient investor protections. Cryptocurrency on a trading app, Bitcoin BTC with altcoin digital coin crypto currency, BNB, … [+] getty The crypto sector is broadly defined and houses everything from joke coins with no real business model to Big Tech products and services, such as Meta’s Diem (which was just sold to Silvergate Capital ). Given the broad range of “crypto” assets, it is hardly surprising that such digital assets fall under the responsibility of an alphabet soup of regulatory bodies and agencies – the SEC, the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), the Office of the Comptroller of the Currency (OCC), and individual state authorities. Digital assets are challenging to define and impact different aspects of the financial service industry. Indeed, some in the traditional financial services refuse to refer to crypto tokens as currencies. For example, Jamie Dimon recently said that he no longer uses the word cryptocurrency. Regardless, blockchain-based products and services were designed, at least in part, like other FinTech products, to disrupt the traditional financial service industry and no one can contest the disruption they have caused, regardless of what you call them. JP Morgan CEO Jamie Dimon. POOL/AFP via Getty Images The innovative, disruptive potential of crypto assets is a source of regulatory concern, which is why there have been increasingly vocal calls to step-up regulatory efforts in connection with the crypto sector. These calls are legitimate, but to whom should they be addressed? Despite Mr. Gensler’s recent comments, there remains much uncertainty in the crypto regulation sector. For example, it is still not entirely clear who the primary regulator in the crypto space is. And of course, there remain open questions regarding which digital assets should be classified as securities, and the legal implications and consequences of some digital asset-based transactions , such as Non-Fungible Tokens (NFTs). What makes this uncertainty particularly concerning is the price tag of what is at stake, given the massive growth of the crypto sector. According to reports , when Bitcoin and Ether (the world’s two largest cryptocurrencies) surged to record highs in November 2021, cryptocurrencies hit a market cap of $3 trillion for the first time. Then, in January 2022, cryptocurrency prices fell sharply, including Bitcoin which plunged 50% from its all-time high. That level of volatility in such a large market is a cause for concern regardless of whether you call the underlying crypto-asset an asset, a security, a currency, or a token. Beyond the price volatility, government departments and agencies have expressed concerns about the risks that emerging digital technology products and services present, ranging from Friday’s Treasury’s report on NFTs to the Federal Reserve’s report last week on stablecoins. Lawmakers have been pushing for the regulation of decentralized exchanges in an attempt to fight rug pulls , which enable a cryptocurrency coins’ creators to deprive the coins of liquidity, causing unwitting investors to basically lose all of their money. “Consumer protection concerns, and market integrity […]
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