With crypto platforms going bankrupt and investors unable to withdraw funds from some crypto outfits, Senator Elizabeth Warren (D-MA) is calling on the Securities & Exchange Commission (SEC) to act.
“Congress needs to act, but the SEC has a responsibility to use its authorities to put guardrails in place and crack down on crypto actors that break the rules,” Senator Warren told Yahoo Finance.
“I’ve been ringing the alarm bell on crypto and the need for stronger rules to protect consumers and financial stability,” Warren added. “Too many crypto firms have been able to scam customers and leave ordinary investors holding the bag while insiders make off with their money.”
It’s not just members of Congress — analysts are also baffled as to why SEC Chairman Gary Gensler has not been more aggressive.
“Gensler has to act soon,” says Cowen analyst Jaret Seiburg. “Otherwise, we expect progressives and conservatives will blame him for why average investors have lost money in crypto.”
‘We have rules in place’
Under Gensler’s leadership, the SEC has been reluctant to propose rules to regulate crypto or apply existing securities laws. And this after Gensler has repeatedly said over the past year and a half that nearly all cryptocurrency tokens are securities, and platforms that trade those tokens are exchanges.
A lobbyist speaking on a condition of anonymity says it seem much of the agenda at the SEC is coming from the chair’s office while career folks at agency aren’t playing the role they have historically.
More enforcement action is expected, according to one crypto industry lobbyist, who also says a significant amount of the crypto industry is afraid to proactively engage with the SEC over fears of enforcement actions.
When asked by Yahoo Finance in an interview on Thursday why the SEC hasn’t acted more aggressively to write rules to protect investors, Chair Gensler said he rejected the premise.
“We have rules in place for what it means to be an investment company, like a mutual fund, when you put your money in,” said Gensler.
Gensler also pointed to enforcement actions the Commission has taken against crypto firms that violated securities laws, specifically, crypto company BlockFi.
Two bankruptcies in three weeks
Cryptocurrency investors are learning there’s no government safety net to protect them when funds disappear on a failed crypto platform.
Customers of at least two crypto lenders — Celsius Network and Canada’s Voyager — have lost money and access to their accounts after both firms failed following the plunge in crypto markets.
Voyager filed for bankruptcy earlier this month after crypto hedge fund Three Arrows Capital was unable to pay back a loan to the crypto lender. Late last week, Celsius filed for bankruptcy protection as well.
Meanwhile, regulators in Europe just agreed on a new regime to safeguard investors and consumers involved in the crypto space.
Lawyers say the SEC is awaiting the outcome of a case from crypto firm Ripple — which the agency is hopeful it will win — to set precedent for crypto rule making while giving the agency more ammunition to regulate crypto tokens as securities.
The SEC has charged Ripple for violating securities laws when it sold its token XRP without registering with the commission to finance its platform, thereby selling an illegal and unregistered security. Ripple has challenged the charges in an ongoing court case. The outcome of this case will likely establish whether the SEC’s interpretation is correct, and thereby set precedent for regulating crypto tokens.
Outside the realm
Other analysts say the SEC is doing, and has done, a fair amount to rein in crypto under Gensler.
Todd Phillips, director for financial regulation and corporate governance at the Center for American Progress, points to the agency’s efforts to bring dozens of enforcement actions while beefing up its personnel to protect investors in crypto markets. Last fall, the agency added 20 people to its now 50-person crypto unit.
“The SEC has been using resources very effectively,” says Phillips. “Under Chair Gensler they’re doing about as much as they can. The SEC only has so many resources and enforcement attorneys so they can only do so much.”
When it comes to crypto lending platforms that are collapsing, Phillips says he isn’t sure how much authority the SEC has over them.
While the SEC has authority over crypto exchanges like Coinbase (COIN) and FTX, the bigger issues now stem from lenders like Celsius and Voyager, which Phillips says are acting like unregulated banks.
“It’s not fair to criticize the SEC to reign these in when the SEC doesn’t have authority to reign them in,” he says. But while the SEC may not have the tools to protect investors when it comes to crypto lenders, Phillips says Gensler has been very clear that rules which govern securities apply to crypto tokens that are securities.
“Most crypto tokens are investment contracts under the Supreme Court’s Howey Test,” Gensler said in a speech in May. “While each token’s legal status depends on its own facts and circumstances, given the Commission’s experience with various tokens that are securities, and with so many tokens trading, the probability is quite remote that any given platform has zero securities.”
SEC Chair Gensler is reportedly working with the Commodities Futures Trading Commission to create one rulebook for crypto regulation, which would allow seamless enforcement, regardless of whether a token is considered security or a commodity.
‘Congress is not ready’
Various proposals have been put forth by members of both the House and the Senate, including a sprawling proposal this spring from Senators Cynthia Lummis (R, WY) and Kirstin Gillibrand (D, NY). But that legislation will likely have to be broken up into pieces to pass, and crypto-related regulation isn’t expected this year given more pressing legislative items.
“The recent turmoil in crypto is a clear example of why Congress and financial regulators need to come together to create a robust regulatory framework for digital assets that protects consumers and provides clarity for investors,” Senator Bob Menendez (D-NJ) tells Yahoo.
But given the typical speed of legislative processes in Washington, the SEC could act faster than Congress using its agency authority on crypto rules to protect investors.
“Congress is not ready to act on crypto legislation,” Seiburg says. “Absent a crisis, it is hard to see Congress passing a crypto regulation bill until spring 2024. And it is likely to take more time rather than less.”
Jennifer Schonberger covers cryptocurrencies and policy for Yahoo Finance. Follow her at @Jenniferisms.