It’s been a critical year for the crypto industry, which saw the high profile collapses of Terra/Luna and crypto exchange FTX, as well as more than $2 trillion erased from the total crypto market since its all-time high in November 2021.
As a result, there’s more pressure on regulators to closely monitor the industry and create robust regulation. Here are some big questions that still remain before any progress is made:
Is crypto a commodity or a security?
Currently there isn’t a comprehensive plan to regulate cryptocurrencies, and one of the big questions that remains is how exactly to classify crypto, said Edward Moya, a senior market analyst at OANDA.
According to Securities and Exchange Commission Chair Gary Gensler, crypto is a security. The Howey Test, which comes from a 1946 Supreme Court ruling in the SEC v. W.J. Howey Co., defines securities as money that is invested in a common enterprise with the expectation of profits derived from the efforts of others.
In a statement in September, Gensler said “promoters are marketing and the investing public is buying most of these tokens, touting or anticipating profits based on the efforts of others,” in which case cryptos would be registered with the SEC.
The SEC has already made some moves. In May, it announced that it would be cracking down on crypto by doubling the size of its Crypto Assets and Cyber Unit.
Others in the industry believe cryptocurrencies act more like commodities, in which case they would fall under the Commodity Futures Trading Commission’s jurisdiction.
“The advantage of the CFTC is that because of their experience with other derivatives, they’re in a position where they’re able to work better with what drives crypto,” said Moya.
Coming to a consensus around what the categorization should be of crypto is extremely fraught, said Yesha Yadav, a law professor and associate dean of diversity, equity, and community, at Vanderbilt University, in an interview with MarketWatch. Congress will have to come to a conclusion because getting clarity on the how to categorize crypto will lead to clearer answers on what regulation can look like, said Yadav.
What are the legislative options?
When it comes to bills – of which there are several – it’s hard to say which one will win over the others, Yadav said, because they were all designed prior to the spectacular collapse of crypto exchange FTX, which filed for bankruptcy in November after the disappearance of billions of dollars in customer deposits.
See: New charges tie Bankman-Fried to damning FTX allegations with testimony from ex-girlfriend Ellison and fellow co-founder
A Senate bill sponsored by Debbie Stabenow, a Michigan Democrat, and John Boozman, an Arkansas Republican, would require all digital commodity platforms — from trading facilities, brokers, dealers, and customers — to register with the CFTC, giving it more power in crypto regulation than the SEC. It’ll also require digital commodity platforms to prohibit abusive trading practices, disclose any conflicts of interest, have strong cybersecurity, and report suspicious transactions, among other things.
A bill sponsored by Sens. Cynthia Lummis, a Wyoming Republican, and Kirsten Gillibrand, a New York Democrat, would divide digital assets into commodities, securities, and ancillary assets. The bill defines ancillary assets as crypto tokens, which do not provide the holder with a profit or revenue share or other financial interest, despite fluctuating in value overtime.
Under this bill, crypto issuers would be required to make certain disclosures to the SEC. Digital asset issues would be presumed to be a commodity, and therefore subject to CFTC regulation, easing the tension between the SEC and other federal agencies.
“It’s hard to predict which bill will win out over another over the coming year, especially as I would say each agency has its supporters, and a lot of that is somewhat shaded by members’ own political positions,” said Owen Telford, policy researcher at Beacon Policy Advisors, in an interview with MarketWatch. “So I’m not sure there will necessarily be a clear outcome in the coming year on which agency should take the lead.”
“You have someone like Senate Banking Committee Chairman (Sherrod) Brown, who kind of questions crypto regulation in its entirety because he is unsure that you should be providing the legitimacy to the asset class,” said Telford. Brown, an Ohio Democrat, “will be a key player in getting any kind of crypto legislation done, and at the moment, it’s not clear that he would necessarily support any of it.”
Some have questioned if crypto regulation needs to happen at all. In a talk hosted by Brookings Institution, a think thank in Washington, D.C., Stephen Cecchetti, an economist and professor at Brandeis International Business School, argued that crypto shouldn’t be regulated at all.
“First, and the strongest argument, I think, against regulation is about conferring legitimacy,” Cecchetti said at the talk, adding that crypto does “nothing to support the real economy, so legitimizing it is simply going to drain creative resources from productive activities.”
So far this year, Bitcoin BTCUSD,