US lawmakers and experts debate SEC’s role in crypto regulation

The U.S. Securities and Exchange Commission and its chairman Gary Gensler have been the target of many lawmakers and witnesses at hearings on the collapse of the cryptocurrency market.

At a Feb. 14 Senate Banking Committee hearing titled “Crypto Crash: Why Financial System Safeguards Are Necessary for Digital Assets,” Senior Member Tim Scott said Gensler is due to appear before Congress before September to consider more enforcement action in the crypto space, urging the SEC chairman to do “morning talk show rounds” rather than testify. According to the South Carolina senator, the SEC has not given “the slightest indication” that it could lead to a lack of investor protection for bankrupt firms, including FTX, Terra, BlockFi, Voyager and Celsius.

“To think, the SEC hasn’t taken any meaningful proactive action to ensure this kind of catastrophic failure doesn’t happen again,” Scott said. “If they have the necessary tools, maybe they just slept at the wheel? […] We would be glad if Chairman Gensler testified sooner – much sooner – than later.”

Senator Tim Scott at a Senate Banking Committee hearing, Feb. 14.

Witnesses who testified at the hearing offered legislators different approaches to regulating cryptocurrencies. Duke Financial Economics Center political director Lee Reiners has proposed legislation to Congress to “separate cryptocurrencies” from the Commodity Futures Trading Commission and designate it as a security under the sole remit of the SEC. Linda Jeng, Chief Global Regulatory Officer and Chief Counsel for the Crypto Innovation Council, testified that the lack of a consistent federal regulatory framework for cryptocurrencies has contributed to a lack of investor protection and uncertainty between firms:

“The SEC has not initiated any formal rulemaking process to update decades-old securities laws to account for the unique attributes of digital assets that are defined as securities.”

Vanderbilt University law professor Yesha Yadav echoed some of Jeng’s concerns about developing a federal framework for cryptocurrencies, but also proposed a self-regulatory regime where exchanges could control themselves as a complement to government regulation. Firms that do not comply with the rules may be forced to pay financial penalties.

SEC to target crypto firms operating as ‘qualified custodians’ – report

In the United States, there appears to be a regulatory tug-of-war between many government agencies seeking to set rules for crypto companies. Gensler stated that most token projects qualify as securities under SEC guidelines and has repeatedly called on firms to “come and talk to us.” The agency has already taken enforcement action against Kraken and Paxos in 2023.

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