New crypto oversight legislation arrives as industry shakes

After 13 years, at least three crashes, dozens of scams and Ponzi schemes and hundreds of billions of dollars made and evaporated, cryptocurrencies finally have the full attention of Congress, whose lawmakers and lobbyists have papered Capitol Hill with proposals on how to regulate the industry.

The latest bipartisan proposal came Wednesday from Sens. Debbie Stabenow, D-Mich., and John Boozman, R-Ark. It would hand the regulatory authority over Bitcoin and Ether to the Commodities Futures Trading Commission. Stabenow and Boozman lead the Senate Agriculture Committee, which has authority over CTFC.

Bills proposed by other members of Congress and consumer advocates have suggested giving the authority to the Securities and Exchange Commission.

This year, crypto investors have seen prices plunge and companies crater with fortunes and jobs disappearing overnight, and some firms have been accused by federal regulators of running an illegal securities exchange. Bitcoin, the largest digital asset, trades at a fraction of its all-time high, down from more than $68,000 in November 2021 to about $23,000 on Wednesday.

While cryptocurrencies have had crashes before, most recently in 2018, this crash has been broader and more systemic. A major hedge fund filed for bankruptcy earlier this summer, which in turn has caused other cryptocurrency brokers to collapse as well. Some crypto brokers have falsely claimed that their customers’ deposits are backed by deposit insurance, like banks are.

Lawmakers, who have run out of patience with the cryptocurrency industry’s attempts to live out an unregulated Libertarian, bank-free world, are now desperate to implement stringent oversight. The industry spent $9 million in 2021 on lobbying fees, according to a report by Public Citizen, a figure that is certain to be higher with all the Congressional proposals this year.

The Stabenow-Boozman bill would be a win for the cryptocurrency industry, which sees the CFTC as more industry-friendly regulator than the SEC. The CFTC, which had a budget last year of $304 million with roughly 666 employees, is a fraction of the size of the SEC, which had a budget of nearly $2 billion and 4,500 full-time employees.

“(The cryptocurrency industry is) trying to get anyone other than the SEC to regulate them,” said Cory Klippsten, CEO of Swan Bitcoin. While an advocate for Bitcoin, Klippsten is deeply skeptical of much of broader crypto industry, which has produced a myriad of tokens and other coins that he considers to be nothing more than scams.

Cryptocurrency billionaire Sam Bankman-Fried, who has donated millions of dollars to mostly Democratic-leaning candidates and super PACs, tweeted his support for the Stabenow-Boozman bill.

Boozman, in a call with reporters, said the industry’s preferred choice to regulate crypto is the CFTC.

“They are fairly united on this,” he said.

In a press conference, Stabenow and Boozman both acknowledged that while they have faith that the CFTC is up to the task of regulating cryptocurrencies, the agency would need support. The CFTC already oversees futures contracts for Bitcoin and Etherium, and the bill attempts to alleviate issues about staffing by imposing user fees on the crypto industry. Those funds in turn would fund more robust supervision of the industry by the CFTC. The bill would leave crypto-like products, like tokens or non-fungible tokens (NFTs), for the SEC to potentially assert its regulative authority.

“Obviously if the CTFC is to move aggressively in this area, they are going to need more resources,” Stabenow said.

Marlon Cumberbatch, who conducts consumer research on cryptocurrency and other digital assets for the National Research Group, says despite the crashes, consumers are still interested in putting their money in digital assets. “Some people believe this is the beginning of the end” for crypto, Cumberbatch said, “but we believe this is the end of the beginning” in terms of investment interest.

There has been a growing list of proposals out of Congress this year that in various ways are trying to address the problems in the cryptocurrency industry. Sen. Pat Toomey, R-Pa., in April introduced legislation, called the Stablecoin TRUST Act, that would create a framework to regulate stablecoins, which have seen massive losses this year. Stablecoins are a type of cryptocurrency pegged to a specific value, usually the U.S. dollar, another currency or gold.

In June, Sens. Kirsten Gillibrand, D-N.Y., and Cynthia Lummis, R-Wyo., proposed a wide-ranging bill called the Responsible Financial Innovation Act. That bill proposed legal definitions of digital assets and virtual currencies; would require the IRS to adopt guidance on merchant acceptance of digital assets and charitable contributions; and would make a distinction between digital assets that are commodities and those that are securities, which has not been done.

Sens. Cory Booker, D-N.J., and John Thune, R-S.D., are also co-sponsors of the Stabenow-Boozman bill. Along with the Toomey legislation and the Lummis-Gillibrand legislation, a proposal is being worked out in the House Financial Services Committee, though those negotiations have stalled.

Committee chair Maxine Waters, D-Calif., said last month that while she, top Republican member Patrick McHenry of North Carolina and Treasury Secretary Janet Yellen had made considerable progress toward an agreement on the legislation, “we are unfortunately not there yet, and will therefore continue our negotiations over the August recess.”

President Joe Biden’s working group on financial markets last November issued a report calling on Congress to pass legislation that would regulate stablecoins and Biden earlier this year issued an executive order calling on a variety of agencies to look at ways to regulate digital assets.