The US crypto business is struggling to define its identity, and this uncertainty could have serious consequences. The question of whether cryptocurrencies should be classified as commodities, like gold and pork bellies, or as securities, like stocks and futures, has led to legal battles. The Securities and Exchange Commission (SEC), America’s top financial regulator, is suing Coinbase, one of the largest crypto exchanges in the world, for violating securities laws. The SEC has been aggressively enforcing regulations and pressuring crypto companies to register with the agency, which many businesses find difficult to comply with.
In addition, the Commodity Futures Trading Commission (CFTC) has also filed a lawsuit against Binance, a major player in the industry, alleging that it violated commodity trading laws.
This confusion regarding the nature of cryptocurrencies and the authority responsible for regulating them has caused apprehension within the industry. Senators Cynthia Lummis and Kirsten Gillibrand, representing Wyoming and New York respectively, will introduce a revised version of their proposed regulatory framework for the fintech industry. The goal is to provide clarity on these issues.
The revised Lummis-Gillibrand Responsible Financial Innovation Act classifies most cryptocurrencies as commodities, placing them under the jurisdiction of the CFTC. This move is a direct challenge to the SEC, which, according to Lummis and others, is hindering financial technology innovation.
Lummis states, “The domestic industries really are trying to comply, for the most part, and they’re just getting the cold shoulder. That’s not how we regulate in this country.”
To prevent a recurrence of the failures witnessed in the crypto industry, resulting in high-profile collapses and significant investor losses over the past two years, the legislation contains provisions aimed at improving the industry’s practices.
As per a knowledgeable source, if passed, the legislation would require crypto exchanges to entrust their customers’ assets to third-party trusts and prohibit them from engaging in “proprietary trading” – using their own funds to trade on their own platforms. Additionally, the CFTC would gain the authority to oversee “material affiliates” of exchanges, such as Alameda Research, the sister company of the collapsed FTX exchange. The founder of FTX, Sam Bankman-Fried, is currently awaiting trial on fraud charges. FTX allegedly lent significant amounts of customer funds to Alameda to cover its investment losses, leading to a liquidity crisis and the downfall of the exchange.
Furthermore, the legislation includes a ban on “rehypothecation,” which prevents lenders from using collateral already pledged for other loans to finance digital assets, according to the source.
Lummis claims that the SEC and other agencies were consulted on the legislation’s content and some of their suggestions were incorporated. However, she expresses concern that they may still attempt to interfere with the measure at the last minute.