The US Has a Renewed Urgency to Regulate Crypto Post-FTX

it comes to imposing regulations on crypto. Last year, President Biden issued an executive order asking agencies to take coordinated action on digital assets, and in the summer, Senators Cynthia Lummis and Kristen Gillibrand issued a bipartisan crypto bill that, among other things, would step up oversight on stable coins

and crypto energy usage. And then there is the ongoing debate between the Securities and Exchange Commission and the Commodities Futures Trading Commission over whether cryptocurrencies should be regulated as securities were commodities. But with an ongoing wave of crypto bankruptcies linked to fd X, government officials are confronted with a new sense of urgency surrounding digital asset regulation. Here to talk about this are Bloomberg reporters Ali Verspiel and

Lydia Bayoud Ali, Lydia welcome. So Ali, uh, now that one of the largest crypto exchanges has collapsed? Has that changed the debate on regulation? What's changed in the conversations

among regulators after FDx? You know, so, I'll say that there's definitely a lot more urgency and the conversations that we're hearing both at regulator d's groups like the Financial Stability Oversight Council, which is led by Treasury, um at you know, the lawmaker level, you're definitely seeing a lot more skepticism and you know, talks about trying to, you know,

maybe put some new rules in place. UM. For instance, Senator Shared Brown, who's the chairman of the Senate Banking Committee, you know, he recently sent a letter to Treasury Secretary Janet Yellen saying, you know, we'd like to work with the agencies to put out crypto oversight framework of some sort. You know, so you're definitely seeing those conversations happen. UM. You know, to some extent, we were seeing a little

bit of the conversation into last year. You know, there was some turmoil before FTX, and obviously f t X was a huge event though, and so you know, there have been talks ongoing about regulating stable coins and potentially you know, offering broader rules as well. I think now we're going to see a lot of focus on things

like fraud, things like protecting customer assets. Um so it'll be interesting to see how that plays outgoing forward, and just out on the CFTC side, there's also been i think more interest using again f t X as this kind of Markie example of what can go wrong. The CFTC is also interested interested as you know, Congress is considering ways to change UH and bring more more direct

regulation of these exchanges into being. You know, they have testified, the chairs testified and other commissioners there have testified that they're really limited in their ability to kind of like look through, you know, if there's a U S entity like FTX actually had a drivers exchange that was regulated here with it by the CFTC, but they weren't able to look through to the international exchange and kind of see that there's this constellation of subsidiaries and sister companies,

and they they're not able to kind of find out all the corporate governance stuff, you know, barring having a whistleblower tip or some reason to bring any sort of investigation or enforcement action. And you know, they've flagged that

that's potentially an issue for this very specific market. And uh, there were some recent speeches where commisions have asked Congress to, you know, consider that fact as they're trying to perhaps address some of the lessons learned from f t x s and other companies collapse this past year, Lydia, how about from the CFTC, and is there any new sense

of urgency, any new priorities do you think? Yeah? So, I think what was notable in the sort of immediate fallout of f t x is bankruptcy is that the chair of the CFTC had to come before the Senate Ad Committee, which is a committee where he had actually been a senior staffer at one point, and testify about their oversight of kind of a smaller player within the f t X universe that had been seeking to do an interesting derivatives trading operation with with cryptocurrency and had

that had never progressed, but also f t X was kind of in many ways seen as aligned with the CFTC and was helping push legislation that would have given it a lot more authority in a way that other players in the crypto community thought might also be beneficial to them. Said that happened, and it was kind of noticeable that the SEC didn't have so much scrutiny from the Hill and in terms of getting kind of hauled

up there to to testify. So since then, I think that the CFTC has been very keen to make the case that, you know, we can be a strong regulator in the space and sort of trying to dismantle this perception that they were really closely aligned with Sambing and Freed and f t X, And it's also given more immunition to the SEC to say, like, hey, we should we should be a strong regulator in this space. You know.

It's interesting to me because in the early years of crypto, it seemed almost like the SEC and the CFTC, at least the appearance was neither one of them wanted to go near it. They didn't think it was their problem. But now they're both on the case that you get the impression Lydia that going forward they will continue to sort of double team the space, that there won't be

you know, one more aggressive than the other. Well. Ali touched on the letter, the letter from Senator around to the Treasury Department asking for a hole of government approach to regulate the space. And so I think that the regulators at least publicly are coalescing behind that notion that like,

we can all play a role here. But I think that the SEC ultimately because they're trying to claim so much jurisdiction, and I think with ft X really falling apart, there are some jurisdictional issues on the Hill where some of the banking committees want to be sure that they have kind of direct oversight of the regulator that itself would have oversight of the community. And so there's still some jurisdictional battles to play out. And you know, it's

not just ft X these days. We've obviously had this fallout with these crypto high savings program offered by Gemini. In turn, Gemini turned over customer assets to Genesis to invest Ali has that created a new focus at all for regulators? Do you think these sort of high yield savings and loan programs that go on in crypto. Is is that a priority now? Do you believe? So? You know what's interesting is that's actually been a priority for

probably at least a year now. Um. You know, we had a Bloomberg story actually last January that talked about you know, some of these what you call crypto lenders being under scrutiny at the SEC, and so it's been sort of a long time priority. You know, you're now seeing a lot of those cases come out. You mentioned Gemini Genesis. We also recently had an enforcement action against Nexo block By. There was an enforcement action earlier last year,

and so it's definitely a focus. I think one of the criticisms you see now from a lot of folks is, you know, why did it take so long for these you know, enforcement actions to come um, and why did it take potentially hundreds of millions of dollars two billions of dollars of investor losses before we saw any action? And so I think that's going to be kind of an interesting thread to watch going forward. Um. You know, I am expecting the SEC to bring more cases this year.

You know, all the indications that I think both Lydia and I are getting or that it's going to be a pretty active year on enforcement, So you know, we'll have to see how that plays out. But yes, I think that definitely has been a priority. But it also brings up the question. You know, some of these outfits are taking deposits, paying out interest on them, and making loans. They sound an awful lot like crypto banks. Is there a role for banking regulators here too, or are they

getting in on the action here among regulators? You know, it's interesting because I I had talked to people, uh kind of making that same point. You know, why why isn't this more of a banking product? And it seems like, you know, the SEC has really sort of staked its claim saying these are actually securities products. I'm not getting, you know, any real sense that the banking regulators are

are necessarily interested in that particular offering. So I think we'll continue to see the SEC sort of coming down on those. But I will say, I mean, there's not really there aren't really many left at this point. Block fives and bankruptcy Voyager Celsius. You know, they were victim to the crypto turmoil last year. Uh, nexto has has said it's not you know, it's exiting. It's us business.

The coin base at one point wanted to offer these kinds of products and you know, the SEC basically told them not to and so you know, they never really got into that business. So it's uh not, but there's there's not there's not much left and I would be sort of surprised to see companies starting to get back into that as kind of like a new product that they want to offer. Yeah, and moving it back from crypto lending to just talk about the industry more broadly.

I think the banking regulators have almost I don't want to say, patting themselves on the back, but they've been quite pleased. I guess that they haven't discovered, at least so far, they haven't discovered really much exposure in the main banking system, the traditional banking system to crypto and that's kind of been walled off Ali and several other colleagues.

So it has a really interesting story out recently though, Um, if you want to talk about the federal home loan yeah, so that you know, this was something that's recently come to sort of the spotlight where the federal homelan banks which were originally set up to boost sort of mortgage

lending under President Herbert Hoover. Purpose has sort of shifted over the years and now essentially, if you are a bank that has the appropriate type of collateral um which includes mortgage backed securities, government backed securities, things that you can buy in the market, then you're able to put that up as collateral and essentially you can get one

of these loans. And so there were a lot of banks that were associated with crypto kind of seen as crypto friendly, uh silver Gate for instance, Signature Bank, and you know, what recently came came to the flour was that they were receiving loans from these federal homelan banks and it's raised a lot of new questions about, you know, what is really the role of these types of loans.

Should there be you know, more restrictions in place. Is this diverging too much for sort of the initial purpose And so that's definitely been and you know, one of the things that's come up and kind of shown that crypto has seemed a little bit more into the banking sector than you know, maybe we originally thought up. Next more with Bloomberg reputters Ali Verspiel and Lydia Bayud on how the f t X collapse shifted the debate on regulation.

We'll be right back. One thing I find very interesting about this whole topic is that prior to the collapse of f t X, UH Sam Bankman Freed himself was sort of this very influential character in Washington when it came to ideas for crypto regulation. He testified before Congress for hours explaining what he thought needed to be regulated. And how Lydia, are they just ignoring all that advice that that uh SPF is awaiting trial, I mean, or

were there good ideas there? Do you think that that actually, despite what happened, maybe he was right about SPF definitely had an influence, but he was just one voice among many. And it's interesting because they work, they put themselves out there as you know, we're going to do crypto the right way, we embrace regulation. It was interesting to see some of his remarks UH in the immediate aftermath of bankruptcy where he was casting some down on his rosy

view of regulation. But folks at the CFTC and on the Hill have testified, and also I think the SEC, but certainly at the CFTC like he was all over that agency and they really tried to bend Congress in the Hill to sort of their perspective of how to regulate the space. But there was also a lot of a lot of pushback on it that was also I think lawmaker's staff and the regulators were taking that into account.

I think Ali could probably speak to that somewhat as well in terms of, you know, some of the exchanges that aren't centralized and what their view was and their pushback as well. As you know, there was some pretty blockbuster congressional hearings with Terry Duffy taking very negative view of what Sam wanted to do in sort of a disintermediated derivatives treading for crypto. Well, what do you think, Allie? I mean, SPF is such a sort of radioactive name

right now. Any idea he had back then now considered off limits, do you think? So, you know, it's really interesting. I mean one of the legislative efforts that he was the most vocal supporter of was this bill from the Senate ad Committee leaders Debbie Stabina and John Boseman, and essentially that was the bill to give the CFTC oversight of certain types of tokens that could be considered commodities.

You know, they specifically named bitcoin and ether, and so it's interesting because it's not necessarily just a SAM idea. Even the Financial Stability Oversight Council has come out with a report saying there's a lack of regulation of tokens that are security so bitcoin. It didn't specifically name the CFTC as as being the regulator, but you can kind of put two and two together because basically right now there's no federal overseer of those. It's all regulated at

the state level. And so that idea, I think there is some backing that some sort of gap needs to be filled there. But I do think for any legislation that SAM was closely involved in or a big supporter of, you know, lawmakers are going to have to take a second look, make sure that it's as strong as they might want it to be, make sure there aren't any

you know, holes. So I think it's definitely tainted the efforts where they stand, But I wouldn't necessarily be surprised if we saw policymakers reworking some of that and then putting it out, you know, putting it out in sort of a slightly different form. Walk us through where they do draw that line between what type of crypto is considered a security and what's considered a commodity. Yet now, I know it's not a hard and fast rule right now, but where do they seem to be drawing that distinction.

Is it as simple as if coin pays a yield they considered a security. Is it more complex than that? So it's a little more complex. I mean, the distinction lies in this Supreme Court ruling, you know, the how we test if you will, and it kind of has four prongs. You know, there has to be an investment of money in a common enterprise with the expectation of

profiting from the efforts of an organization's leadership. And so the SEC will say we think most digital assets fit into this this category, whereas crypto firms to often say, well, we think our tokens are you know, decentralized where there is no kind of central leadership making decisions. And you know, that's been one of the big issues at the center of the SEC's case against Ripple over its XRP token.

It's not very clear. So that will be something that would be interesting to see if lawmakers decide to weigh in on it. It's that securities versus commodity definition is kind of like the toughest nut to crack for all the policymakers here to kind of move this issue forward and sort of designating who gets to regulate what. But you know, when we move to the legal venue, I think, as far as I can recall um Ali mentioned the Ripple case, but so far only bitcoin has like a

court ruling behind it saying this one's a commodity. Everything else still seems kind of up in the air, at least in terms of, you know, here is a court order making a decision. What is interesting and something to watch though, is the SEC brought this case that Ali and I covered last year against a an executive at coin base who was allegedly sending insider trading tips to a friend and a family member. And in that complaint

the SEC made these declarations. I think it was nine tokens that were listed on coin base they claimed that they were securities. And you can imagine that this coin base wasn't super thrilled about this designation in this court filing. And you know, if if eventually because there's also a criminal component, which is going to move first through court, but eventually if the civil part from the SEC, you know, gets decided by a judge, that could also bring certainly

for those tokens, more clarity to the space. What are the leaders of the industry, like coin base, what's their perspective on all of this? You know, I think definitely the vast majority would rather be have their tokens be labeled commodities. You know, a lot will say though, like they that they wouldn't mind working with the SEC trying to register, but they would claim that, you know, the SEC is not working with them, that it's not you know, taking too too much of a hardline approach, and that

they're having a tough time coming to agreement. Um, Whereas obviously the SEC will say, well, we think there's a lot of illegal activity happening in this space, and it's so it's hard to know what exactly is is the

true narrative here. But I would say in terms of pushing legislation, a lot of the crypto industry was behind this bill to give the CFTC more authority, the one exception being the Decentralized Finance community, which you know, they felt that the bill was gave too much of an advantage to centralized exchanges like coin based like at the time FTX, they were in opposition to that legislation. Well, I think we'll leave it at that. I know, ladies,

you're super busy and we really appreciate your time. Hopefully no news broke while we were sitting here talking. I don't want to drink. You never know in cryptot, no sleep on this speed. Ali Verspiel and Lydia Bayoud, thank you so much, Thank you. Thanks. You can find more of their reporting on the Bloomberg Terminal and Bloomberg dot com. For more, be sure to check out our twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from

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