Who and How To Regulate Crypto

More importantly, what does it mean that the regulators themselves don't entirely seem to agree joining me to bring us up to speed on what's happening these days with US crypto regulation. We have to Bloomberg reportes Alison verse Bro in d C. So the CFTC has argued, we feel like we have the expertise to do this, and Alex newin the current regulation framework in the US is a patchwork and it's inadequate. Welcome and thank you both so

much for being here. Alison, you're in d C. You are, you know, dialing in from the studio that we have there in the office, and as a result, you have probably more real time access to what's going on as it relates to legislators on the hill, as it relates to how regulators are thinking about things. So I'm going to start with you. We've seen the collapse of an algorithmic stable coin. We have seen prices of assets across the board being quite far from their old time highs.

We have seen multiple enforcement actions including the SEC, the d o J, other regulators, and other entities of the U. S. Government accusing people of everything from insider trading to wire fraud. Is this environment one that you think is adding some urgency to the activity that you're seeing there? I think it is, and in certain places, right I think, Um, you know, you mentioned the collapse of of Terra, so that obviously added some urgency around the stable coin discussions.

And we do see those, um, you know, starting to go somewhere, at least trying to go somewhere. Of whenever you're talking about legislation in the US, it's quite difficult to get that done on a bar partisan basis, um. But basically, you know, we've seen Treasury actually getting involved, um, in particular with a bill that's being worked out on the House side between a Chairwoman Maxine Waters and ranking

Member Patrick McHenry on the House Financial Services Committee. UM, so we know that they've been trying to work out a deal. We know that they're getting pretty close, um, that there are still some hang ups. So that's definitely a place where we could potentially see action and maybe even by the end of the year though mid terms are coming up in November and we know that Congress kind of gets a little side checked, um anytime that

we have an election year, So we'll see what happens there. UM, I'd say another area, definitely, you know, we're seeing a lot of enforcement. UM. In particular, we've seen some actions or we saw an action over the last last month on an insider trading case at the SEC. Broad we also know that the SEC it has an active probe into coin Based, the largest US exchange, and it's whether

it's offering you know, unregistered securities on its platform. The SEC looking into coin based, it raises the question of defining what is the security, what is the commodity? Who has control over what? I mean? How far away are we really from getting those answers? But we can expect I think some of that to pick up as well. UM. And then the last thing I would say is we've definitely seen sort of a growing um effort on Capitol Hill to you know, give the Commodity Futures Trading Commission

more authority to regulate cryptocurrency directly. So basically, right now it has most a jurisdiction over crypto derivatives. But you know, if there are some folks I think certain coins like bitcoin, ether are commodities and that they should be directly regulated by the CFTC. We've started to see some lawmakers um supporting that effort. You know, I think it remains to be seen whether or not you could get enough lawmakers on board to actually pass something in the House and Senate.

But you know, another one to watch um at the

end of this year and into next year. So just to unpack that for the folks who aren't necessarily paying attention to the minute of which US regulators involved in crypto, there's there's almost like factions might be too strong a word, but there are definitely different perspectives and approaches here, right So, as you've identified, on the one hand, we have the U S Securities and Exchange Commission in the SEC which typically does not get involved in anything that looks like

a commodity, which, for argument's sake, let's say Bitcoin and ether are considered to be. But then over on the other side, you have somebody which literally has commodities in the name, um, the CFTC, which is like, hey, we're here and we're very interested in doing these things. Now. One of the things that we've talked a lot about on this podcast is that everything else in crypto that's not Bitcoin, that's not ether, seems to be up for grabs over whether it is defined as a security or

if it's just defined as a commodity. Is that a fair assessment of the of the fight right now? I would say that's a fair assessment, And I think, you know, we definitely see the crypto industry kind of pushing for for the CFTC to be its main regulator. Um. You know,

I have heard a few reasons why. Um, the industry will say that they feel like the CFTC is more open to working with them, and that they feel like their assets truly our commodities, um, and thus that regulator is a better one for them, whereas maybe more cynical folks would say, I would say that the CFCC has you know, less stringent investor protection standards, and you know, there's some thought that they may be a little bit of an easier regulator than the SEC, though I will

note UM Chair Rosten Venom of the of the CFTC has pushed back against that aggressively. UM you know, always points to their enforcement record. You know, they have brought dozens of enforcement cases UM over the last several years, and so he's continued to say that the CFTC is aggressive of the c CFTC will continue to go after

fraud and manipulation in this area. You know, there's there's definitely, uh, some debate as to as to why the industry would be pushing for the CFTC, but it's definitely something that we're seeing right now. And Alex you have written about exactly that that Allison is describing this idea of the CFTC saying, hey, no, we're here, We're serious, We're ready for this. Can you talk a little bit more about that.

The SEC has seemed to have taken a more aggressive effort when it comes to enforcement actions, but the CFTC chair have also recently signaled that the agency is also going to ram up it's UM enforcement actions as well. Pointing out that the current regulation framework in the US is a patchwork and it's inadequate in terms of UM regulating the industry. And he has also said that they will creatively use their authority in this field to do

so without really naming exactly what that would look like. Yes, the thing that various people in crypto seem to be clamoring for is the C word, which is clarity. You you hear this a lot. They're like, we just want to know what rules we have to follow, as um Allison said earlier, more cynical folks might argue they want to know what those rules are so they can immediately higher lawyers who can help them not have those rules

applies to them. But there definitely does seem to be a very strong and explicit desire for at least some boundaries, guardrails whom I regulate. Is what those things are? As you know, Alex has pointed out the cfc C is saying, Hey, we're here where we want to be able to do this, What in your experience would that look like? And how might that be different from what the SEC is proposing. That's one of the arguments that they make. But I

do know that. The CFTC also has pointed out that if it were to get more authority and more jurisdiction, that it would need additional resources. I think an important important point to make is that the CFTC is a much smaller agency than the SEC, which some say is an argument for why the SEC maybe should take this over just because it has more resources, that has more money,

it has more staff. UM. So the CFTC has argued, you know, we feel like we have the expertise to do this, but yes, we do need Congress to give us more money. UM. There's been talk of maybe, you know, imposing some sort of user fee um like exists in other industries to help pay for for some of this extra work. So, you know, we'll have to see how that all shakes out in terms of the you know, the money, resources questions that would all have to get

approved by legislatives. Is that correct? That is correct? Um? And like I said, some of the bills that we've seen out there, such as the UM you know, there was a bill from Senators Lammis and Jilla Brand and that would have had some sort of user fee as like the funding mechanism for this extra power. So I know, that's been something that's been pretty popular in terms of legislative proposals. But we'll have to see, you know, if that's ultimately um, what ends up happening. Coming up, we'll

have more from Allison Verse, Brol and Alex Newin. One thing we haven't talked about is what if everybody just got along. They're like, we're all going to regulate crypto and it's gonna be great, and we're going to combine forces and we'll have twice as much ability to you know, keep everyone in line. Like, what is the vibe, as it were, that you're getting from folks that you've spoken to the agencies? You know, the agencies always say, um,

that they that they worked together. And I think the staffs. You know, if I talk to folks at these agencies, they say the staff in particular the career staff. You know, they've worked together for years on these types of issues. UM. I do think more recently, you know, the SEC brought an insider trading case. Uh. In that case, it chose to identify nine tokens as securities. If they were found to have traded securities, then the company may well have

to file register with the SEC. As in exchange, and I know that that created some frustration at the CFTC. According to the sources that I talked to, they've been conducting sort of a parallel investigation. There was a lot of thought that maybe some of the tokens that were identified by the SEC um could have actually been commodities. And so you know, there's a feeling of being a little bit bigfooted with that with that case. Um, So I think that has created maybe some attention, and yes,

has exacerbated the tensions. And you know, there's been some thought amongst staff. From one of the people that I talked to, they said, the staff are concerned that are they now going to have to go to the SEC every time they want to carry out an enforcement action? Do they need SEC approval? Um? You know, given sort of this jurisdiction grabs. So we'll have to see how that continues to kind of, you know, play itself out in the coming months. Um if that causes maybe more

of a rift than we've seen before. Interesting. So it sounds like, you know, in addition to folks in the industry saying they want clarity, and I'll give a specific example. So right after this enforcement action, these allegations against the former employee of coin base, as well as against coin Base itself came to light. UM their chief legal officer like went on Twitter and in a blog post to say,

you know, we have no securities on our platform. We have an extensive review process that prevents there from being securities in the pros platform. We've engaged with the SEC previously. So you're definitely getting the impression that people do want clarity, they want more communication, but they would much prefer that that clarity being a direction that works better for them. Yes,

I think yeah, going back to the cynical view. Um. You know, we had that a Bloomberg Crypto summit of pretty recently and at that summit, SEC chair former SEC chair Jay Clayton made a comment when he said, you know, the industry, when they talk about wanting regulatory clarity, what they really want is de regulation and to be treated,

you know, differently than every other market. One of the things that I think is important about regulation of digital assets is to look at the etymology the genesis of digital assets. They came about in a different way from most financial innovations. Most financial innovations are domestic and institutional.

Digital assets our global and largely retail that has presented a regulatory challenge that we really haven't encountered before, which is trying to have global coordination UM across a new type of asset class at the retail level. So I think if you think about it that way, you understand why there's some challenges. So, you know, I I do think though to the industry's point, you know, we haven't really seen a ton of real rags or guidance in

this area. UM. I think in part because you know, I've talked to folks that agencies where you know, this is an emergency, emerging area. It takes a little while for people to get educated on this stuff. And I think you're actually starting to see more movement of late because government agencies has had to have had some time

now to understand crypto a little bit more. Alex, just as a closing question, I want to ask you about an agency that doesn't often come up in crypto, which is the fd I C. You wrote a story recently about the fd i S the Federal Deposit Insurance Court, which exists to help customers of banks be protected in the event that something happens to that bank. But they

had to wait into a crypto situation. What was that? Yes, So recently the fd i C and I believe the Federal Reserve UM demanded Voyager is a now bankrupt crypto platform. Voyager announced that they suspended UM deposited trading withdraws and now they filed for a Chapter UM eleven bankruptcy productions to clarify to their customers that the fd i C doesn't ensure products issued by Voyager, and I think they

wanted the platforms to correct any misleading statements around that. So, Allison, you know hearing things like this for the ft i C, which really center around this idea of customer confusion. We have customers being confused, we have crypto companies being confused, we have regulators being confused. What hope is there for clarity anytime soon? You know? I think we could see some clarity around the edges on some of this stuff. Right.

So with the f d i C, they approved regulations in May clarifying that, you know, the agency's procedures for taking action against firms and people who make misleading claims about deposit insurance, you know, essentially saying that you can't do this, UM, we will come after you if you do. And so I think we could see agencies putting out little actions like this all around the perimeter that sort of help investors and help clarify the rules in terms

of big action. You know. Again, I'll say that I think the the stable coin effort, it's for sure one of the most likely to the most likely to pass in the near term. I say that with hesitancy because whenever you're talking about legislation on Capitol Hill, um, it's always kind of like take the timing with a grain assault, you know, you always have to use as soon as

because things just they change pretty fast. Um. But we have, like I said, I mean, it seems like the big hang up with stable quail legislation right now is over a provision regarding custodial wallets, and essentially Democrats and the Treasury, which has been working with lawmakers, want a provision in there that would protect customers in cases where intermediaries uh

go insolvent um. And so this would separate assets that they keep in custodial wallets from the proprietary assets of these crypto firms and maybe have some protections to prevent you know, situations like we've seen with some of these bankruptcies, and so the big hang up there is they want a federal requirement and I was told by sources that Republicans are looking for that to be set at the state level, and so you know that's one of the

hang ups. But if it's something that they can overcome by September, which is their their next goal for considering this legislation, then you know, I think, uh, it's looking more likely that we get something by the end of the year. Well, as you said, we'll see and if it's and if it does happen, we'll report on it, and if it doesn't happen, we'll probably have to report on that too. So that is how it works. So thank you so much, Alison, and thank you so much

Alex for joining us today. You can find more of both Allison and Alex's work on the Bloomberg Terminal on Bloomberg dot com and on Twitter. Allison is at ali very Sprill that's a L L y V E R s p r I L l E, and Alex is at Alex nwin eleven. That's a L E x N g U y E N two three one one. On the next episode, of Bloomberg Crypto. I used to argue you could divide folks into two categories, people who play

video games and people who don't. Gaming is bigger in revenue terms worldwide than the film and television industries combined. It's also a complex universe that's currently dealing with hard and necessary conversations over who benefits from that profitability, over things like labor conditions, and of course about intellectual property. And then you add blockchain and n f t s

into the mix and things get even more complicated. In the next episode, you'll hear from Bloomberg reportos Cecilia donastells you for a discussion of why and how crypto is showing up in video games. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I heeart Radio, visit the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto

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