Will Congress Let Crypto Pick Its Regulator?

Reeling from losses, the industry is pressing Congress to legislate a government seal of approval—with feeble regulatory substance.

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While the broad financial market has made back most of its recent losses, crypto has collectively lost around a trillion dollars this year. The marquee cryptocurrency, Bitcoin, now valued at about $24,000, is down about 50 percent for the year and almost two-thirds from its November 2021 peak of nearly $67,000.

The industry wants Congress to give all crypto regulation to the relatively weak and understaffed Commodity Futures Trading Commission. The CFTC regulates mainly futures and some financial derivatives in wholesale markets, but has no proven capacity to regulate the kind of retail transactions and small-investor abuses that are typical of crypto.

Shifting crypto regulation to the CFTC would change existing law for the worse. For now, the far stronger Securities and Exchange Commission is able to regulate most kinds of crypto under established law, on the reasonable premise that most crypto vehicles are securities.

There are a couple of rings to this circus, and they also include competition in Congress and the executive branch over turf. One involves a kind of crypto known as stablecoins. These are supposedly guaranteed to hold their value, except sometimes they don’t because they are not always backed by cash or cash equivalents.

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Stablecoins are used mainly in other crypto transactions. Nobody uses them to pay bills or to make traditional investments. Some in the administration, notably Nellie Liang, a top deputy to Treasury Secretary Janet Yellen, are big enthusiasts of stablecoins, which they see as benign financial innovation. Other regulators and consumer groups view stablecoins as pure financial engineering with no legitimate function not already played by more traditional forms of money, and an invitation to speculation, fraud, bubble, and collapse.

Until a couple of weeks ago, Rep. Maxine Waters (D-CA), the ordinarily progressive chair of the House Financial Services Committee, was sponsoring legislation to regularize and regulate stablecoins. The draft bill would allow both banks and non-banks to issue stablecoins, supposedly with safeguards. But the measure would give backdoor access to non-banks into the banking system, raising a whole other set of risks and regulatory dilemmas.

Waters had a co-sponsor in the ranking Republican on the Financial Services Committee, Rep. Patrick McHenry of North Carolina. She was also working closely with the leading corporate Democrat on her committee, Josh Gottheimer of New Jersey. But McHenry and Gottheimer were demanding too many provisions drafted by the crypto industry intended to further weaken regulation. Even Treasury had some concerns, and Waters pulled her own bill.

An even more dangerous measure is comprehensive and weak crypto regulation proposed in a bill with the Orwellian title the Responsible Financial Innovation Act, sponsored by Republican Sen. Cynthia Lummis and Democrat Kirsten Gillibrand, and drafted by the crypto industry. The bill, covering not just stablecoins but the entire industry, would create several new tax loopholes and expand the definition of commodities to include nearly all digital assets, taking regulatory jurisdiction away from the stronger SEC and giving it to the weaker CFTC.

In the face of massive pushback from other regulators, consumer groups, even banks, and skepticism from Democratic senators, the industry is now betting on a more modest power grab in the form of a bill introduced in early August by Democrat Debbie Stabenow of Michigan, who chairs the Senate Ag Committee, and the committee’s ranking Republican, John Boozman of Arkansas, called the Digital Commodities Consumer Protection Act.

Shifting crypto regulation to the CFTC would change existing law for the worse.

Though not as bad as the Lummis-Gillibrand version, this bill explicitly gives the CFTC jurisdiction over such forms of crypto as Bitcoin and Ethereum, while leaving the SEC with general oversight of much of the industry. Under the guise of clarifying jurisdiction, the bill sets up conflicts down the road, as crypto players would forum-shop for the weaker regulator and create forms of crypto designed to end-run the SEC.

Why do this? By shifting jurisdiction to the CFTC, that gives congressional jurisdiction to the Ag Committee Stabenow chairs. The bill would thus create an opportunity for massive campaign fundraising by committee members from the crypto industry. Dennis Kelleher, who heads the reform group Better Markets, likens this “cash-soaked feeding frenzy” to the lobbying in the 1990s that ended with the Clinton administration and the Congress passing legislation allowing banks to merge into mega-banks after repealing Glass-Steagall and prohibiting regulation of derivatives.

For now, Sen. Stabenow has planned a markup for September. One key player who has not yet weighed in publicly is Sherrod Brown, the Ohio progressive who chairs the Senate Banking Committee and also serves on the Senate Ag Committee. Brown and Stabenow have a cordial relationship. I’m told that Brown believes that any bill needs to leave crypto jurisdiction mostly with the SEC.

It is astonishing but not all that surprising that Congress, led by Democrats no less, would consider far-reaching legislation to legitimize this reckless industry without first having undertaken a single investigative hearing on the industry’s structure and record.

A further complication is the role of Rostin Behnam, the former Stabenow staffer who now heads the CFTC. Behnam has been openly supporting the CFTC power grab promoted by the crypto industry.

In a keynote speech at a Brookings Institution event on the future of crypto regulation on July 25, which read as if it could have been written by the industry, at least half of Behnam’s remarks were devoted to making the case that the CFTC should be crypto’s prime regulator. “The CFTC is ready and well situated to address the risks in the cash markets for digital assets through direct oversight,” Benham said. By contrast, SEC Chair Gary Gensler has preferred to work behind the scenes to defend SEC jurisdiction and stronger regulation of crypto.

With Congress now in recess and other priority bills awaiting floor action in September, the clock has probably run out on crypto legislation in this Congress. That’s good news in that it slows down the crypto industry’s lobbying steamroller—but not such good news if you think Republicans will control the next Congress, in which case the industry will probably get its preferred regulatory license to wreak government-endorsed havoc on financial markets.

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