At the Feb. 14 Senate Banking Committee hearing on cryptocurrency, Lee Reiners, policy director of the Duke Financial Economics Center at Duke University, said in his witness testimony that in order to move forward with comprehensive cryptocurrency regulation, Congress must take action on defining cryptocurrency as a security, commodity or something else. Reiners was one of three witnesses who testified at the hearing, which was titled "Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets."
"Post-FTX, many policymakers have called on financial regulators to use their existing legal authority more aggressively to clean up the crypto industry and protect investors. I agree that regulators can, and should, do more, but I also believe that congressional action is needed to close gaps in the current regulatory framework," Reiners said in his testimony. "The debate around whether a given digital asset is a commodity, security or something else must be addressed if one agency is to have sole authority over digital asset markets. I urge Congress to carve out cryptocurrency, or a similar term like crypto-asset, from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws. This would give the (Securities and Exchange Commission) SEC exclusive authority to regulate all aspects of the crypto industry and provide greater certainty to market participants, as no Howey Test analysis would be needed to determine whether the asset qualifies as a security. The SEC simply has more expertise, more resources (although, to be clear, additional funding would be required), and more appetite for enforcement in the digital assets area than the (Commodity Futures Trading Commission) CFTC does. Most importantly, unlike the CFTC, the SEC has a statutory mandate to protect investors."
Reiners, who teaches courses on cryptocurrency law and policy, cybersecurity policy and financial regulation at Duke, said during his testimony that there are three options for how the U.S. tackles the issue of regulating crypto, aside from imposing traditional financial regulations on the crypto sector, according to a transcript of the testimony. The three options are to ban crypto, regulate crypto as gambling or grant regulatory authority to an existing agency.
"While each of these options has merit, I believe the best, and most feasible, path forward is for Congress to carve out cryptocurrency from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws," Reiners said.
According to Reiners, the two primary goals of crypto regulation should be to protect investors and maintain financial stability. He said that the most effective way to do so would be to ban crypto outright, as China did in 2021, although he does not agree with the way in which China implemented the ban. In terms of regulating crypto as gambling, Reiners said that although some commentators, including Fabio Panetta, a member of the executive board for the European Central Bank, have equated crypto and gambling, Reiners believes there are several key differences between the two, so there is a need for "a more comprehensive financial regulatory approach" to crypto.
Reiners said that many calls for regulatory action are directed to the SEC, but he believes legislation is needed to "close gaps in the current regulatory framework," and added that the SEC will likely need more resources to carry out enforcement. Reiners said the CFTC "also needs to do more to protect crypto investors, but, apart from a few meaningful enforcement actions, the agency has unfortunately demonstrated little desire to do so at the scale needed." He noted that the CFTC used its existing enforcement authority over crypto "sparingly." Reiners listed the actions that U.S.-based crypto exchanges currently do not have to do, including providing audited financial statements, separating customer and firm assets and maintaining "net capital at required levels to protect customers and creditors from monetary losses if the exchange fails."
"What is needed is one dedicated regulatory agency with exclusive oversight over cryptocurrency issuance and trading," Reiners said. "The threshold questions, however, are which agency should be given this task, and what should be the extent of its authority?"
He argued that the SEC should be given the authority, although the agency might need "to craft more customized rules so that crypto issuers and intermediaries can better comply with the spirit of securities laws." Reiners pointed out that even former CFTC Chairman Timothy Massad said the SEC should be given authority over crypto trading: "Despite my personal affection for the CFTC, the SEC may be better suited to the task because it is more focused on retail investors and cash markets," Massad said.
Reiners said forcing crypto issuers to register with the SEC would mean many of the approximately 20,000 different crypto tokens would cease to exist, which he believes is a good thing, because it would leave only the tokens with "some long-term value creation potential.”
Some crypto moguls, such as Changpeng Zhao (CZ), the Canadian CEO and founder of Binance, the world's largest crypto exchange, have advocated for more regulation, arguing that it helps bring trust and growth to the industry.
"Regulatory clarity is needed ASAP. I have said this before and will say it again: The best form of user protection is globally consistent, risk-based regulation. Outright bans will just lead to users operating in the shadows, at their own risk, and without any safety net," CZ said in a Jan 24. Twitter post. "User protection and market integrity are enhanced when lawmakers and regulators expand the scope of permissible activities. We have seen this in many other industries: Tradfi, health care, pharma, internet, content, etc."
