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Crypto's big two weeks: Here's what happened and what it could mean

Crypto is having a very big two weeks.

After being litigated and lobbied with more than a dozen enforcement actions by the Securities and Exchange Commission, the crypto industry saw the most concrete rules proposed yet from Congress for a framework to regulate cryptocurrencies.

The movement in Washington comes as the industry digests two contradictory opinions over the last two weeks from different federal judges in New York about whether digital currencies can be considered securities when sold to the general public. Crypto prices and stocks have been mixed, as a result.

“Expect to see more disagreement between courts, and less clarity, until Congress acts,” Stephen Palley, a Washington, D.C.-based legal partner with Brown Rudnick who co-chairs the firm’s digital commerce group, said Monday over Twitter.

One possible turning point for how the industry is regulated came last week when the Republican-led House Financial Services Committee passed legislation out of committee that aims to create clarity around gaps between the rules of the Commodity Futures Trading Commission (CFTC) and the SEC.

A long outstanding issue for the crypto community has been what criteria would cause a crypto token to be classified as a commodity or as a security.

The bill provides the CFTC with jurisdiction over digital commodities and clarifies the SEC's jurisdiction over digital assets offered as part of an investment contract. It also tries to direct what firms need to do to register with the SEC and requires the SEC to write new rules that are customized to govern crypto.

There would be a "decentralization" test to help decipher whether the token is a commodity, but that wouldn't exclude it from necessarily becoming a security depending on how it's used.

UNITED STATES - MAY 31: Rep. Patrick McHenry, R-N.C., attends a news conference after the House passed the Fiscal Responsibility Act, which will raise the debt limit, in the U.S. Capitol's Rayburn Room on Wednesday, May 31, 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
Rep. Patrick McHenry, R-N.C. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

House Financial Services Committee Chair Patrick McHenry (R-N.C.) and a top deputy, Rep. French Hill (R-Ark.), were able to get six Democrats on board with the bill to get it out of committee.

"There is no commingling," said McHenry, referring to allegations made about FTX, a cryptocurrency exchange that collapsed last year. "The worst practices of FTX are banned in this bill."

"It is better at worst case than what we have currently, which is no consumer protection in the hopes the courts will understand the complexities of securities and commodities law and the technology. We have to wrestle with it. It is Congress’s obligation to wrestle with it."

The bill made it out of committee despite objections from Democratic committee leader Rep. Maxine Waters (D-Calif.), who feels the bill fails to offer adequate funding and maintains consumers and investors will have fewer protections than currently granted under existing securities laws.

"Moving forward on legislation is certainly a positive development, but we have to be pragmatic," said Sandra Ro, chief executive of Global Blockchain Business Council, a trade association focusing on blockchain technology.

"The political climate and the congressional calendar currently present obstacles to seeing legislation become law. While any movement is positive, time is of the essence."

'Crypto wants to diminish the role of the SEC'

So far, the SEC hasn't written specific rules about how the crypto industry should be policed. Rather, the agency has only stated that current securities laws apply to crypto.

SEC Chair Gary Gensler has repeatedly asked crypto firms to register with the SEC and leveled more than a dozen enforcement actions against crypto firms for violating securities laws.

Securities and Exchange Commission, Chairman Gary Gensler speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing on
Securities and Exchange Commission Chairman Gary Gensler. (Evelyn Hockstein/Pool via AP)

The introduction of the Republican-sponsored legislation raises the question of whether the SEC will be forced to change its approach to regulating crypto companies using rules on the books, or whether new rules need to be implemented by lawmakers to regulate these assets.

"I think it fundamentally rejects much if not all of what the SEC chair has been saying about the state of the market and the so-called clarity of the rules," said Paul Grewal, the chief legal officer of Coinbase (COIN), the largest cryptocurrency exchange in the US.

The SEC is suing Coinbase for selling certain digital currencies that the SEC considers to be unregistered securities.

FILE - Coinbase employee Daniel Huynh holds a celebratory bottle of champagne as he photographs outside the Nasdaq MarketSite, in New York's Times Square, April 14, 2021. Coinbase rose, Friday, June 23, 2023, after winning a Supreme Court case. The crypto trading platform wanted to keep a dispute with a customer in arbitration, a process that many companies prefer over lawsuits in courts. (AP Photo/Richard Drew, File)
Coinbase is the largest US crypto exchange. (Richard Drew/AP Photo, File)

TD Cowen analyst Jaret Seiberg, for his part, doesn't see a path forward for this bill through the end of 2024.

"Democrats object to giving the CFTC authority over so much of the crypto universe as it has no experience with retail investor protections," Seiberg told Yahoo Finance. "By contrast, crypto wants to diminish the role of the SEC and boost the power of the CFTC."

Court confusion

But the courts have not yet been clear on how digital currencies should be treated.

Analisa Torres, a US judge in the Southern District of New York, said on July 13 the XRP digital token issued by Ripple Labs was a security only when it was sold to institutional investors, and not when it was purchased by the general public. The SEC had sued Ripple for selling unregistered securities.

Then July 31, US judge Jed Rakoff disagreed with that specific view in his case, in which the SEC has alleged stablecoin issuer Terraform Labs sold unregistered securities.

He determined that how a crypto token is sold — whether through an exchange or directly to institutional investors — does not determine whether any reasonable investor would expect the promise of profits. Rakoff ruled the SEC's case against Terraform Labs founder Do Kwon can proceed.

NEW YORK, NY - SEPTEMBER 03: Judge Jed Rakoff poses for a portrait in his office at the Daniel Patrick Moynihan court house in Manhattan, New York on September 3, 2013. (Photo by Yana Paskova/For The Washington Post via Getty Images)
US judge Jed Rakoff in the Southern District of New York. (Yana Paskova/For The Washington Post via Getty Images)

The verdict was a blow to crypto exchanges like Coinbase that do sell digital currencies to the general public.

Coinbase's Grewal, however, sees Rakoff's ruling as another sign new rules are needed for crypto.

"I think it actually underscores that we need a single standard that applies across the country and that single standard can really only come in the form of legislation from Congress," Grewal said.

"A couple of district judges reaching different conclusions about certain elements of cryptocurrency regulation in the same courthouse actually only adds fuel to the fire that we think is lighting Congress to move forward."


There is also movement in Washington that affects another part of the crypto world: stablecoins.

On July 27, the House Financial Services also passed stablecoin legislation in a vote of 34-16 with about seven Democrats signing on in a show of bipartisan support.

But not all Democrats are on board. Waters objected to it, contending it undermines creating strong reserve requirements by allowing any stablecoin regulator — federal or state — to unilaterally expand the list of eligible reserve assets.

Waters also said the bill grants no actual enforcement authority to the Federal Reserve for issuers with state licenses, a key sticking point for Democrats.

Rep. Maxine Waters, D-Calif., speaks before the House Financial Services Committee during a hearing regarding the state of the international financial system at the Capitol in Washington, Tuesday, June 13, 2023. (AP Photo/Amanda Andrade-Rhoades)
Rep. Maxine Waters, D-Calif. (Amanda Andrade-Rhoades/AP Photo)

"We are getting to a point where [Congress has] to make a go or no-go decision on whether or not they're going cut this deal," said John Rizzo, a former Treasury public affairs official, who worked on the President's Working Group's stablecoin recommendations, and is now senior vice president at the Clyde Group.

"The differences now don't seem all that different from the differences that we confronted in the summer of 2022."

Both parties are still at loggerheads now over unhosted wallets and the degree of state versus federal oversight — issues that were also unresolved last year.

Waters also asserted the stablecoin bill removes the ban on companies from issuing stablecoins, allowing companies like Amazon (AMZN), Walmart (WMT), or Facebook (META) to create their own stablecoins or be affiliated with a stablecoin issuer.

"Does no one remember the numerous hearings we had when Mark Zuckerberg tried to do this just four years ago?" Waters said during a hearing last week.

"Facebook, with its own coin, could become effectively a global bank with 2 billion customers overnight."

Rizzo thinks in the end a slightly different bill will go to the House floor, with potentially more Democratic initiatives. Rizzo believes McHenry's goal is passage into law and that he will be open to compromises, noting the Biden administration thinks there is significant value in reaching an agreement on stablecoins.

"The differences are manageable if there's the political will to form an agreement," said Rizzo.

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