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SEC’s ‘Backdoor’ Approach to Crypto May Cost It Power

·3 min read

Crypto’s notable absence from the U.S. Securities and Exchange Commission’s spring regulatory agenda is the latest sign of an agency with a penchant for backdoor regulation of digital assets while ignoring issues that need attention.

By and large, that’s the opinion of one of its most outspoken commissioners, Hester Peirce, who slammed the priorities of its chairman, Gary Gensler on Wednesday (June 22), as the agency released a list of the issues it plans to work on in the coming months.

“Although the agenda includes rules that might regulate crypto protocols or platforms through an unmarked backdoor,” she said, “it does not appear to include any rules primarily intended to grapple with the main regulatory questions that have arisen around these assets.”

The approach appears to be coming back to bite Gensler, who has pursued an aggressive strategy with an industry he has repeatedly called “the Wild West of finance” that’s showing signs of pushing Congress members toward a regulatory framework favoring other agencies.

See also: At Senate Hearing, CFTC Chair Behnam Steps Up Battle With SEC for Crypto Oversight

Sneaking In

The back doors Peirce referred to are three proposals, one that would vastly expand the commission’s control over centralized and decentralized cryptocurrency exchanges, another that would define decentralized finance (DeFi) exchanges as “dealers” who have to register, and a third that would force crypto custodians to list assets they hold for clients on their balance sheets.

Read more: DeFi Advocates Cry Foul on SEC Again — This Time, Over Attempts to Define ‘Exchange’

In the first two instances, the proposals were footnotes in rules that run hundreds of pages long. While the first would give the agency a great deal more control, the second would be potentially crippling for decentralized exchanges (DEXs), as automated market makers (AMMs) they run on are software that manages buying and selling of crypto and are incapable of registering, industry advocates said.

“It’s an all-out shadow attack on decentralized finance,” Gabriel Shapiro, general counsel of Delphi Digital Labs, said in March.

See more: DeFi Advocates Blast Proposed SEC Rule Change as Crippling ‘Shadow Attack’

More broadly, Peirce said the agency’s approach has led to rules that do “not appear to include any rules primarily intended to grapple with the main regulatory questions that have arisen around these assets.”

Scratching its Head

The crypto custody rule forced leading U.S. exchange Coinbase to issue a warning in May that customers’ crypto balances could be at risk in a bankruptcy, hitting its stock price — despite saying that it was not in danger of bankruptcy.

That’s something Federal Reserve Chairman Jerome Powell brought up in testimony before the Senate Banking Committee on Wednesday, saying it has regulators unsure of how to address it with any lenders that hold cryptocurrency for clients

“Custody assets are off balance sheet, have always been,” Powell said. “The SEC made a different decision as it relates to digital assets.”

That rule also prompted five U.S. senators, including Sen. Cynthia Lummis (R-Wyo.) — who recently released a bipartisan crypto regulatory bill that would strip power from the SEC — to send the agency a letter complaining of an “attempt to circumvent the rulemaking process.”

By leading its regulatory efforts with enforcement and staff guidance instead of deliberate rulemaking, the letter said, the SEC has embraced “a back-door staff-led approach that creates more questions than answers.”

It’s also part of the reason that the bill Lummis co-authored with Sen. Kirsten Gillibrand (D-N.Y.) gives regulatory authority over cryptocurrencies long claimed by the SEC to the Commodity Futures Trading Commission (CFTC), which is considered more pro-crypto — or at least less anti-crypto.


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