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Outside the Box: Congress may be getting it wrong: Crypto should be regulated just like other financial assets

Cryptocurrency has gone from niche interest to Super Bowl ad, and Congress is now looking at ways to appropriately regulate these new assets.

Congressional committees have held hearings to understand stablecoins, the environmental impacts of crypto mining, and the role of government in policing markets. Several lawmakers have introduced legislation to bring crypto assets into the regulatory fold, with sponsors arguing that their bills offer “responsible federal oversight of trading platforms and critical consumer protections.”

Unfortunately, many bills introduced so far are unnecessary at best and harmful at worst—and fundamentally misunderstand crypto assets.

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Crypto assets are simply new, digital versions of traditional assets—like securities, commodities, and collectables—which have been regulated for many decades. They are also susceptible to similar risks and scams, but with potentially worse outcomes because of the speed and anonymity of crypto transactions.

Fortunately, regulators already have broad authority to address many of the concerns posed by crypto: Among others, the Securities and Exchange Commission (SEC) can regulate the offering and sale of crypto securities; the Financial Crimes Enforcement Network can protect the financial system from the use of crypto assets for illicit purposes; and the Internal Revenue Service can ensure that everyone pays their fair share of tax on the income they earn from crypto asset transactions.

The overarching problem is not that crypto assets are unregulated; it is that many crypto issuers and related businesses, like crypto exchanges, have essentially ignored legal requirements.

For example, issuers of crypto assets that are securities must comply with the full range of securities laws with which all other securities issuers must comply, including registering their securities with the SEC, providing investors quarterly and annual disclosures, and listing their assets only on well-regulated securities exchanges.

Failure to adhere to these and other requirements has led to significant fraud and market abuses, with some crypto investors losing their life savings. Similarly, crypto investors have ignored legal requirements to report and pay tax on the income they earn from crypto transactions.

Even though crypto assets are just like traditional assets, advocates argue that the existing financial regulatory framework does not fit crypto, is outdated, and does not allow for necessary innovations. Congress should, they claim, create a new regulatory structure for crypto assets and transactions.

There are two problems with this argument.

First, the framework of regulation that Congress constructed over the past decades has, except for a very small number of gaps, proven effective at mitigating risks. Since crypto assets are new versions of traditional assets and pose the same risks, this regulatory framework can work well with respect to crypto assets, too.

Second, if Congress placed crypto assets under alternative—and objectively weaker—regulatory regimes, regulatory arbitrage will occur. For example, if Congress gives crypto securities a full or partial carve-out from the securities laws, traditional issuers likely will stop issuing securities and will start issuing crypto assets, sidestepping the very protections that Congress originally put in place following the 1929 crash.

None of this is to say that Congress should not legislate. However, Congress must act cautiously and deliberately when considering crypto legislation so that it does not inadvertently weaken existing statutory protections. Instead, it should focus on strengthening them.

There are three specific areas where Congress should act.

First, Congress must enact legislation to regulate the sale of crypto commodities like bitcoin
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Although several agencies may currently enforce prohibitions against fraud, market manipulation, and unfair sales tactics in this market (known as the spot market), they cannot issue new regulations requiring, for example, exchanges to be protected against cyberattacks, to actively police their markets for fraud, or to only list crypto assets for sale if they are resilient to market manipulation.

The SEC already has authority to mandate these common-sense protections in the crypto securities markets, and Congress should ensure they are similarly applied to the crypto commodities markets as well.

Second, with each bitcoin transaction estimated to produce 1,000 pounds of carbon emissions, Congress must work to reduce the environmental impacts of the technology underlying crypto assets.  Among other solutions it can incentivize the adoption of more energy-efficient blockchains by imposing listing standards on crypto exchanges. Exchanges are venues where traders meet to buy and sell assets, and investors are less likely to trade unlisted assets.

Congress should require U.S. securities and commodities exchanges to list only crypto assets that use energy-efficient blockchains. As a result, issuers of crypto assets would use greener technologies to reach investors on exchanges, and dirtier technologies would lose favor.

Third, Congress must ensure that regulators have the basic capacity to police the $2 trillion crypto market. Regulators have had authority to regulate large sections of the crypto markets for some time, but resource and staffing constraints meant that the laws went unenforced, and the market saw massive growth without government oversight. This, in turn, harmed investors.

To ensure that the crypto markets cannot continue operating lawlessly, Congress must ensure that regulators have the staffing and technology to appropriately enforce necessary regulations.

The crypto industry claims that these assets are revolutionary. Simply put, they’re not. Before legislating, Congress must understand that existing statutes are sufficient to regulate many crypto assets, and it must not inadvertently weaken regulators’ existing powers in the pursuit of protecting investors.

Todd Phillips is director of financial regulation and corporate governance and Alexandra Thornton is senior director of tax policy at the Center for American Progress. This op-ed was adapted from their new report, “Congress Must Not Provide Statutory Carve-Outs for Crypto Assets.”

More views on crypto regulation

Mark Hulbert: Bitcoin fails first big test as a hedge against geopolitical uncertainty

Kenneth Rogoff: The Fed is both too cautious about digital dollars, and too nonchalant about private cryptocurrencies

Andres Velasco: Private stablecoins should be regulated out of business before they cause the next financial crisis

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