Congress, the White House and federal agencies have all taken steps toward regulating cryptocurrency in recent months, but the task is anything but easy and industry insiders maintain that more clarity is needed to ensure a successful regulatory framework.
"If you look at what's going on in the crypto world, it's kind of the Wild West," said Sen. John Boozman, R-Ark., ranking member of the Senate Agriculture Committee and co-sponsor of the Digital Commodities Consumer Protection Act of 2022.
Mr. Boozman introduced the DCCPA in August with three of his fellow committee members: Chairwoman Debbie Stabenow, D-Mich., Sen. Cory Booker, D-N.J. and Sen. John Thune, R-S.D. The bipartisan bill gives the Commodity Futures Trading Commission the authority to regulate digital assets that act as commodities, such as bitcoin and ether.
On Sept. 15, CFTC Chairman Rostin Behnam expressed support for the bill at a Senate Agriculture Committee hearing, stating "the CFTC's expertise and experience make it the right regulator for the digital asset commodity market." The same day, SEC Chairman Gary Gensler told the Senate Banking Committee that the majority of cryptocurrencies are securities and should fall under jurisdiction of the SEC.
Deciding which agency has jurisdiction over which digital assets is just one of the many complex issues plaguing the crypto regulatory landscape. However, while many questions remain, it is clear that cryptocurrency oversight has become a priority for key players in Washington.
The White House released its first framework on managing digital assets in the U.S. in September, which involves the work of several federal agencies to develop recommendations and reports on the crypto market. This came after President Joe Biden issued an executive order in March outlining a national strategy for oversight of the crypto industry.
"The White House executive order was really the key pivotal moment where you have the president of the United States telling all the federal agencies that we want to have a cohesive, coordinated effort on how to allow this industry to flourish while also protecting U.S. citizens," said Craig Salm, New York-based chief legal officer at Grayscale Investments LLC, a digital asset manager with $16.9 billion in assets under management as of Sept. 27.
Crypto regulation is also one of the few issues that has received bipartisan support on Capitol Hill. Aside from the DCCPA, Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., worked together to introduce the Lummis-Gillibrand Responsible Financial Innovation Act in June, which lays out a more comprehensive framework for regulating digital assets through defining key terms, determining jurisdictional authority and directing other federal agencies on managing crypto.
"I don't think this is a Republican or a Democrat issue," Mr. Boozman said.
According to a Pew Research Center survey conducted in July, 16% of Americans say they have invested in, traded or used a cryptocurrency. If federal regulation is achieved, then experts said investments could increase, specifically on the institutional side.
"It would give more clarity to a whole host of investors that have been waiting on the sidelines to see that type of clear regulation applied," Mr. Salm said.
Sheila Warren, San Francisco-based CEO for the Crypto Council for Innovation, a global alliance of crypto leaders, agreed but made a distinction between institutional investors and retail investors.
"I think you're going to see a tremendous amount of engagement institutionally; retail, I'm not actually sure it's going to change that much," she said. "What I hope is that you'll see retail able to make more educated and sophisticated decisions about what to invest in."
The effect on investments could also depend on what type of regulation is achieved, according to Teresa Goody Guillen, partner at Baker & Hostetler LLP and a former litigation counsel for the SEC.
"For example, if regulation results in cost-prohibitive or impracticable requirement, that tends to have a chilling effect on investment in the industry, which can also negatively impact the innovation in the industry," Ms. Goody Guillen said in an email. She added that if regulation "fosters the development of the technology," then investment often increases.
It is likely that regulation will consist of "both a legislative solution and additional administrative solutions out of various regulators," said Aliceson "Kristy" Littman, Washington-based partner at Willkie Farr & Gallagher LLP, co-head of its digital works practice and a member of the securities litigation and enforcement practice.
"I think there's still a lot of work to do to build a system that gives industry a clear path to regulatory compliance," she said.
Regulating cryptocurrency is not a simple task in part because it has many possible uses, according to Grayscale Investments' Mr. Salm.
"I think because there's so many different use cases, it's why you don't see one single type of regulation that can be applied to it," Mr. Salm said. "And that's really similar to the internet, where there's no internet regulation. Instead, we regulate activity on the internet: we regulate financial transactions, we regulate e-commerce, we regulate intellectual property."
While the DCCPA offers several provisions for regulating digital commodities, it does not include any guidance on regulating digital securities. One complication is that there's still confusion over the definitions of each term.
"There is still a lot of room for the SEC, I think, to assert jurisdiction over digital assets that are not commodities and function more like securities," Ms. Littman said.
The SEC announced in September the addition of a new office to review filings that involve crypto assets. The Office of Crypto Assets will join the seven existing offices that are grouped by industry in the division of corporate finance's Disclosure Review Program.
The Lumis-Gillibrand bill addresses both SEC and CFTC jurisdiction, as well as stablecoin requirements and the treatment of digital assets for tax purposes. This differs greatly from the DCCPA, which Mr. Boozman said is "very simple," potentially increasing its chance to become law.
"I think that we got a good chance of actually getting it passed this year," Mr. Boozman said. "If not, then certainly we will reintroduce it next Congress."
When asked about the DCCPA, Ms. Lummis said in an email: "We are looking into what similarities both bills have and how we can work and get our priorities across the finish line."
At the Senate Agriculture Committee hearing in September, several experts testified before the committee asking for the bill to provide more clarity on the definition of a digital commodity vs. a digital security. One of those experts was the Crypto Council for Innovation's Ms. Warren.
"The industry is calling consistently for regulatory clarity," Ms. Warren said in an interview. "Part of what that means is articulating the boundaries and distinctions and definitions around these different terms, which don't really have any meat to them yet."
The Lummis-Gillibrand Responsible Financial Innovation Act does set a standard for determining which digital assets are commodities and which are securities via the Howey Test, which the SEC currently uses for determining what transactions qualify as "investment contracts."
According to Kari S. Larsen, New York-based partner for Willkie Farr & Gallagher and co-head of the digital works practice, "part of the issue is that there's certainly ambiguity and different interpretations" of what constitutes a digital commodity vs. a digital security, and "that is one of the fundamental issues that the industry is wrestling with right now."
"I think that without legislation providing additional clarity (with) respect to the jurisdictions or at least definitionally, that there will continue to be this back and forth and ambiguity about where is the appropriate jurisdiction," Ms. Larsen said.
