May 16, 2023

Historic crypto hearing: What traders need to know  

May 16, 2023

Historic crypto hearing What traders need to know
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The rise of Cryptocurrencies such as Bitcoin has paved the way for a revolution in digital-asset trading. As crypto becomes mainstream new rules and regulations need to be implemented to avoid scams and fraud such as FTX 

The US House Committees on Agriculture and Financial Services held a joint hearing on May 10th to address the landscape of digital assets including cryptocurrency. The hearing concluded with potential next steps for regulators and Congress to enhance regulations around crypto.   

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The hearing, titled “The Future of Digital Assets: Assessing Regulatory Gaps in Digital Asset Markets,” was conducted by the Agriculture Committee and Financial Services Committee of the US House of Representatives. The Agriculture Committee oversees the US Commodity Future Trading Commission (CFTC), while the Financial Services Committee oversees the US Securities and Exchange Commission (SEC).  

In this article, CMTrading examines the outcome of the hearing and provides insights for traders.  

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Landmark crypto hearing  

During the hearing, panelists addressed the absence of a comprehensive federal regulatory system for commodity spot trading and the challenges in determining whether a digital asset qualifies as a security under an investment contract or falls within the definition of a commodity according to the Commodity Exchange Act (CEA).   

The hearing emphasised the significance of resolving regulatory uncertainty and establishing a clear and consistent framework for digital assets.   

Leaders of both committees expressed their intent to develop legislation that would establish regulatory clarity for digital asset markets. Representative Patrick McHenry (R-N.C.), Chairman of the House Financial Services Committee, specifically highlighted the necessity for potential enhancements to the current SEC framework regarding digital asset disclosure.   

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He also emphasised the expansion of CFTC’s authority over non-security digital assets like bitcoin in the spot market, as well as modifications to SEC rules governing broker-dealers and security exchanges about digital assets. McHenry emphasized that congressional approval would be required for such actions since neither the SEC nor the CFTC possesses the authority to implement them unilaterally.  

Criticism from within   

Representative GT Thompson (R-Pa.), Chairman of the House Agriculture Committee, criticised the existing process for determining whether a digital asset qualifies as a security, deeming it ambiguous, impractical, and unworkable. He acknowledged that the committees have a unique opportunity to establish a digital asset market framework that enables developers and users to engage with digital assets in a secure and compliant manner.  

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Regulatory challenges   

Although the politically divided US Congress often faces challenges in passing new legislation, there were areas of bipartisan consensus during the joint hearing. Witnesses and many legislators agreed that regulatory clarity is necessary to alleviate uncertainty and enhance the digital assets marketplace in the US.   

In terms of testimonies and key questions, Matthew Kulkin, former Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight and current partner at Wilmer Hale law firm, provided relevant insights for participants in the derivatives market. Kulkin stated that the statutory definition of a “commodity” intentionally encompasses a wide range of assets, and he urged Congress to expand the CFTC’s enforcement authority concerning fraud and manipulation in the digital commodity spot market. He also advocated for a clear delineation of roles, designating the CFTC as the primary regulator for digital commodities and the SEC as the primary regulator for digital securities.  

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Combating digital fraud  

The US Market Integrity and Major Frauds Unit (MIMF) is at the forefront of combating fraud and market manipulation related to cryptocurrencies on a national level.   

Since 2019, the MIMF Unit has taken legal action against cryptocurrency fraud cases, with a total value exceeding $2 billion, targeting intended financial losses inflicted upon investors worldwide. To identify and prosecute intricate cryptocurrency investment schemes, price and market manipulation in the crypto sphere, fraudulent activities involving unregistered cryptocurrency exchanges, as well as insider trading impacting cryptocurrency markets, prosecutors in the Unit employ a combination of blockchain data analytics and conventional law enforcement methods.   

2022 MIMF Unit Crypto Fraud National Enforcement Action: 

Historic crypto hearing: What traders need to know

2022 MIMF Unit Crypto Fraud Enforcement Results 

crypto

A hotbed for fraud   

Congressman Stephen Lynch said that crypto advocates criticize SEC disclosure because they know their businesses do not comply with “orderly markets and investor protection law.”    

Lynch said: “Rather than comply with existing rules, various cryptocurrency firms have engaged in a legal battle against the SEC.”   

He pointed out that the SEC had “prevailed” in its 130 cases against the crypto industry.   

Earlier in 2023, the SEC sued crypto exchange Kraken for offering its Ethereum staking products as unregistered securities. The company settled with the SEC without admitting nor denying guilt.   

A court recently ordered the SEC to respond to Coinbase’s request for regulatory clarity. The SEC had previously issued Coinbase a Wells Notice threatening enforcement against unregistered securities listings.  

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Looking to Switzerland  

According to Maxine Waters, the ranking member of the House Financial Services Committee, attempts have been made to establish a new market structure for cryptocurrencies in the USA.   

Bryan Steil, a representative from Wisconsin, acknowledged Congress’s willingness to enact crypto regulations but highlighted Switzerland and Europe’s more forward-thinking approach.   

In response to Steil’s inquiry, Daniel Schoenberger, the chief legal officer of Web3 Foundation, commented on Switzerland’s early establishment of a transparent regulatory framework. He emphasized that this framework provided legal certainty for companies to be headquartered there and ensured immediate clarity in terms of classification.  

Long road ahead for crypto regulation   

During the Financial Times Crypto and Digital Assets Summit in London, SEC Commissioner Hester Peirce expressed doubt about the likelihood of imminent crypto legislation in the United States.   

Commissioner Peirce suggested that the US could draw insights from Europe’s Markets-in-Crypto-Assets (MiCA) regulation, which has recently been enacted by the European Union. The MiCA bill establishes guidelines for asset disclosure requirements and anti-money laundering regulations for cryptocurrency exchanges, among other provisions.   

Timothy Massad, a researcher from Harvard, proposed the creation of a Self-Regulatory Organization (SRO) involving the SEC and the CFTC during the summit. The SRO would receive an official endorsement from the United States Congress.   

In Europe, companies holding licenses in one EU member state can operate across the remaining 26 states. Local regulators oversee license applications, while compliance with MiCA rules is enforced by the European Banking Authority and the European Securities Authority. 

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Disclaimer
Trading involves a significant risk of loss and is not suitable for all investors. It’s important to understand the risks and seek advice from an independent financial advisor if necessary.

The information provided here does not constitute investment advice.

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