The Center for American Progress, a left-leaning think tank, released a report Monday calling on the Securities and Exchange Commission to aggressively assert its authority over large swaths of the market for digital assets, in the latest signal that the U.S. center-left is becoming increasingly impatient with crypto firms that refuse to submit to the SEC’s authority.
The report, previewed exclusively by MarketWatch and authored by Todd Phillips, CAP’s director of financial regulation and corporate governance, argues that SEC Chairman Gary Gensler has the law on his side when he has said that the vast majority of cryptocurrencies being traded today are unregistered securities and that their issuers and brokers and exchanges who trade them are violating federal law.
“The SEC is in a pretty difficult situation here, because they are issuing guidance explaining what the law is,” Phillips said in an interview with MarketWatch. “They are having meetings with companies, telling them what the law is and they are bringing lawsuits based on what the law is and the industry doesn’t seem to care.”
Though CAP describes itself as nonpartisan, it “has strong ties to the Democratic Party establishment,” according to Influence Watch, and is led by by Patrick Gaspard, a former high-ranking official in the Obama administration. The report could be the latest sign that the debate over crypto regulation is taking on a partisan valence.
This dynamic was on display at a Senate Banking Committee hearing last month, when Republicans took Gensler to task for not providing the crypto industry with enough clarity as to what makes a digital asset a security and therefore under SEC jurisdiction.
Republican Sen. Pat Toomey of Pennsylvania has been increasingly critical of what he calls the SEC’s “strategy of regulation by enforcement,” or the practice of bringing enforcement actions against crypto issuers without “proactively [providing] rules of the road to the industry,” according to a September letter the ranking Republican on the Senate Banking Committee sent to Gensler. In August, the ranking Republican on the House Financial Services Committee, North Carolina Rep. Patrick McHenry, accused the SEC Chair of attempting a “power grab,” in asserting his agency’s jurisdiction over digital asset exchanges.
Democrats have largely come to Gensler’s defense on the issue, who has argued when Congress passed U.S. securities laws they “painted with a broad brush,” and that its definition of a security “included about 35 different things.”
Some of the most high profile Democratic lawmakers sitting on committees with jurisdiction over financial markets and crypto have called for the SEC and other financial regulators to get more aggressive with the crypto industry.
In July, Sen. Sherrod Brown of Ohio, Democratic chairman of the Senate Banking Committee called cryptocurrencies “funny money” that was putting “Americans’ hard-earned money at risk,” while Sen. Mark Warner of Virginia, the Democrat who chairs the Senate Intelligence Committee, has pushed for tougher tax reporting rules on crypto transactions and expressed worry about digital assets enabling cyber crime.
Democratic Rep. Bill Foster of Illinois, co-chair of the House blockchain caucus, even called for laws to allow federal courts to identify digital-asset holders and then reverse transactions in bitcoin or other digital currencies, a policy that is anathema to many cryptocurrency investors.
Phillips argued the SEC must get tough in order to protect investors from largely unregistered and unregulated exchanges offering digital assets. In the report, he likened today’s digital asset market to the capital markets of the 1920s, “with rampant speculation, market manipulation, deception and outright theft.”
He cited several examples of exchanges that had investor funds stolen through hacking incidents, including the August $600 million theft at Poly Network, a $97 million heist from the exchange Liquid and the 2019 “siphoning” of $163 in digital assets by the founder of the QuadrigaCX exchange.
“These abuses should not occur, especially as the law already exists to put a stop to most of them,” Phillips wrote in the report. “Simply bringing digital-asset securities under the jurisdiction of the securities laws to the greatest extent possible would allow the SEC to address abuses related to” asset valuation, accounting rules, data privacy, investor insurance and market access, he added.
Though the SEC has signaled it doesn’t consider the two most popular cryptocurrencies, bitcoin and ether to be securities, Gensler has suggested the vast majority of other digital assets are. Even if the SEC cannot regulate bitcoin and ether directly, it can regulate exchanges that offer them, as long as those exchanges trade other digital assets that are securities, Phillips said.
The CAP report also suggests the SEC should pass rules mandating that issuers of digital assets disclose the environmental impact of their technologies, as the mining and digital assets and validating of transactions on the blockchain can be energy intensive. “If you disclose blockchain power consumption people will move their investments into coins that use the lowest power blockchains, and that could end up helping the industry use less energy,” Phillips said.
CAP’s Phillips said there is a range of views in the Democratic caucus on cryptocurrency, but argued that it was perhaps most important for the party to spend more funding the SEC, so it can enforce laws already on the books. President Joe Biden’s budget called for a 5% boost to the SEC’s in June that financial watchdogs have called “meager” and inadequate for the agency to tackle aggressive regulation of an entirely new asset class.
Gensler agrees, telling CNBC last month that the agency is “short-staffed” with about 5% fewer staff than it had five years ago. He argued for a 10% surge in the number of lawyers at the agency to help policy crypto.
“The SEC has limited bandwidth to deal with issues,” CAP’s Phillips said. “They have limited personnel, they have limited time and Congress needs to increase funding so the SEC and other regulators can go after the law breakers.”