Has the Biden Administration Lost the Plot on Crypto Regulation?

While we understand the Biden Administration's approach to crypto regulation is in the process of being defined, we have yet to see any definitive proposals or policy statements that will bring clarity and consistency.

What we have glimpsed through statements by Treasury Secretary Janet Yellen and Chairman Jerome Powell, and from recent congressional hearings, appears defensive and reactionary. It also appears to be influenced more by recent ransomware attacks, China's policy regarding CBDCs, environmental issues, and El Salvador's adoption of bitcoin as legal tender than any effort to clarify markets and assist the industry's growth. It appears that agencies that are responsible for crypto regulation have shifted to national security concerns instead of competitive markets and products. The lack of progress is disappointing.

Olta Andoni is Chief Legal Officer at Nifty's. Donna Redel is a Professor at Fordham Law and Board Member at NY Angels.

This state of affairs contrasts starkly to the increasing institutional adoption of crypto currency assets, the approval of ETFs by  Canada, Brazil and states in Europe) the movement among states here (especially Wyoming, Texas and New York) to create comprehensive legal frameworks for crypto-digital assets and the widespread crypto ownership by the public.

Furthermore, recent enforcement actions/settlements around 2017 ICOs are not instructive in the current environment where DeFi projects with VC backing operate without apparent regulatory oversight. A recent plenary meeting of selected DeFi projects and regulators happened behind closed doors, giving the public and other projects little guidance. The action brought against Ripple and other associated entities is only in the discovery stage, so it is doubtful that any outcome will occur in 2021 that might provide greater legal clarity. There are no cases likely to lead to judge-made law suggesting when a token is or is not a security, still the number one issue of regulatory confusion among several of them.

Chairman Gensler recently stated "…[t]his (crypto) is quite volatile, one might say a highly volatile asset class, and the investing public would benefit from investor protection on crypto exchanges." The emphasis on a federal framework for exchange regulation is, in our opinion, long overdue as we advocated in our CoinDesk article in response to Peirce's Safe Harbor Proposal 1.0.  But more certainty is needed, whether that certainty is the result of judge-made law, a binding rule promulgated by the SEC or a new law created by Congress.  

The beginning of the Gensler tenure doesn't bode well for the crypto market which is still seeking clarity on existing products, much less an ETF product with as many as nine proposals before the SEC for consideration. ETFs are popular with retail investors who currently have little or no access to regulated bitcoin products, thereby "forcing" them into more risky unregulated altcoin alternatives.

The recent CBDC hearings on Capitol Hill, most notably that of Sen. Warren's subcommittee and the committee of Rep. Maxine Walter , have demonstrated a dual-pronged approach to protect the dollar's hegemony. The committees proposed task forces to study a digital dollar and restrictive crypto regulation aligned with national security and crime concerns. In our opinion, this is the wrong approach because it is based on the lack of understanding of the environmental impact of bitcoin, and underplays the need to move quicker on the adoption of CBDCs to be globally competitive while simultaneously protecting citizen privacy. At the same time, USD CBDC might reduce reliance on stablecoins like tether, which were recently labeled by a federal official as a short-term financial destabilizer.