Coming after the Biden Administration’s Executive Order on Digital Assets, the Congressional Blockchain Caucus has signaled it will watch new regulation in line with their belief in a “light touch” approach.
The Caucus asked SEC Chair Gary Gensler in March 2022 for information on “voluntary” requests for documents and information to blockchain, cryptocurrency, digital assets and other entities.
Congressional Blockchain Caucus Co-Chair Rep. Tom Emmer (R-MN) said the letter came in response to complaints from crypto and blockchain firms that agency requests were “overburdensome,” stifled innovation and did not “feel particularly voluntary.”
Advocating “a light touch regulatory approach”
The SEC has expressed a strong interest in regulating crypto trading platforms.
The SEC’s Division of Enforcement is obtaining information from blockchain and cryptocurrency firms. The eight members of Congress who signed the letter worried that the SEC is using investigative powers “to gather information from unregulated cryptocurrency and blockchain industry participants in a manner inconsistent with the Commission’s standards for initiating investigations.”
The Congressional Blockchain Caucus is a bipartisan group of members of Congress and staff who favor “a light touch regulatory approach” for blockchain and cryptocurrency.
Members have sponsored bills on blockchain and cryptocurrency such as the “Securities Clarity Act” and the “Digital Commodity Exchange Act.” Those bills seek to clarify and streamline regulation by making regulatory schemes less complicated and onerous on industry.
The letter leverages the mundane Paperwork Reduction Act to elicit information on whether the SEC is making “overburdensome” requests. Themes include:
- Volume: In the last five years, how many voluntary document requests has the agency issued? How many questions do the letters ask, on average? What kinds of businesses do they ask?
- Costs: What compliance costs do recipients incur to comply? How much time do they have to respond? Has an SEC cost-benefit analysis determined the value of the information versus the fairness and efficacy of requests?
- Effects: Do recipients know responses are voluntary? What are the consequences for declining to respond? Does the agency tell recipients if they are under informal investigation?
- Purpose: Do recipients know the objective of the requests? How SEC will use the information?
Emmer acknowledged “the SEC has authority to obtain info from market participants for rulemaking purposes.” He also said “burdensome reporting requirements” should not weigh down crypto startups. He said the caucus “will ensure our regulators do not kill American innovation and opportunities.”
President Biden issued a sweeping executive order in 2022 acknowledging the key role digital assets will play in the global financial system. It embraces crypto as the wave of the future – while setting the stage for increased oversight, regulation and enforcement.
What It Means
- Businesses that have seen themselves in a legal gray area may find themselves subject to many of the same regulations as traditional financial service providers.
- The order calls for an “unprecedented focus of coordinated action” to address the illicit use of digital assets. This will likely lead to increased criminal enforcement, including holding companies accountable for illegal activity perpetrated through their networks.
- Numerous agencies are developing policies and regulatory frameworks to protect consumers, investors and businesses in the crypto sphere.
- The order directs agencies to coordinate with international partners on approaching and responding to risks. That may involve cross-border investigations and prosecutions.
In More Detail: The Executive Order’s Six Priorities
Citing the explosive growth in digital assets, the order makes the case for stronger oversight and increased regulation of cryptocurrencies. It announces six key priorities:
- Protecting Consumers, Investors and Businesses
- The Treasury Department and others will develop recommendations to address the risks and opportunities of digital assets. The Attorney General will report on law enforcement’s role to detect, investigate and prosecute crypto crime and recommend regulatory or legislative action.
- Protecting U.S. and Global Financial Stability
- The Financial Stability Oversight Council will identify economy-wide financial risks digital assets pose and develop proposals to address them and associated regulatory gaps.
- Mitigating Illicit Finance and National Security Risks
- The order emphasizes the growing use of digital assets to facilitate cybercrime, money laundering, terrorist and proliferation financing, fraud, theft, and corruption. It asks agencies to evaluate how regulation can mitigate risk.
- The plan addresses how investigators can increase compliance with laws against money laundering and financing terrorism, focusing on decentralized financial ecosystems, peer-to-peer payments and obscured blockchain ledgers.
- Reinforcing U.S. Leadership in the Global Financial System
- The Commerce Department will work with other agencies on a framework to drive U.S. competitiveness and leadership in and use of digital asset technologies.
- The Treasury Department will facilitate international engagement on issues like global compliance and standards.
- Promoting Access to Safe, Affordable Financial Services
- The Treasury Department will report on the future of money and payment services.
- Supporting Responsible Innovation
- Several agencies will support advances in the development, design and implementation of digital asset systems.
- One goal: Ensuring such technologies emphasize privacy and security, defend against illicit exploitation and reduce negative climate impacts and environmental pollution from cryptocurrency mining.
On the horizon
- The order puts the “highest urgency” on research and development of a U.S. Central Bank Digital Currency. It says that may support efficient and low-cost transactions and greater access.
Signs of Increased Regulation
- The Justice Department’s National Cryptocurrency Enforcement Team
- Biden’s March 2022 executive order came months after the Justice Department announced a National Cryptocurrency Enforcement Team.
- The team investigates and prosecutes crimes like money laundering, ransomware and extortion schemes, and trading on dark markets for drugs, weapons and hacking tools.
- The task force’s creation suggests the Justice Department has the resources and will to investigate allegations of crypto wrongdoing.
- The SEC has eyed regulating crypto trading platforms
- When asked in January if the SEC will start regulating crypto trading platforms in 2022, Chairman Gary Gensler said “…I sure hope so.”
- He also said: “To the extent that folks are operating outside the regulatory perimeter, but are supposed to be inside, we will bring enforcement actions.”
- Gensler has said he sees most cryptocurrencies as securities subject to SEC regulation.
- Other agencies are also marching toward regulation
- The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency have conducted interagency “policy sprints” focused on crypto assets.
- The goal was to analyze if and how existing regulations apply to crypto activities and to establish a road map for the future.
- They promised to “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible” and articulate expectations for compliance with existing laws.
- Our 2021 Year-End Crypto Roundup details other regulatory initiatives.
- Regulators are getting more tools – and power
- Until now, regulators approached crypto misconduct with outdated laws that didn’t always fit. Now regulators are getting more tools and power.
- Even without a coordinated strategy or crypto-specific regulatory framework, agencies have held companies and people accountable for misconduct.
- The SEC has brought numerous enforcement actions for fraudulent and unregistered digital asset offerings, and the DOJ recently arrested two people on charges they tried to launder $4.5 billion in stolen cryptocurrency.
- FinCEN and the Commodity Futures Trading Commission reached a $100 million settlement with cryptocurrency exchange BitMEX last year. The exchange’s founders pleaded guilty to charges stemming from the company’s failure to establish, implement, and maintain an anti-money laundering program.
 See Board of Governors of the Federal Reserve, Money and Payments; The U.S. Dollar in the Age of Digital Transformation (Jan. 2022).
 U.S. Dep’t of Justice, Press Release, Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team (Oct. 6, 2021).
 Jennifer Schonberger, SEC’s Gensler wants crypto exchange regulation in 2022, warns on stablecoin, Yahoo Finance (Jan. 20, 2022).
 Cheyenne Ligon, Gensler’s Crypto Testimony: 6 Key Takeaways, CoinDesk (Oct. 6, 2021).
 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (Nov. 23, 2021).
 See U.S. Securities & Exchange Commission, Cyber Enforcement Actions.
 U.S. Dep’t of Justice, Press Release, Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency (Feb. 8, 2022).