SEC sends positive crypto signals, industry fears a future Gensler

The US Securities and Exchange Commission (SEC) has sent numerous positive signals on crypto assets, but the industry fears a “future Gary Gensler” could erase any progress.  

The SEC has already dropped a slew of cases brought by the former chair and “crypto sceptic” Gensler against crypto platforms, as well as establishing a crypto asset task force. However, proposed stablecoin legislation has not landed well with crypto advocates.

Three bills

There are currently three stablecoin regulation bills doing the rounds at the Capitol at different states of development. They are the GENIUS Act, the STABLE Act and the draft legislation known as the Waters Act, after US representative Maxine Waters (D-CA).

While stablecoin legislation is welcomed, critics say the three proposals are too close to bank regulation, offer too much discretion to regulators, and do not allow for a clear path for state-level stablecoin rules.

Jennifer Schlup, director of financial regulation studies at the Cato Instituteʼs centre for monetary and financial alternatives in Washington DC, wrote in a recent analysis that stablecoin operators should not be subject to capital, liquidity and risk management requirements like banks because they do not “function as fractional reserve banks”.

Discretionary gatekeeping

Schlup and others have pointed out that discretionary gatekeeping approaches allow regulators to pick winners and losers, and can act like “de facto bans” on financial innovation.

“Moreover, the existence of this discretion creates a trapdoor whereby regulators may subvert congressional intent to support competition in payment systems with their own additional requirements,” Schlup wrote.

Proposed legislation, apart from the STABLE Act, gives too much power to federal regulators and too little leeway to states to design their own regulations. There is also too much scope for federal regulators to take enforcement action against state-regulated stablecoin issuers.

One crypto lobbyist Compliance Corylated spoke to put it bluntly: “Let’s just say we get another Gensler in Treasury and this person decides I hate all this, and I don’t believe your state has what it takes to regulate this stablecoin issuer.”

States should at least have the power to contest what the Treasury decides, the lobbyist added.

Safeguarding rules

The SEC continues to reconsider the effect of its rulemaking on crypto firms. On Monday, acting chair Mark Uyeda said the regulator would revisit its new safeguarding proposals, which industry critics deemed to be too far reaching and would extend custodial requirements to crypto assets.

“Given such concern, there may be significant challenges to proceeding with the original proposal. As such, I have asked the SEC staff to work closely with the crypto task force to consider appropriate alternatives, including its withdrawal,” Uyeda said.

Security status

SEC crypto task force leader Hester Peirce will convene the first of its “Spring sprint toward crypto clarity”, roundtables on March 21. The session, “How we got here and how we get out – defining security status”, will be live-streamed on the regulatorʼs website.

In a statement released at the task forceʼs launch, Peirce said analysing crypto assets using the Howey Test can be difficult, and difficult to apply consistently. She and the task force will look at several options for determining security status for crypto assets, she added, including a regulatory taxonomy that could provide a predictable, legally precise and rational approach.