SEC’s ‘backdoor’ approach to crypto may cost it energy

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Crypto’s notable absence from the US Securities and Exchange Commission’s spring regulatory agenda is the latest sign of an agency with a penchant for backhand regulation of digital assets while ignoring issues that need attention. particular.

Overall, that’s the view of one of its most outspoken commissioners, Hester Peirce, who criticized the priorities of its chairman, Gary Gensler, on Wednesday (June 22) as the agency released a list issues she plans to work on in the coming months.

“While the agenda includes rules that may regulate cryptographic protocols or platforms via an unmarked backdoor,” she said, “it does not appear to include rules primarily intended to address major regulatory issues that have arisen around these assets”.

The approach appears to be coming back to bite Gensler, who has pursued an aggressive strategy with an industry he has repeatedly called “the Wild West of finance” that shows signs of pushing members of Congress toward a regulatory framework favoring other agencies.

See also: In Senate Hearing, CFTC Chairman Behnam Steps Up Battle With SEC Over Crypto Oversight

sneak in

The backdoors Peirce is referring to are three proposals, one that would dramatically expand the commission’s control over centralized and decentralized cryptocurrency exchanges, another that would define decentralized finance (DeFi) exchanges as “dealers” that must register, and a third that would force crypto custodians to list the assets they hold for customers on their balance sheets.

Read more: DeFi Advocates Cry Foul on SEC Again – This Time More Attempts to Define “Exchange”

In the first two cases, the proposals were footnotes in rules that spanned hundreds of pages. While the former would give the agency much more control, the latter would be potentially crippling for decentralized exchanges (DEXs) because the automated market makers (AMMs) they run on are software that manages the buying and selling crypto and are unable to register, industry advocates said.

“It’s a total phantom attack on decentralized finance,” Delphi Digital Labs general counsel Gabriel Shapiro said in March.

See more: DeFi advocates Blast’s proposed SEC rule change as a crippling ‘attack from the shadows’

More broadly, Peirce said the agency’s approach has led to rules that “do not appear to include rules primarily intended to address key regulatory issues that have arisen around these assets.”

scratching your head

The crypto custody rule forced major US exchange Coinbase to issue a warning in May that customers’ crypto balances could be at risk in the event of bankruptcy, hitting its stock price – although it said it didn’t. was not in danger of bankruptcy.

It’s something Federal Reserve Chairman Jerome Powell brought up before the Senate Banking Committee on Wednesday, saying regulators don’t know how to fix it with lenders who hold cryptocurrencies for their clients.

“Assets in custody are off-balance sheet, they always have been,” Powell said. “The SEC made a different decision regarding digital assets.”

The rule also prompted five U.S. senators, including Sen. Cynthia Lummis (R-Wyo.) — who recently released a bipartisan crypto regulation bill that would strip the SEC of its power — to send the agency a letter complaining of an “attempt to circumvent the rule-making process”.

By directing its regulatory efforts with enforcement and staff guidance instead of deliberate rulemaking, the letter says, the SEC has taken “a roundabout staff-led approach that creates more questions than answers.”

It’s also part of the reason the Lummis bill co-authored with Sen. Kirsten Gillibrand (DN.Y.) gives regulatory authority over cryptocurrencies long claimed by the SEC to Commodity Futures Trading. Commission (CFTC), which is seen as more pro-crypto — or at least less anti-crypto.

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