Recent statements by Gary Gensler, the Chairman of the U.S. Securities and Exchange Commission (SEC), before members of the House of Representatives reflect U.S. regulatory bodies' desire to establish rules to regulate the cryptocurrency market akin to Wall Street activities that protect investors in the securities field. However, the challenge facing this market is the absence of an authority to regulate it, tasked with auditing cryptocurrency exchanges or brokers, as significant amounts of money are invested in cryptocurrencies despite concerns over whether a sophisticated financial system exists to manage them. The Wall Street Journal quoted Gensler saying, "It cannot be known whether some trades on cryptocurrency exchanges are genuine or fraudulent."
On another note, the Federal Trade Commission reported that investors lost approximately $82 million in cryptocurrency fraud during the fourth quarter of last year and the first quarter of this year (over six months), which is more than ten times the amount lost during the same six-month period a year ago. It pointed out that many losses came from scammers targeting small investors on social media.
The House Financial Services Committee formed a 12-member task force to consider potential legislative changes and study digital assets that were developed with little to no regulation. In 2014, then-Chair of the Federal Reserve Janet Yellen stated that the House did not have authority to regulate Bitcoin or similar cryptocurrencies. At that time, the total market value of Bitcoin alone was around $4.3 billion, but its value is now estimated at about $622 billion, owned by millions of individual investors and a handful of public companies, including Tesla, the giant electric vehicle manufacturer in the U.S.
Yellen, who currently heads the Treasury Department, indicated that the department is in the early stages of reviewing whether its authority to regulate payment networks could apply to some cryptographic assets, explaining that they are using one possible tool, which is monitoring financial stability, to target crypto assets such as cash-backed stablecoins. However, some regulators mentioned that such a tool could become a source of risk, as it allows regulators to write rules governing those activities and grants the Federal Reserve authority over cryptocurrencies.
Currently, the SEC is seen as the practical overseer of the industry, but its regulatory model frustrates cryptocurrency companies, which argue that investor protection rules do not always align with how cryptocurrencies are used. They pointed out that the SEC has not clarified how brokers can hold crypto assets that are considered securities, given that the methods of custody differ significantly from how stocks are held.
Cryptocurrency companies have stated that regulators should write rules that suit their industry, rather than relying on enforcement actions based on past conditions. Michelle Bond, the CEO of the Digital Asset Markets Association, suggested that in the absence of federal rules, some companies have adhered to an internal code of conduct governing corporate ethics. She stated, "It is unlikely that attempts to regulate digital assets will succeed if you do not have engineers, developers, and programmers at the table, because the technology can be very complex."
