FTX and Terra/Luna also saw high-profile collapses this year, while the entire value of the cryptocurrency market has lost more than $2 trillion since reaching an all-time high in November 2021.
As a result, regulators are under increased pressure to closely watch the sector and develop stringent regulations. Before any progress is achieved, the following significant issues need to be resolved:
Is cryptocurrency a security or a commodity?
According to Edward Moya, a senior market analyst at OANDA, there is currently no comprehensive plan in place to govern cryptocurrencies, and one of the major issues that need to be resolved is exactly how to categorize cryptocurrencies.
Cryptocurrency is security, according to Gary Gensler, chair of the Securities and Exchange Commission. Securities are defined by the Howey Test, which derives from a 1946 Supreme Court decision in the case of SEC v. W.J. Howey Co., as funds invested in a group enterprise with the expectation of benefits from the labor of others.
In a statement from September, Gensler claimed that in cases where “promoters are promoting and the investing public is buying most of these tokens, proclaiming or anticipating rewards based on the efforts of others,” cryptocurrencies would need to be registered with the SEC.
Already, the SEC has taken some action. In order to combat cryptocurrencies, it said in May that it will expand the size of its Crypto Assets and Cyber Unit.
Others in the sector think that since cryptocurrencies behave more like commodities, they should be governed by the Commodity Futures Trading Commission.
The CFTC has the advantage of being in a position to work more effectively with the factors driving cryptocurrency because of its familiarity with other derivatives, according to Moya.
According to Yesha Yadav, a law professor and associate dean of diversity, equality, and community at Vanderbilt University, reaching an agreement on how cryptocurrencies should be classified is quite difficult. Congress will need to make a decision because, according to Yadav, determining how to classify cryptocurrency would help to clarify potential regulatory options.
What possibilities are there for legislation?
It’s difficult to predict which of the bills, of which there are many, will prevail over the others because they were all created before the spectacular failure of the cryptocurrency exchange FTX, which filed for bankruptcy in November after the disappearance of billions of dollars in customer deposits, Yadav said.
A Senate bill supported by Michigan Democrat Debbie Stabenow and Arkansas Republican John Boozman would require all digital commodity platforms — from trading facilities to brokers, dealers, and customers — to register with the CFTC, giving it more power than the SEC in crypto regulation. It will also require digital commodity platforms, among other things, to prohibit abusive trading practices, disclose any conflicts of interest, maintain strong cybersecurity, and report suspicious transactions.
A bill introduced by Wyoming senator Cynthia Lummis and New York senator Kirsten Gillibrand would categorize digital assets into commodities, securities, and supplementary assets. The bill defines auxiliary assets as crypto tokens that, despite fluctuating in value over time, do not grant the bearer a profit or revenue share, or other financial interest.
The SEC would need to receive specific disclosures from cryptocurrency issuers under the terms of this law. The conflict between the SEC and other federal agencies would be lessened since it would be assumed that issues involving digital assets are commodities and are therefore governed by the CFTC.
According to Owen Telford, a policy researcher at Beacon Policy Advisors, It’s difficult to predict which bill will prevail over another over the coming year, especially as he would say each agency has its supporters, and much of that is somewhat shaded by members’ own political positions. Therefore, he is not sure a definite decision on which agency should take the lead will be made in the upcoming year.
Someone like (Sherrod) Brown, the chairman of the Senate Banking Committee, doubts crypto regulation in its totality because he isn’t confident that the asset class should be given credibility, Telford said. Ohio Democrat Brown “will be a vital factor in getting any type of crypto legislation done, and at the moment, it’s not obvious that he would necessarily support any of it.
Bitcoin is down 63.57% so far this year and Ethereum is down 66.88%. The total value of all cryptocurrencies is $811.87 billion, an increase of 1.53% over the previous day.
