Ethereum set to stress test US crypto deregulation
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Pranav Kiran
TORONTO, May 22 (Reuters Breakingviews) -Cryptocurrencies are insidiously weaving their way into the fabric of American finance. The latest effort is on Capitol Hill, where lawmakers are ready to support a proposal that would dilute the Securities and Exchange Commission’s power over securities related to digital and decentralized currencies. It’s primed to be yet another example of stress-testing deregulation, which has a bad habit of hurting investors.
The U.S. House of Representatives, according to Politico, is poised to pass legislation that would among other things make it easier to get approval for spot exchange-traded funds that track cryptocurrencies such as ethereum. It would also give the Commodity Futures Trading Commission power over regulating the spot market for the underlying digital assets. The SEC is already weighing their viability, after greenlighting bitcoin-related ones earlier this year. BlackRock’s iShares Bitcoin Trust and others have attracted $29 billion since January from everyday investors and big portfolio managers seeking ways to make their fortunes in the wildly swinging market.
Not all cryptocurrencies are the same, however. The most important difference, especially where an investment portfolio is concerned, is how they’re structured. Bitcoin, for example, uses a system called “proof of work,” where miners solve math problems to unearth coins. By contrast, ethereum in 2022 moved to a “proof of stake” system, where community members put up their tokens to validate transactions and expand the affiliated blockchain.
This esoteric distinction is a big concern for SEC Chair Gary Gensler, because he reckons the consensus mechanism puts ethereum under his agency’s purview. Under the Howey test that determines what is an investment contract to be regulated, the proof-of-stake system amounts to an “expectation of profit” for little to no work, similar to an interest payment.
Gensler, who has been broadly wary of crypto, warned on Wednesday that the House’s Financial Innovation and Technology for the 21st Century Act, which among other things would free blockchain-recorded contracts from being designated as securities, creates gaps in oversight and puts “investors and capital markets at immeasurable risk.” Underlying tokens in spot crypto ETFs are mostly bought and sold offshore using pseudonymous wallet addresses, making it harder to uncover wrongdoing and track the legitimacy of prices. Moreover, it hardly inspires confidence that the FTX cryptocurrency exchange is bankrupt and founder Sam Bankman-Fried is sitting behind bars for fraud.
Not all financial deregulation is harmful, but history is also littered with wreckage that followed laxer rules. Gensler’s resistance in this instance is justified. Even if the House passes the bill, it would still need Senate and White House approval, meaning there’s time yet to keep crypto under control.
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CONTEXT NEWS
Securities and Exchange Commission Chair Gary Gensler on May 22 warned that legislation under consideration in Congress to govern how cryptocurrencies are regulated would put investors and markets at risk.
The Financial Innovation and Technology for the 21st Century Act would “create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts,” Gensler said.
Championed by Republicans and supported by some Democrats, the proposal is set to be passed in the U.S. House of Representatives on May 22, Politico reported.
Editing by Jeffrey Goldfarb and Oliver Taslic
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