Turf war around crypto opens the door to arbitration
The cat in the water may be taken by the Commodities Futures Commission, more moderate than the SEC
Crypto firms can divide and conquer Washington’s regulatory fiefdoms. The US Federal Reserve last week delimited its territory and asked banks to notify it if they offer services for bitcoin and the like. Other agencies are also struggling to oversee this trillion-dollar market. Fragmentation presents an opportunity for some players in the sector, but harms the owners of tokens.
The central bank move is intended to include more crypto activities in its purview. Due to fuzzy rules or outright bans, such as traditional banks dealing directly with digital assets, banks have been wary of delving too far into this wild market.
The Fed’s supervisory letter gives banks the green light to go further, with safety limits. If they have proper risk management and controls in place, it looks like the Fed won’t stand in their way.
The decision goes against other rules. For example, a May Securities and Exchange Commission bulletin said that companies that hold digital assets of their customers must record the risk on their balance sheets at the fair market value of the currency. The edict increases regulatory capital charges for banks, making crypto services too expensive in many cases. As the Fed seeks clarity on the SEC’s guidance, non-banks may pressure the agency to uphold its actions.
At the same time, the SEC is in its own fight for territory. In an insider trading case filed in July, the Gary Gensler-led agency declared several digital assets to be securities. Gensler has also been the most vocal US regulator in bringing enforcement cases around crypto.
However, certain congressional proposals would largely hand oversight to the smaller Commodity Futures Trading Commission, the CFTC. The cryptocurrency industry supports this idea. It has tripled its lobbying spending to about $9 million last year, according to the consumer advocacy group Public Citizen. The CFTC is seen as more moderate than the SEC, which is headed by a former Goldman Sachs banker.
The lack of general federal regulation hurts owners of digital assets. The total value of cryptocurrencies has more than halved since hitting the $3 trillion mark last November. Three Arrows Capital, Voyager Digital, and Celsius Network are some of the crypto companies that have filed for bankruptcy in recent months. Only some will be able to take advantage of regulatory arbitrage.
