The U.S. Securities and Exchange Commission (SEC) has several cryptocurrency investment funds and traders in its sights, recent actions by the regulator against Uniswap or funds such as Grayscale, warn of a new regulatory wave in the blockchain sector.
In the past, SEC Chairman Gary Gensler called blockchain-derived tokens “synthetic stocks” and those investment funds or firms that support their spread are likely to end up in legal trouble.
On Wednesday, Gensler warned that tokens that behave like stocks or have returns similar to the shares of major companies listed on U.S. stock indexes will likely end up being regulated under U.S. securities law.
“It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides a synthetic exposure to underlying securities,” Gensler said. “These platforms —whether in the decentralized or centralized finance space— are implicated by the securities laws and must work within our securities regime.”
Gensler was referring to the concept of DEFI, as decentralized finance where tokens that track the performance of cryptocurrencies such as Ethereum have begun to be generated. Some DEFI companies such as Coinbase, have started to organize decentralized lending systems, where users can lend directly to other users at an interest rate set by both parties.
The debate is whether tokens derived from DEFI applications constitute a security or not, and if so, how the SEC should go about regulating them. The concept of DEFI is based on the possibility of making transfers and investing in digital assets without a central authority having to supervise the transaction, so a very strict regulation of crypto brokers could end up completely undermining this new sector.
Under pressure from Democrats
Several Democratic Party senators have supported stricter regulations for cryptocurrencies, as is the case of Elizabeth Warren who has pressed the SEC to structure new regulations and has stated that it should not wait “until small investors have disappeared”.
Some crypto-investors have argued in the past, that the SEC does not have the tools to regulate the cryptocurrency market or blockchain businesses.
Senate Banking Committee Chairman Senator Pat Toomey (R-Penn) has been critical of the position taken by the SEC on cryptocurrencies, stating that “for investors to benefit from a fair and competitive marketplace, regulators must proactively provide rules of the road to the industry. Unfortunately, the Securities and Exchange Commission (SEC) has instead adopted a strategy of regulation-by-enforcement in this area.”
Senator Toomey asked Gensler to elaborate on why Stablecoins, cryptocurrencies, and other forms of crypto-assets should be considered Securities under U.S. law.
Recently the Biden administration introduced an amendment within the $3.5 trillion plan that would force cryptocurrency brokers to disclose their users’ transaction information to the IRS. Toomey and another team of bipartisan senators managed to introduce in the amendment the clarification that under the definition of a broker are excluded developers and miners who validate the transaction.
Other authorities such as the Federal Reserve (FED) are busy establishing mechanisms to control the volatility still experienced by crypto assets, and FED Chairman Jerome Powell has not only affirmed that these assets are part of the future, but is also studying the possibility of the central bank designing its own stablecoin.