If you’ve been following Congress lately, you might be wondering why this is becoming the summer of cryptocurrency. Although crypto isn’t among the top 20 policy concerns Americans identify when asked, crypto industry-sponsored legislation is gaining momentum even though it raises serious threats to investors, consumers, markets and even financial stability.
That legislation — the Financial Innovation and Technology for the 21st Century Act (FIT 21) — passed the House last month after the crypto industry spent an enormous sum lobbying on its behalf. The industry also filled pro-crypto super PAC coffers with hundreds of millions of dollars to threaten any lawmaker who dares to oppose crypto’s agenda. Now, the bill heads to the Senate, where the industry’s lobbying campaign will be fierce.
Given the crypto industry’s long RAP sheet of lawlessness, arrests, criminal convictions, predatory conduct, illegal behavior, bankruptcies, lawsuits and scandals, policymakers should view with deep skepticism anything related to crypto, including FIT 21.
After all, it was FTX’s Sam Bankman-Fried and his partner Ryan Salame (sentenced last month to seven and a half years in prison for buying influence in Congress via illegal campaign contributions) who were the original advocates for the core provisions now in FIT 21. The enactment of crypto-friendly legislation would set the stage for another scandal similar to, or worse than, what we experienced with FTX.
Here are just a few of the questions that should be asked about FIT 21.
First, is it just deregulation disguised as regulation? FIT 21 claims to modernize the longstanding regulation of securities by creating an entirely new category for crypto called “investment contract assets,” which it then excludes from the definition of a “security.” That eliminates it from oversight by the U.S. Securities and Exchange Commission (SEC), which has been a longtime goal of the crypto industry. The last thing crypto wants is to be regulated by an effective cop on the financial beat like the SEC. This regulatory exclusion, which is really just wholesale deregulation, would also likely result in a surge of asset issuances, sales and trading without appropriate transparency, disclosure and guardrails, or the protections of the securities laws.
Second, will the Commodity Futures and Trading Commission (CFTC) have enough resources to properly oversee the crypto markets?
FIT 21 removes oversight of crypto digital asset securities from the SEC and gives it to the CFTC, which has been chronically underfunded for years and already lacks the resources to do the important mission it is mandated to do. The CFTC’s 2024 budget remains unchanged from 2023 at $365 million (compared to the SEC’s 2023 budget of $2.1 billion) and it has fewer than 700 employees (compared to the SEC’s approximately 4,500 employees).
FIT 21 would substantially increase the CFTC’s responsibilities, making it the de facto regulator of countless new crypto exchanges and broker-dealers, and it would charge the agency with implementing numerous resource-intensive and lengthy notice-and-comment rulemakings.
Without significantly increased funding for the CFTC to fulfill its substantial new responsibilities under FIT 21, the agency won’t just be unable to regulate the new crypto products and entities. It also won’t be able to do its important existing work to regulate the commodity markets, which will harm all Americans.
Third, given that the CFTC lacks the necessary investor protection mandates to effectively regulate crypto, doesn’t FIT 21 expose investors and our markets to heightened risks?
Investor protection has been at the core of U.S. securities laws and regulations and is the bedrock of the U.S. markets. The SEC’s investor protection mission is especially relevant in the crypto arena because most people put money into cryptocurrencies hoping for a return on investment. These investors deserve the protection of the securities laws as much or even more than other investors, given the monumental risks that come with crypto offerings.
The CFTC does not have an investor protection mandate that lies at the heart of the SEC. The difference in their mandates is largely due to the different types of participants in each market. Retail investors have always been active in the securities markets, but they have not traditionally participated in the more complex derivatives markets overseen by the CFTC.
These questions (and more) are important because the U.S. benefits from the broadest, deepest and most liquid financial markets in the world. Those markets fuel U.S. business creation and expansion, creating jobs, wealth and economic growth. However, those markets are not preordained to remain the preeminent markets in the world. Their global status is due to the trust and confidence of investors and customers worldwide, and that is largely due to their belief that those markets are well-regulated.
That’s what’s at stake in the debate over FIT 21 and why everyone must ask the tough questions, carefully scrutinize the claims, and determine whether or not FIT 21 helps or hurts Main Street Americans and businesses.
Dennis Kelleher is a co-founder and the president and chief executive of Better Markets.