US: Janet Yellen grappling with clearer crypto regulation

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Yesterday, 4 Republican lawmakers sent a letter to US Treasury Secretary Janet Yellen to request explanations regarding some regulatory gaps in the regulation of the crypto market in the US.

In particular, what is driving the Republicans to question Yellen are doubts about how the Financial Stability Oversight Council (FSOC), led by her, manages cryptocurrencies in terms of federal laws.

Once again, the issue of the US securities law applied to crypto exchanges comes back into fashion, as it has not been possible to find a common ground that can satisfy everyone.

The Republican co-signers of the letter have also proposed a new bill called the Financial Innovation and Technology for the 21st Century Act, which takes a global approach to regulating cryptocurrencies and could potentially solve the highlighted issues.

Let’s see all the details below.

Republicans highlight several regulatory gaps in Yellen’s regulation of crypto markets in the US

Yesterday, Republican lawmakers Patrick McHenry, Glenn “GT” Thompson, French Hill, and Dusty Johnson sent a letter to Secretary of the Treasury Janet Yellen in her capacity as chair of the Financial Stability Oversight Council (FSOC) to request explanations regarding the lack of a clear regulatory framework for crypto markets in the US.

Despite several market oversight bodies having repeatedly highlighted various gaps in how cryptocurrencies that do not represent securities should be treated at the federal level, no one has been able to create a fertile regulatory ground to ensure innovation and simultaneously protect investors.

The Republicans have also highlighted the inability of the CFTC and the SEC to establish the boundaries within which they become competent in regulating the crypto spot market.

No federal authority has been able to introduce a clear regime in the system of digital currency exchanges, with transparent and non-interpretative rules.

To underline in this regard how within the FSOC, which is responsible for monitoring the stability of the US financial system, CFTC Chairman Rostin Behnam and SEC Chairman Gary Gensler serve as board members alongside Yellen.

Gansler and Benham have repeatedly highlighted the need for a new supervision for the world of crypto exchanges, which is growing year after year.

The Republicans insist to Yellen noting how the FSOC has failed to find a common ground on how securities laws should be applied to cryptocurrency issuers, citing the legal case between the SEC and Ripple Labs.

Despite the fact that a New York judge has established Ripple’s innocence in the alleged violation of securities laws with the XRP asset; it has not yet been determined how other tokens fall under the category of direct sales (securities) to institutional investors.

In the letter, Yellen was also asked, as happens every time the topic of securities regulation in the US is discussed, whether Bitcoin and Ether represent security or not and whether it would be appropriate to extend the jurisdiction of the CFTC to include the spot market.

The 4 Republican legislators co-signers of the appeal to Yellen, asking for a formal response by February 20, have decided to propose their own bill called the Financial Innovation and Technology for the 21st Century Act, which takes a comprehensive approach to regulating cryptocurrencies.

This document would provide federal regulators with clear authority over the spot markets of digital assets, and ensure that customer protections provided by the current financial regulatory framework apply to intermediaries and activities related to digital assets.

“After the collapse of FTX, the committees of the House for agriculture and financial services (committees) have undertaken a historic effort to develop legislation that provides greater regulatory oversight of digital asset markets. The Financial Innovation and Technology Act for the 21st Century (FIT21) would give federal regulators clear authority over digital asset spot markets and ensure that customer protections provided by the current financial regulatory framework apply to intermediaries and activities related to digital assets.”

Yellen and legislation on stablecoins

While US Republicans press Janet Yellen to address regulatory gaps on crypto assets provided by current law, she confirms her commitment to establish a new regulatory framework.

On Tuesday, the US Treasury Secretary testified before the House Financial Services Committee and once again asked Congress to approve legislation to regulate stablecoins and the non-securities cryptocurrency spot market.

Yellen in this context has noticed how:

“There are many areas regarding digital resources where we have clear regulatory authority, but we have identified some gaps where it would be very useful for Congress to intervene to fill those gaps, for the protection of consumer investors and to address risks to financial stability.”

In particular, with regard to the world of cryptographic stablecoins, it is necessary to address as soon as possible new legislation that takes into account the growth recorded by this sector in recent years.

Just 4 years ago, the peg-USD stablecoin market was worth only 4 billion dollars, while now we have reached over 140 billion.

If not regulated, stablecoins can go from being a tool capable of improving liquidity for exchanges and financial market performance, to a systemic threat to the US finance industry.

In all this, there is also the regulatory aspect to consider, which will be the coexistence relationship between stablecoin and CBDC, which, although similar, belong to two separate categories.

The risk is that if a new general law on digital currencies is not enacted, it will no longer be possible to clarify the confusion that has arisen among the regulation of securities trading, federal identification for cryptocurrencies that are not securities, obligations for intermediaries, and burdens for stablecoin issuers, etc.

Yellen has asked for Congress’ help at Capitol Hill stating that: 

“We would greatly appreciate an effort from Congress to create an appropriate regulatory framework to address these risks”