Cryptocurrency advocates are raising alarms about two separate policy changes brewing in Washington that they say could give federal regulators power to ban financial institutions from engaging in cryptocurrency transactions and otherwise hamper crypto developers with “radical” new regulations, observers of the industry say.
The first is a new rule proposal put forth by the Securities and Exchange Commission on Wednesday aimed at increasing oversight of communications platforms that facilitate off-exchange securities trades, typically used in the markets for bonds and some derivatives.
Gabriel Shapiro, a crypto-focused lawyer at the law firm BSV, wrote in a Thursday newsletter that this new proposal could easily be used to expand the definition of securities exchanges to include automated market makers, a type of decentralized protocol that matches buyers and sellers of cryptocurrencies without an intermediating exchange or broker.
“We should not underestimate the threat this radical and sudden paradigm shift by the SEC poses to the blockchain and decentralized finance movements,” Shapiro wrote. “We have been given a paltry 30 days to make our voices heard — the SEC must revise this proposal to make clear that it is not intended to…prohibit the creation and deployment of mere code for peer-to-peer token trading or websites.”
The SEC did provide an unusually short 30-day time period for comment, though that period will likely be a couple weeks longer due to a backlog of proposed regulations making their way into the Federal Register. The 30-day comment period only begins once the regulation proposals have been placed in the Federal Register, though interested parties can submit their comments to the SEC before that time. Comment periods typically last 45 or 90 days.
The lone Republican commissioner on the SEC, Hester Peirce, strenuously objected to the rule proposal at commission meeting on Wednesday, taking particular exception to the short window for public comment.
During an appearance at the Finance on the Blockchain conference Thursday, Peirce echoed Shapiro’s concerns that the new rule could impact crypto operations, despite its avowed purpose.
“I think it’s really important for people in the crypto space who are operating or planning to set up any kind of trading venue…to take a look at this release, because it’s really daunting,” she said. “Please take a look at it with an eye toward thinking about how it might apply, and please consider helping us think through those issues by writing a comment letter.”
The SEC rule proposal came just days after another scare for crypto advocates following the release of text of the America COMPETES Act of 2022, aimed at boosting U.S. semiconductor production and other research and development. The bill is being sold as a measure to help U.S. industry compete with China technologically, but it included provisions that would increase the Treasury Department’s power to combat money laundering.
The bill “would hand the Treasury Secretary unchecked discretion to forbid financial institutions (including cryptocurrency exchanges) from offering their customers access to cryptocurrency networks,” according to a Wednesday blog post by Jerry Brito, executive director of the crypto advocacy group Coin Center.
“This amendment offers the secretary an entirely unchecked power to secretly ban or condition any transaction at any domestic financial institution” he added. “It is a dangerously authoritarian approach to solving money laundering concerns.”
Lobbyists for the crypto industry, however, appear confident that they can have the text amended to alleviate some of their concerns, unlike their failed attempt to remove new crypto tax reporting requirements from last year’s bipartisan infrastructure deal.
“This is not another infrastructure situation,” wrote Kristin Smith, executive director of the Blockchain Association, a crypto industry group on Twitter. “We are having constructive dialogue with decision makers who are open to input.”