Elizabeth Warren has warned that cryptocurrency investors are at the “mercy of manipulators and fraudsters” because the crypto market isn’t properly regulated, according to a new press release from the U.S. Senator’s office. Warren’s solution, as she outlined in a letter to the SEC chairman on Wednesday, is to have the SEC finally regulate cryptocurrencies properly in the U.S.
“While demand for cryptocurrencies and the use of cryptocurrency exchanges have skyrocketed, the lack of common-sense regulations has left ordinary investors at the mercy of manipulators and fraudsters,” Senator Warren said in a statement published on her website.
“These regulatory gaps endanger consumers and investors and undermine the safety of our financial markets,” Warren continued. “The SEC must use its full authority to address these risks, and Congress must also step up to close these regulatory gaps and ensure that every investor has access to a safe cryptocurrency marketplace.”
The Massachusetts Senator implored SEC Chair Gary Gensler to finally do something about the world of crypto, including the online exchanges like Coinbase and Binance where people buy and sell coins such as bitcoin, ether, and dogecoin, as well as thousands of others.
“The volume of trading on Coinbase, the largest cryptocurrency exchange in the United States, grew from $30 billion in the first quarter of 2020 to $335 billion in the first quarter of 2021, a more than 10-fold increase,” Warren said, emphasizing how quickly the crypto market has changed in a short time span.
Coinbase became the first crypto company to be listed on the Nasdaq stock exchange in April of this year, as Warren notes in her letter to the SEC. And while that listing has provided an aura of credibility to crypto buying and selling, there’s still a lot of risk for the average retail investor who’s interested in purchasing something like bitcoin.
Ultimately, much of the regulation around crypto hinges on the definition of a cryptocurrency. Crypto believers will tell you that bitcoin is a currency like the U.S. dollar, while crypto skeptics believe bitcoin is a security like a share of stock in a company. If it’s a currency, the average American can’t be taxed for buying it even if the price goes up, just as you wouldn’t be taxed for holding U.S. dollars if the value of those dollars went up relative to other international currencies. But if bitcoin and other cryptocurrencies are a security, that means it’s an asset that can be taxed when you make money from it.
El Salvador recently made headlines when it decided to adopt bitcoin as an official currency. And while we won’t know for some time how the country’s experiment will pan out, there’s one area where Salvadorans will see immediate benefits: They won’t have to pay any capital gains taxes on profits from bitcoin. Whether you think that’s good or bad depends largely on whether you believe bitcoin is a gigantic Ponzi scheme.
Senator Warren included questions in her letter to the SEC chairman, and has asked for them to be answered by July 28. The questions themselves are an interesting peek into how prominent Democrats are approaching the relatively new world of crypto regulation and we’ve copied them in full below.
- Do you believe that cryptocurrency exchanges are currently operating in a “fair, orderly, and efficient” manner? If not, what problems has the SEC identified that are associated with the use of these exchanges?
- How do the characteristics of assets traded on cryptocurrency exchanges differ from those of assets traded on traditional securities exchanges? Do these characteristics warrant additional investor and consumer protections for cryptocurrency exchanges relative to those provided for traditional exchanges?
- Describe the extent of the SEC’s existing authority to regulate existing cryptocurrency exchanges. To what extent does that authority differ from the agency’s authority over traditional securities exchanges?
- Foreign regulators have moved to restrict cryptocurrency exchanges in their jurisdictions in recent years while calling for international coordination to address regulatory gaps. One specific regulatory challenge may arise from the unique organizational structure of some global exchanges. For example, Binance, one of the largest cryptocurrency exchanges in the world by trading volume, “is everywhere and yet based nowhere. The cryptocurrency exchange has processed trillions of dollars in trades this year as it transfers digital and conventional money around the world through a constellation of affiliates. And yet it has no headquarters.” In your view, to what extent is international coordination needed to address gaps in the regulation of cryptocurrency exchanges and ensure the protection of investors and consumers in the United States?
- In a recent address, Commodity Futures Trading Commission (CFTC) Commissioner Dan M. Berkovitz stated: “In a pure ‘peer-to-peer’ DeFi system... [t]here is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance, or make customers whole when processes fail. A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves. Caveat emptor—‘let the buyer beware.’” Berkovitz further argues that DeFi derivative instruments are likely illegal under the Commodity Exchange Act.
- Do you agree with Commissioner Berkovitz’s assessment of DeFi platforms?
- Do decentralized platforms raise similar investor and consumer protection concerns within the SEC’s jurisdiction? If so, what challenges does the SEC face in addressing these concerns?
- Do the characteristics of decentralized cryptocurrency exchanges warrant additional investor and consumer protections relative to those needed for centralized cryptocurrency exchanges?
How will this all play out over the coming weeks and months? Your guess is as good as ours, but the SEC has shown an appetite to finally bring crypto exchanges into the fold.