All in all, this wasn’t a very good week for Securities and Exchange Commission Chairman Gary Gensler’s fight to win regulatory control over cryptocurrencies.
As Gensler was again making the case that virtually all cryptocurrencies except bitcoin are securities over which his SEC has authority, Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.) said that while their broader crypto regulatory framework bill won’t see a vote until 2023, one key part might be incorporated into another bill the Senate Banking Committee will vote on this year.
That is the provision that would give the Commodities and Futures Trading Commission (CFTC) authority over most cryptocurrencies.
“I think both Kirsten and I believe that the [Responsible Financial Innovation Act] … as a total bill is more likely to be deferred until next year,” Lummis said at the Bloomberg Crypto conference on Tuesday (July 19). “It’s a big topic, it’s comprehensive, and it’s still new to many U.S. senators and so it’s a lot for them to digest in the few remaining weeks we have in this calendar year.”
But, they believe the CFTC control portion could end up in a smaller bill before the Senate Agriculture Committee, which oversees that agency, Cointelegraph noted. The SEC has claimed that virtually all cryptocurrencies, except bitcoin, are securities since well before Gensler’s tenure began.
Ripple in the Middle
Meanwhile, in a House Financial Services Committee hearing that same day, Rep. Brad Sherman (D-Calif.) — a strong supporter of more aggressive crypto regulation — took Gensler’s new enforcement division director, Gurbir Grewal, to task for the agency’s lack of action against bigger fish than BlockFi and cross-border payments firm Ripple — which it claims has been selling the XRP cryptocurrency that power its payments in what amounts to a nine-year illegal securities sale.
The SEC is suing Ripple in a case that the regulator has long hoped would put a court ruling behind its assertion that cryptocurrencies are securities.
“The division has determined that XRP is a security and is going after XRP but … has not gone after the exchanges where tens of thousands of illegal securities transactions were occurring,” Sherman said.
“The big fish operating the major exchanges did many, many tens of thousands of transactions with XRP,” Sherman said. “If XRP is a security — and you think it is, and I think it is — why are these crypto exchanges not in violation of law? Is it enough that the crypto exchanges have said, ‘Well, having committed tens of thousands of violations in the past, we promise not to do anymore in the future?’ Is that enough to get you off the hook for enforcement?”
Meanwhile, the Ripple case is playing out in court over the question of whether XRP meet the four-part Howey Test that defines what is and is not a security. This is that the buyer makes an investment of money in a common enterprise with the expectation of profit, to be derived from the efforts of others.
The latest fight in the contentious case is the SEC’s attempt to get the court to reverse its ruling allowing an XRP owner to join the suit with amicus status on behalf of other owners.
One interesting feature, according to attorney James Filan, is that the agency alleged there were “threats against an expert” witness by Ripple supporters. This is not really surprising, given that a huge number of XRP’s investors have for years been known as the “XRP Army” for their aggressive — and even rabid — support of both Ripple and the token, as well as their willingness to harass people they see as opponents on social media, particularly Twitter.
The point is — and it’s an indirect but potentially relevant one — that a lot of the case rests on whether other XRP owners are part of a “common enterprise” with Ripple, which is far and away the largest owner of XRP and was “gifted” 80% of the tokens when they were all pre-mined in 2013.
Allegedly threatening someone testifying against Ripple sure does make it seem like other XRP owners see the payments firm as important to their ability to make a profit.
Indian, Japanese Regulators Push Back
In Japan, regulators gave an “extremely stern warning” to the Japan Virtual Currency Exchange Association (JVCEA), a five year old crypto industry self regulatory group, the Financial Times reported.
Citing what the paper called a “spiraling regulatory crisis in Japan’s multibillion-dollar virtual asset business,” the Japanese Financial Services Agency has criticized the association for poor governance, poor internal communications, serious delays in producing anti-money laundering (AML) regulations and an unclear decision-making process.
A person the FT described as “close to both industry and the government” said that “when Japan decided to experiment with self-regulation of the cryptocurrency industry, many people around the world said it would not work. Unfortunately, right now it looks as though they may be correct.”
India’s crypto industry, meanwhile, is in crisis as the finance minister revealed in parliamentary testimony on July 19 that the Reserve Bank of India wants cryptocurrencies banned outright — which is not exactly new, but it has seemed to back off after the government made clear that cryptocurrencies would be forbidden from being used as a payments currency, calling them a “clear danger” and saying they are “designed to bypass the financial system and all its controls,” including AML and know your customer (KYC) requirements, according to The Register.
That was just five days after the Internet & Mobile Association of India (IAMAI) announced without warning that it was shutting down the crypto industry’s five-year-old lobbying group, the Blockchain and Crypto Assets Council (BACC), The Block said.
In the U.K., the Treasury introduced a bill in Parliament that would modify or extend the rules for banking and payment systems to cover “digital settlement assets.” Separately, regulators are introducing stablecoin regulations that include the rules for their use as a means of payment Wednesday (July 20), CoinDesk wrote.
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