The legislation, if passed, would require cryptocurrency exchanges to hold their clients’ assets in third-party trusts and prevent them from so-called “proprietary trading,” according to a person with knowledge of the law. , that is, essentially trading with their own funds. on their own exchange. It would also give the CFTC the power to oversee “significant subsidiaries” of exchanges, such as Alameda Research, the sister company of the collapsed FTX exchange, whose founder, Sam Bankman-Fried, is awaiting trial on fraud charges. FTX allegedly loaned large amounts of customer funds to Alameda to cover its investment losses, before a liquidity crisis on the exchange that led to its downfall.
The law also prohibits “rehypothecation,” which essentially prohibits lenders’ ability to fund digital assets with collateral already pledged for different loans, the person said.
The SEC and other agencies were consulted on the content of the legislation, according to Lummis, who remains wary of trying to defeat the measure. “They saw it. We asked them to tweak it and we incorporated some of their changes,” she says. “After all of our efforts to contact them and work with them, I don’t want them to come in at the last minute and put their kiboth on this. »
The proposal comes at a time when there is significant animosity toward SEC Chairman Gary Gensler in the Republican-controlled House. Republicans even introduced a bill intended to dilute Gensler’s power by adding a sixth commissioner to the SEC and eliminating the chair position altogether. But lawmakers admit they have created space for the regulator to act – often unilaterally – on crypto due to Congressional inaction on the subject.
“The reason [Gensler] The reason we have this opportunity is because Congress has failed to act,” says Sen. John Boozman of Arkansas, the ranking Republican on the Agriculture Committee.
After senators dropped their bill Wednesday, the hard legislative work begins. Digital assets fall under the purview of numerous committees: banking (on which Lummis sits), agriculture (one of Gillibrand’s committees), and finance. Even the environment committee wants to have a say on cryptocurrency mining. This only concerns the Senate.
Each of these committees approaches cryptography from a different angle. Take the Senate Banking Committee. Its Democratic chairman, Sherrod Brown of Ohio, focused on the risks to consumers, while Senator Elizabeth Warren, Democrat of Massachusetts, found the issue a bridge to the other side. Last year, she partnered with first-term Sen. Roger Marshall, a Kansas Republican, on the Digital Asset Anti-Money Laundering Act of 2022, which would bring crypto companies under the Bank Secrecy Act, a law of 1970 which requires financial institutions to monitor. and reporting money laundering, among other regulations that critics say would crush the crypto industry.
This measure was not introduced in this 118th Congress, perhaps because Gensler and the Justice Department are virtually implementing the bipartisan legislation in real time. Even as industry leaders, investors, and their congressional allies accuse the SEC of crippling crypto, what has become clear in recent months is that if Congress fails to act, securities regulators will once again securities will aggressively go it alone.
CORRECTION: Updated at 3:15 p.m. ET to correct a reference to staking.
