Warren Challenges SEC's Crypto Regulation Authority

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The SEC has until the end of this month to respond to Warren's questions.

U.S. Senator Elizabeth Warren wrote to the Securities and Exchange Commission (SEC) chairman Gary Gensler this week to ask if the SEC had enough authority to properly regulate cryptocurrency exchanges.

Warren, who was recently named chair of the Senate's Banking Subcommittee on Economic Policy, is an active advocate for consumer rights. Her letter said the current situation can't go on: "As the cryptocurrency markets continue to grow and expand, the lack of regulation to provide basic investor protections is unsustainable."

She raised a number of questions that get to the heart of the challenges involved in policing this sprawling industry. The SEC has until July 28 to respond.

Elizabeth Warren's crypto concerns

Warren's wide-ranging letter highlighted several worries about the industry. She questioned whether the SEC had enough authority to close existing gaps in regulation that she feels "leave investors and consumers vulnerable to dangers in this highly opaque and volatile market."

Here are some of her specific concerns:

• Increased use of cryptocurrency exchanges. Warren points out that the volume of trading on popular exchange Coinbase grew tenfold from the first quarter of 2020 to the first quarter of 2021. She is concerned that crypto exchanges don't have the same regulatory protections as securities exchanges like the New York Stock Exchange.
• Risk of market manipulation. Warren cites a study that showed 95% of Bitcoin trading on popular data site CoinMarketCap was inaccurate. The worry is that exchanges fake high volumes in order to get better rankings.
• The way exchanges hold crypto assets. Warren says that the way cryptocurrency exchanges hold customer assets would not be allowed on a traditional securities exchange. This opens the way for exchanges to use customer assets without telling them what they are doing.
• Cryptocurrency scams. Finally, Warren refers to the amount of money lost in various crypto scams. She says that nearly 7,000 people lost a total of $80 million between Oct. 2020 and March 2021. She also says a further $83.4 million was lost in decentralized finance (DeFi) scams between January and April this year. DeFi is an umbrella term for various applications that replace traditional financial services. "The harms to consumers as a result of this under-regulated market are real and continue to proliferate in the absence of effective SEC regulations," she said

Challenges in cryptocurrency regulation

There are several different agencies involved in U.S. cryptocurrency regulation right now, including the SEC. The Commodity Futures Trading Commission (CFTC) also plays a big role since many cryptocurrencies are classified as commodities, not securities. And then there are the IRS and Financial Crimes Enforcement Network, both of which have stepped up to the post in crypto regulation recently.

Part of the reason so many agencies are involved is that it's difficult to define the nature of cryptocurrencies -- and different cryptocurrencies behave in different ways. For example, Litecoin (LTC) is a digital currency that hopes to make digital payments faster and cheaper. In contrast, Ethereum (ETH) and Cardano (ADA) are programmable ecosystems where people can build applications that solve a host of problems. Some cryptocurrencies have more in common with securities and others have more in common with currencies.

Another issue is the decentralized and international nature of cryptocurrencies. Decentralization takes away the need for central bodies like banks and governments. It makes it easy for cryptocurrency exchanges to operate internationally, and some actively operate outside of national jurisdictions.

Will Congress get involved?

Warren's letter to Gensler asks whether Congress needs to act to protect consumers. We may already know the answer since this actually echoes Gensler's words earlier this year. He said in May that he'd asked Congress to consider the issue of more investor protection on crypto exchanges.

And a recent Goldman Sachs report argued there's a good chance Congress will set up a new agency dedicated to cryptocurrency oversight. In the coming months, we'll also see the results from a Federal Reserve consultation that seeks to stimulate a broad conversation into a digital dollar and cryptocurrency.

Increased regulation is unavoidable. What remains to be seen is what form it will take. It could create increased consumer confidence in a fledgling market or stifle growth and push cryptocurrency businesses abroad.

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