U.S. policymakers hinted at tightening regulation of digital assets in a flurry of statements and reports Thursday morning.
A 46-page report on crypto’s environmental impact published by the White House recommended legislative or executive action to “limit or eliminate” energy-intensive proof-of-work technology that secures Bitcoin and a handful of other cryptocurrencies.
Gary Gensler, head of the Securities and Exchange Commission, said most cryptocurrencies are securities subject to SEC regulation, while Jerome Powell, chairman of the Federal Reserve, said they are – except for stablecoins – speculative assets that are “not backed by anything.”
And there’s more to come. The Washington Post reports that the Treasury Department will, in a series of forthcoming reports, “warn the White House that cryptocurrencies could pose significant financial risks that outweigh their benefits unless the government rolls out major new regulations,” citing people familiar with the matter.
It’s clear that regulators intend to continue tightening their grip over the nascent, unregulated industry. US regulators have increased their oversight of the crypto industry this year amid its surging popularity and deepening integration with the broader economy.
The White House report was completed in response to an executive order issued earlier this year by President Joe Biden, which mandated that federal agencies undertake a systematic review of the crypto industry and issue recommendations for its regulation.
A pair of U.S. Senators released a draft bill this summer that would place most digital assets under the jurisdiction of the Commodities and Futures Trading Commission, an agency whose regulations are considered less onerous than those of the SEC.
Most concerning to proponents of blockchain technology, the Treasury Department in August sanctioned Tornado Cash, a protocol that allows users to obfuscate the movement of their digital assets, citing its use by North Korean hackers and other criminals.
The industry is fighting back, however.
Coinbase Steps Up
On Thursday morning, Coinbase, the most popular crypto exchange in the US, announced it would fund a lawsuit seeking to overturn the Tornado Cash sanctions. The six plaintiffs include Coinbase employees and Ethereum developers who used or planned to use Tornado Cash for otherwise legal reasons, including donating to Ukraine after it was invaded by Russia and minimizing the opportunity for criminals to track or steal their digital assets.
“None of the Plaintiffs is a terrorist or a criminal,” the lawsuit reads. “None supports terrorism or illegal activity. None launders money. Each is an American who simply wants to engage in entirely lawful activity in private.”
The lawsuit argues that Treasury is limited in what it can sanction to property, a foreign country, or a person – not software.
“Defendants’ action prohibits Plaintiffs from engaging in speech protected by the First Amendment to the Constitution. By providing a certain degree of privacy, Tornado Cash allows Plaintiffs to engage in important, socially valuable speech. As a result of the designation, Plaintiffs are unable to use Tornado Cash to make donations to support important, and potentially controversial, political and social causes.”
The White House report released Thursday accepts that digital assets have “provided some benefits and value for some U.S. residents and businesses, and have the potential for future benefits with emerging uses.”
It goes on to note that crypto accounts for one-half to 1% of all greenhouse gas emissions in the US, and would present a barrier to meeting emission reduction goals absent a concerted effort to use less energy.
Gensler on Thursday allowed that Bitcoin may not be a security – and, therefore, not subject to SEC regulation – but was notably silent on other cryptocurrencies, including Ether.
“Chair Gensler says most digital assets are securities. Decades of legal precedent say otherwise,” tweeted Jake Chervinsky, head of policy at industry lobbyist The Blockchain Association. “Regardless, crypto is a novel & unique technology: how it should be regulated is a major question for Congress (not the SEC Chair) to decide.”
Powell said stablecoins may have a role in the financial system – but not without government oversight.
“I think you need regulation,” he told Peter Goettler, the CEO of libertarian think tank Cato Institute.
“If people are going to think something is money, then it needs to actually have the qualities of money … I don’t think you want to take money and make it into just another consumer product where sometimes it fails, and sometimes it’s good – you want it to be guaranteed to be good, ” Powell said.