(Bloomberg) -- Crypto is squarely in the cross hairs of Washington regulators, with fresh calls for stricter controls before the industry can get big enough to affect the broader financial system.
Oversight of digital assets is among the most pressing issues for US financial watchdogs for 2023. Next year, they’re also set to finalize an overhaul of Wall Street stock-trading rules, step up their focus on environmental, social and governance issues, and review criteria for approving bank mergers.
The debate over how to regulate digital assets — and which agencies should have oversight — simmered for most of 2022. It then reached a boiling point in November as crypto exchange FTX failed, leaving investors facing billions of dollars in potential losses. The situation was also embarrassing for lawmakers who took donations from entities and people tied to the firm and for regulators who met extensively with its executives.
On the policy front, FTX’s sudden and spectacular collapse kindled a long-standing debate on whether Congress must step in to write new rules, or regulators like the Securities and Exchange Commission already have the tools they need to oversee the asset class.
Either way, the tumult bolstered calls for tougher regulation by SEC Chair Gary Gensler and Commodity Futures Trading Commission Chairman Rostin Behnam. Top of Washington’s agenda for next year will be sorting out the jurisdiction bounds of those two watchdogs and other federal agencies.
Politics will make addressing those priorities more complicated for regulators appointed by President Joe Biden, a Democrat.
Republicans will hold a majority in the House and take the helm of the powerful Financial Services Committee in January. Gensler, Behnam and other political appointees are certain to face a barrage of scrutiny from the emboldened lawmakers.
Partisan cracks were already beginning to show at recent congressional hearings as some GOP lawmakers argued that the crypto industry shouldn’t be punished for the actions of former FTX Chief Executive Officer Sam Bankman-Fried. The 30-year-old has been accused by US prosecutors of a range of crimes for his role in the firm’s collapse.
Meanwhile, longtime crypto skeptics — mostly Democrats — have said the crisis highlights larger problems and that a sweeping crackdown is needed.
Any new regulation must be “sufficiently robust to ensure that people feel confident again in the cryptocurrency industry. Otherwise, there are serious doubts about its future,” said Yesha Yadav, a law professor at Vanderbilt University who specializes in financial and securities regulation.
So far, the Biden administration appears to want both tougher enforcement of existing rules for crypto, and Congress to write new laws. Treasury Secretary Janet Yellen this month warned that the broader US financial system has been mostly insulated from the latest “crypto winter,” but that could change if ties between traditional Wall Street firms and digital-asset companies strengthen.
One thing appears certain: After making inroads with lawmakers on both sides of the aisle before the recent market turmoil, crypto companies will now face a colder reception on Capitol Hill.
“It’s important for the industry to understand that when they’re going in to talk with members of Congress, that it might not be quite as welcoming or curious a reception as they might have once had,” said Alex Grieve, a crypto industry lobbyist and a vice president in Tiger Hill Partners’ government relations practice.
In addition to arguing for a lighter touch on digital assets, House Republicans are expected to push hard against proposals from the SEC to require greenhouse-gas emissions disclosures for publicly traded companies and ESG disclosures by investment firms.
In particular, the GOP House majority is expected to take aim at corporate executives and regulators like Gensler for embracing what some in the party have deemed “woke capitalism.”
BlackRock Inc., which is often portrayed by Republicans as the ringleader for including environmental or social issues as part of investment decisions, has ramped up face time and political spending on Capitol Hill in anticipation of anti-ESG backlash.
Other asset managers, like State Street Corp. and Vanguard Group Inc., are trying to get ahead of Republican critiques that they use their stakes in public companies to cast proxy votes that favor a liberal agenda.
The financial-services sector is “unified in the expectation that this will become an increasingly large part of the industry’s dialog with the Hill next year,” said John McKechnie, a Republican financial-services lobbyist and senior partner at Total Spectrum.
Wall Street will also be watching four SEC proposals that represent the most sweeping overhaul to the trading of stocks and other securities in nearly two decades. They will be a focus of the agency’s work over the next year.
The markets regulator proposed the plans in December after Gensler for months teased the broad strokes of his vision for pushing more trades onto exchanges and out of “dark markets” dominated by market makers such as Virtu Financial Inc. and Citadel Securities.
The industry and public have until at least the end of March to weigh in on the package’s 1,600 pages. “They’re going to be extremely busy once the comments start coming in,” said Ian Katz, managing director of Capital Alpha Partners, a policy research firm.
Crafting final versions of what promises to be some of the most complex and interconnected rules of Gensler’s tenure will likely further delay other regulatory efforts, including new workforce disclosures, he said.
--With assistance from Laura Davison.
©2022 Bloomberg L.P.
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