Crypto world hopes for breakthroughs this week in Washington

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The crypto world is hopeful for some gains this week in Washington as it pushes for a new regulatory framework and new products that could expand its mainstream appeal.

The House is set to vote Wednesday on legislation that would provide the type of regulatory oversight the industry wants.

Separately, investors are hoping the Securities and Exchange Commission is close to approving the first exchange-traded funds that would invest directly in the cryptocurrency ether (ETH-USD).

“There’s a been a real sea change in Washington around crypto,” Bitwise Asset Management chief investment officer Matt Hougan, one of the applicants hoping for ether ETF approval, told Yahoo Finance.

“It looks like Washington has gotten the message that crypto is good for America and that it’s popular with American voters.”

The key regulatory change proposed by new legislation before the House — known as the Financial Innovation and Technology for the 21st Century Act, or FIT21 — is that it would establish the Commodity Futures Trading Commission as a leading regulator of digital assets.

There would be clear delineations for what the CFTC would regulate and what would fall under the purview of the Securities and Exchange Commission, a longtime foe of the industry that has cracked down on operators with enforcement actions and lawsuits.

UNITED STATES - FEBRUARY 15: Rep. Patrick McHenry, R-N.C., leaves the U.S. Capitol after the last votes of the week on Thursday, February 15, 2024. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Rep. Patrick McHenry, R-N.C., a lead sponsor of the legislation that would offer a new regulatory framework for the crypto industry. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

It would also establish consumer protections and bar the sort of comingling of customer funds that played a role in the collapse of cryptocurrency exchange FTX in late 2022.

The industry has been lobbying hard for this framework, which it would prefer to the aggressive enforcement of the SEC.

“[This] marks the official end to the losing narrative that crypto is not here to stay,” said Cody Carbone, chief policy officer for The Digital Chamber, a crypto lobbying group.

SEC Chair Gary Gensler offered new warnings about the bill in a statement Tuesday night, saying that it “would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk.”

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler testifies before a House Financial Services Committee oversight hearing on Capitol Hill in Washington, U.S. September 27, 2023.  REUTERS/Jonathan ErnstU.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler testifies before a House Financial Services Committee oversight hearing on Capitol Hill in Washington, U.S. September 27, 2023.  REUTERS/Jonathan Ernst

Securities and Exchange Commission Chairman Gary Gensler. (REUTERS/Jonathan Ernst) (REUTERS / Reuters)

The bill does face opposition from some Democrats. Even if it passes, it could still face an uphill climb in the Senate.

“What the Senate will see is a vote total,” said Republican Rep. Patrick McHenry, the lead sponsor of this legislation. “I think that that should get members of the Senate to look at this afresh.”

The price of one specific cryptocurrency — ether — is rallying this week as investors grow more confident the SEC will give the green light to invest in ether ETFs.

In January the SEC approved ETFs that invest directly in bitcoin (BTC-USD), a development that expanded mainstream acceptance of the world’s largest cryptocurrency. Now investors are hopeful that the same will happen with the second-largest cryptocurrency.

“Given the political ‘backroom’ drama, approval will be seen as significant regulatory relief for the sector,” Bernstein analysts said in a note.

The crypto world is hoping for the same from the legislation that is expected to come before the House Wednesday.

Roughly 60 crypto companies and industry organizations, including Block, Coinbase (COIN), Circle, Kraken, and Paxos, sent a letter to House leadership last week in support of the bill.

“The bill is well written,” said Kara Calvert, head of US policy at Coinbase. “It’s the first bill that explicitly contemplates how to think about decentralization, how to think about something that moves from looking like a security to looking like a commodity.”

Calvert says the bill lets regulators focus on creating rules for centralized tokens, allowing for more focused resource management instead of scattershot regulation by enforcement.

Republican lawmakers say this legislation will bring clarity to a key question: whether a certain digital asset is a security or not. The SEC has argued that many cryptocurrencies are in fact securities — and therefore should be overseen by the agency.

But most House Democrats — led by House Financial Services Committee ranking member Maxine Waters — oppose the bill.

Waters held a member briefing for Democrats Monday, urging them to vote against the bill. She warned that changes made to the bill since last summer would now result in a mass deregulation of crypto and even some traditional securities.

In a letter reviewed by Yahoo Finance that was sent to Democratic House members, Waters and House Agriculture Committee ranking member David Scott wrote that the revised bill “would transfer most crypto and some traditional securities into a regulatory void, with no primary regulator and virtually no laws or regulations.”

FILE PHOTO: Chairwoman U.S. Representative Maxine Waters questions a witness during a U.S. House Financial Services Committee hearing titled “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks” on Capitol Hill in Washington, U.S., September 21, 2022. REUTERS/Elizabeth Frantz/File PhotoFILE PHOTO: Chairwoman U.S. Representative Maxine Waters questions a witness during a U.S. House Financial Services Committee hearing titled “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks” on Capitol Hill in Washington, U.S., September 21, 2022. REUTERS/Elizabeth Frantz/File Photo

Democratic Rep. Maxine Waters opposes the new crypto regulation bill. (REUTERS/Elizabeth Frantz/File Photo) (Reuters / Reuters)

The end result, the letter stated, would be a “proliferation of fraud that will have devastating consequences for consumers and investors.”

The Democratic lawmakers argued the definition of “digital assets” and the revised bill’s addition pertaining to “investment contract assets” would effectively deregulate most cryptocurrencies by removing them from the purview of the SEC.

They also worry that by making the CFTC the primary regulator, consumers and investors won’t be afforded the same types of protections enjoyed under the SEC.

It is not known how much opposition the bill would face in the Senate.

Senate Banking Committee Chair Sherrod Brown — who has prioritized cracking down on crypto used for money laundering — is staying mum so far on the House crypto legislation.

“We must make sure that crypto platforms play by the same rules as other financial institutions,” Brown said in a statement last month. “And we need to make sure that we have the tools to crack down on illicit finance with digital assets, just as we would with any other asset.”

McHenry said he is hopeful that the outcome of the vote Wednesday could catch senators’ attention.

“We’re going to drive like hell to get whatever we can out of this Congress,” McHenry said about passing crypto policy.

“There is bipartisan support for that drive. But no matter what happens this Congress, this policy set is inevitable, it will happen, just like the role of crypto is here to stay.”

Gensler made it clear in his Tuesday statement he doesn’t believe this legislation moves policy in the right direction.

“The crypto industry’s record of failures, frauds, and bankruptcies is not because we do not have rules or because the rules are unclear,” he added. “It’s because many players in the crypto industry don’t play by the rules.”

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