Crypto wars: Biden administration at war with itself over regulation

A family feud is brewing over the regulation of the $2 trillion crypto business.

FOX Business has learned that two, and possibly as many as three agencies inside the Biden administration are at odds with each other over who will take the lead in regulating cryptocurrencies and the broader digital coin business. Complicating matters, Sen. Elizabeth Warren, D-Mass., may be tilting the scales in favor of one of them, according to people with direct knowledge of the matter.

People at the Commodity Futures Trading Commission – widely considered by securities lawyers to hold the most statutory authority to regulate crypto – say that Warren has been quietly assisting the efforts of Securities and Exchange Commission Chair Gary Gensler to become uber-regulator of digital currencies. 

These people, who spoke on the condition of anonymity, said Warren appears to be backing the development of new legislation that would give the SEC enhanced powers to regulate crypto. Warren, a ranking member of the Senate Banking Committee, and Gensler, a former Wall Street executive, academic, and securities regulator in the Obama administration, are longtime associates who share many of the same approaches to reining in what they believe are abuses in the financial markets.

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Warren has recently called for a crackdown on alleged abuses in the crypto business, and Gensler has announced the SEC will play a key role in that effort — setting off a turf war inside the Biden administration with the CFTC. 

Another regulator, the Consumer Financial Protection Bureau, is also weighing whether it should regulate the crypto business, FOX Business has learned.

The SEC, the CFTC, and a spokesperson for Warren had no immediate comment. A spokeswoman for the CFPB declined comment but confirmed the agency has received complaints about crypto fraud that it takes "seriously." 

Over the past eight months, the bureau has been inundated with thousands of consumer complaints alleging crypto-related rip-offs and fraud, prompting officials there to discuss joining the regulatory fray, according to people with knowledge of the matter.

The discord comes as the Biden administration has begun to push for more oversight of digital currency and its decentralized framework used to transact business, known as the blockchain. Advances in the use of blockchain technology and the increasing acceptance of digital coins like bitcoin to buy everything from cars to now movie tickets have brought crypto into the mainstream in recent years. Digital currencies are also being used by cybercriminals for ransom payments, including Colonial Pipeline, which forked over millions to hackers to free the largest U.S. pipeline idled by bad actors.  

This is why top government officials, including Treasury Secretary Janet Yellen, have publicly stated their concerns that crypto is too often used to finance criminal activities such as money laundering and fraud — because it’s largely unregulated.

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Cryptocurrencies have long been a regulatory conundrum because no one is entirely sure whether they qualify as a security, a commodity or a separate currency. Traders say digital coins embody a little bit of both, which makes it difficult to determine who has more jurisdiction over it. 

According to court precedent, the SEC can only regulate assets that qualify as a security, like a stock, or a bond that represents ownership in a company or an interest in a company’s cash flow. This means that only some crypto tokens fall under its purview without further Congressional grants. 

The CFTC may have more power to broadly regulate crypto, securities lawyers say, because it’s the official regulator of commodities and the derivatives market, a category that crypto could more neatly fall under.

"They may have to create a new category for it over time," said Thomas Hayes, chairman of Great Hill Capital. "Right now it doesn’t fit any category perfectly, but I think the CFTC has the most cogent argument at present." 

As for the CFPB, created in the aftermath of the 2009 financial crisis, it has a much broader mission — to protect consumers from being treated unfairly. That ill-defined mandate could, in theory, make it a regulator as well if consumers are the subjects of frauds and scams, legal experts say.

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The CFPB was the brainchild of Warren, a longtime critic of banks and the advocate for tougher financial regulation. In June, Warren wrote Gensler demanding better crypto regulation, and Gensler responded this Wednesday agreeing that investors are not adequately protected in cryptocurrency markets. He said the SEC needs to have more regulatory authority to effectively crack down on digital-coin abuse. 

His letter echoed remarks he made last Monday in a speech to the Aspen Institute, where Gensler likened the crypto business to the "Wild West" with rampant fraud, and that the SEC would both be investigating rip-offs and seeking additional powers from Congress to expand its mandate to do so.

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Gensler’s speech and Warren’s letter as public comments were seen as power grabs by officials at the CFTC, where top officials say their agency, not the SEC, has the statutory authority to lead the crypto regulation. Commissioner Brian Quintenz responded to the Gensler speech by tweeting, "Just so we’re all clear here, the SEC has no authority over pure commodities or their trading venues whether those commodities are wheat, gold or crypto assets." 

Also chiming in, former CFTC Chairman Chris Giancarlo tweeted, "Only one US regulatory agency has experience regulating markets for #Bitcoin & Crypto and it is not @SECGov." 

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As the Biden administration sorts out the crypto-regulation mess, industry groups have been bracing for additional regulations for months, as FOX Business has reported. Some say they welcome additional regulation because it would normalize the industry. But other crypto supporters worry the overhang of additional regulation is stifling the innovation of crypto. 

SEC Commissioner Hester Peirce, also known as "crypto mom," told FOX Business that she worries that new crypto technology and innovation is occurring offshore to evade any potential U.S. regulation. "We’re already seeing people in the space avoiding the U.S. because they don’t know what the rules are," she said.