Rep. Raja Krishnamoorthi in a flurry of Aug. 30, 2022, letters questioned the SEC, other financial regulators, and digital asset exchanges on efforts to counter crypto fraud.
Krishnamoorthi, an Illinois Democrat, is chair of the House Oversight Committee’s Subcommittee on Economic and Consumer Policy.
“As stories of skyrocketing prices and overnight riches have attracted both professional and amateur investors to cryptocurrencies, scammers have cashed in,” he wrote in his letter to SEC Chair Gary Gensler. “The lack of a central authority to flag suspicious transactions in many situations, the irreversibility of transactions, and the limited understanding many consumers and investors have of the underlying technology make cryptocurrency a preferred transaction method for scammers.”
Krishnamoorthi also sent letters to the Treasury Department, Commodity Futures Trading Commission (CFTC), and Federal Trade Commission (FTC), as well as exchanges Binance.US, Coinbase, FTX, Kraken, and KuCoin.
In his letter to Gensler, the House Democrat called the federal government slow in curbing crypto fraud, and argued that current regulations “do not comprehensively or clearly cover cryptocurrencies under all circumstances.” To highlight the regulatory uncertainty, he cited the commission’s ongoing legal battle with Ripple Labs Inc. surrounding the latter’s XRP token, as well as the first-of-its kind insider trading enforcement action against ex-Coinbase manager Ishan Wahi and two others. That enforcement case drew criticism from CFTC Commissioner Caroline Pham as an example of the SEC’s “regulation by enforcement” in the crypto space.(See SEC Charges Former Coinbase Manager for Crypto Insider Trading in the July 22, 2022, edition of Accounting & Compliance Alert.)
“Without clear definitions and guidance, agencies will continue their infighting and will be unable effectively to implement consumer and investor protections related to cryptocurrencies and the exchanges on which they are traded,” Krishnamoorthi wrote.
The SEC, in its crypto enforcement, has routinely asserted authority by applying the “Howey Test” established in the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co.. Under that test, an investment contract – which is classified as a security under the Securities Act of 1933 – must involve an investment of money in a common enterprise, with an expectation of profit from the efforts of a third party.
Congress, Krishnamoorthi warned, “may need to pass legislation to help bring stability to the digital asset industry and protect consumers from investment fraud and abuse.” But he wrote that more information is needed on what agencies are already doing, making a broad information request on “all policies, guidance, or other official documents” from 2009 on regarding the commission’s efforts to combat crypto scams and fraud, among other documents, by Sept. 12.
This article originally appeared in the September 1, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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