President Joe Biden is planning an executive action for federal agencies to regulate cryptocurrencies, digital assets and bitcoin, as he contends this is a matter of national security. He’s striking at a time when the crypto sector, along with the stock market, is going through a tumultuous time, losing large amounts of value, as the Federal Reserve said it will start raising interest rates to cool down inflation. His sights aren’t only on bitcoin. Regulators will look into stablecoins and NFTs. The Biden administration will also coordinate efforts with regulators and global leaders.
Regulatory agencies, such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, Internal Revenue Service and the self-regulation Financial Industry Regulatory Authority, will likely coordinate their investigations. They’ll also review whether or not tokens should be considered and registered as securities.
Usually, when there is concern over a sector in the financial industry, the regulatory bodies conduct extensive, invasive examinations and audits. They’ll grill executives and key players of the platforms and brokerages that offer customers to buy, sell and trade securities. Trading activities will be highly scrutinized to search for any patterns of potentially illegal or unethical behavior.
While bitcoin and other coins aren’t yet considered securities, the regulators will dig into finding out if there are instances of money laundering, pump-and-dump schemes, shady business practices, wash sales and market manipulations. This would be a complete game changer if Biden’s administration goes full throttle on this matter.
An underlying, unspoken reason for the seemingly sudden interest by Biden may be all the money that is sloshing around in the crypto space. Biden’s multitrillion-dollar infrastructure and other plans are creating a huge amount of debt for the country. The digital asset world is now too big to fail, but it’s not too big to extract a lot of money from it.
If the regulators find irregularities, substantial fines and tax levies may be extracted from everyone involved in the crypto ecosystem. The United States Treasury Department is already looking into what entities will be considered a crypto broker under the infrastructure bill Congress passed last year, and the reporting of any capital gains or losses to the IRS.
Gary Gensler, the newly appointed chairman of the SEC, the premier regulator of financial services firms and Wall Street, has previously voiced his concerns over digital assets.
Gensler took office when Wall Street had gone wild. During the pandemic, young, novice “investors” fell in love with meme stocks and aggressively traded on Robinhood. Cryptocurrencies became all the rage and a number of digital asset exchanges and platforms emerged to service the overwhelming demand for buying, selling and trading bitcoin, dogecoin, ethereum and other cryptocurrencies.
There was a boom in underwriting IPOs and SPACs. Questions arose over Chinese stocks listed and traded on U.S. exchanges and the practice of payment for order flow. Investors complained of activities that suspiciously looked like pump-and-dump schemes and attempts at market manipulations.
Gensler shared his concern with CNBC, stating about the regulatory agency, “We are short-staffed.” He added, “It might sound odd to say that [about] an agency with 4,400 remarkable, dedicated staff working remotely during this challenging pandemic. But that’s 4% to 5% less than we had just five years ago.”
The lack of staffing and proliferation of new types of firms and products shouldn’t be too surprising to industry insiders. In the aftermath of the financial crisis, compliance and regulations were made a top priority. The carnage created during this period created the need for greater oversight of the securities markets, bankers, brokers and traders.
Regulators cracked down on money laundering, insider trading, Ponzi schemes and other types of abusive and violative practices. The need for risk, audit, legal, compliance, privacy, regulatory and related professionals was insatiable. Compliance went from a sleepy back-office type of job into one of the hottest and fastest growing professions on Wall Street.
Things quickly changed when President Donald Trump took office. His administration made deregulation of the financial markets and Corporate America a top priority. Trump contended that with fewer rules and regulations, the “animal spirits” of companies will kick into gear. Companies, unencumbered by onerous regulatory burdens, would be set free to aggressively pursue bold business pursuits. Along with high taxes, regulations were viewed by Trump as an anathema to corporate growth and profits. He ordered that new rules will not be needed and existing ones should be scrutinized and thrown out, as he famously proclaimed, “For every new rule, two must be revoked.”
Regulatory budgets were cut and regulatory personnel felt that they weren’t appreciated or adequately supported. Many left to pursue other opportunities. Savvy Wall Street players noticed the shift in policy and we’ve now seen the results.
The SEC and other financial regulators, such as the Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Commodity Futures Trading Commission, Federal Reserve Bank and FINRA, a self-regulatory organization, are likely to request and receive funding from President Joe Biden’s administration, especially as Senators Elizabeth Warren and Bernie Sanders have been outspoken with their dislike and distrust of Wall Street.
It’s reasonable to believe that there will be an aggressive hiring campaign at the SEC and other regulatory agencies. Strict examinations, audits and reviews of the securities and cryptocurrency industries will occur. To keep the banks and financial institutions safe and out of the crosshairs of the regulatory bodies, there may be a substantial increase in hiring of compliance, risk, audit, legal and regulatory professionals.
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