Breakingviews: D.C. turf war opens crypto regulatory arbitrage

Cryptocurrency ventures can divide and conquer Washington’s regulatory fiefdoms. The U.S. Federal Reserve staked out its turf this week, telling lenders to notify it if they offer services for bitcoin and its ilk. Other agencies are also wrestling to oversee the $1 trillion market. The scrap provides an opportunity for some industry participants, but it hurts token owners.

The central bank’s move is aimed at bringing more crypto activities under its purview. Because of murky rules or outright prohibitions, such as traditional banks being banned from directly trading digital assets, lenders have been wary of wading too far into the wild market.

The Fed’s supervisory letter gives banks the green light to go further, with guardrails. If they have adequate risk management and controls in place, it looks like the Fed won’t stand in the way.

The decision flies in the face of other rules. For example, a Securities and Exchange Commission bulletin in May said companies that hold digital assets for clients must record the risk on their balance sheets at the currency’s fair market value. The edict increases regulatory capital charges for lenders, making crypto services too expensive in many cases. While the Fed seeks clarity on the SEC guidance, non-banks can push the agency to maintain its measures.

At the same time, the SEC is in its own land grab. In an insider trading case filed in July, the agency led by Gary Gensler declared that several digital assets were securities. Gensler also has been the most aggressive U.S. regulator in bringing crypto enforcement cases.

Proposals in Congress, however, would largely hand oversight to the smaller Commodity Futures Trading Commission. The crypto industry supports that idea. It has tripled its lobbying spending to about $9 million last year, consumer advocacy group Public Citizen says. The CFTC is considered tamer than the SEC, which is led by a former Goldman Sachs banker.

The lack of overarching federal regulation hurts digital asset owners. The total value of cryptocurrencies has more than halved since reaching the $3 trillion mark last November. Three Arrows Capital, Voyager Digital and Celsius Network are among the crypto firms that have filed for bankruptcy in recent months. Only some will be able to capitalize on the regulatory arbitrage.