As cryptocurrency market grows, federal and state officials mull tighter controls

WASHINGTON (, 2022)—On the eve of Super Bowl Sunday, during the first rounds of anticipated ads, a QR code bounced around the screens of millions of viewers' television screens for 60 seconds.

The ad, which cost more than $14 million, had been purchased by cryptocurrency company CoinBase. The spot, which also ran during the game, illustrated that the cryptocurrency industry was working to address a new customer base and wasn't shy about spending millions to do so.

Cryptocurrency and NFTs (non-fungible tokens) have entered the mainstream of the financial world in recent years and the companies behind them are making it easier for investors to trade in both crypto and NFT futures with their computers and smartphones.

The use of cryptocurrencies has also been seen as a means of transmitting money to questionable people, organizations, and nations. And that is drawing the attention of federal and state regulators, as well as critics familiar with the issue.

President Joe Biden on Wednesday signed an executive order taking the next steps at strengthening federal oversight of cryptocurrency and protecting consumers from potential fraud.

Former Secretary of State Hillary Clinton recently warned that cryptocurrency could be used to channel funds to Russia, even after financial sanctions were imposed following its invasion of Ukraine.

"I do think that the Treasury Department, I think the Europeans, should look hard at how they can prevent the crypto markets from giving an escape hatch to Russia, both governmental and private transactions in and out of Russia," Clinton said in a Feb. 28 interview with Rachel Maddow on MSNBC. "I would hope somebody at the Treasury Department is trying to figure out how they're going to rein in the leaky valves in the crypto market that might allow Russia to escape the full weight of the sanctions."

FBI Director Christopher Wray told lawmakers Thursday the intelligence community believes Russia and its allies overestimated their ability to circumvent U.S. economic sanctions through cryptocurrency.

"We have built up significant expertise, both at the FBI and with some of our partners, and there've been some very significant seizures and other efforts that I think have exposed their (attempts to use) cryptocurrency as a way to get around sanctions," Wray told the Senate Intelligence Committee.

Beyond the international stage and sanctions against Russia following the invasion of Ukraine, federal officials are raising concerns over the potential for the illicit use of cryptocurrency.

"We will continue to look at how the sanctions work and evaluate whether or not there are leakages, and we have the possibility to address them," Treasury Secretary Janet Yellen said at the University of Illinois Chicago days before Biden's order. "I often hear cryptocurrency mentioned and that is a channel to be watched."

Lawmakers also are concerned about cryptocurrency oversight.

Sen. Chris Van Hollen, D-Maryland, a member of the Senate Banking, Housing and Urban Affairs Committee, said Russia is being squeezed financially on multiple fronts.

"The U.S. and our NATO allies are punishing the Kremlin with crippling economic sanctions for waging this unprovoked war in Ukraine," he said in a statement to Capital News Service. "It is encouraging to see private companies joining in the effort, including technology and cryptocurrency firms, to block access to services as well as additional sources of capital."

Financial experts have said that while Russian citizens and businesses could turn to crypto to try to evade sanctions, the volume of the transactions required would likely make them easier to detect.

Cryptocurrency currently is being advertised by the industry as incredibly flexible, with the potential for future uses such as buying of items with NFTs (non-fungible tokens, which are a means of buying the digital certification, or receipt, of anything from a piece of art to a video) as well as paying bills, taxes and other expenses.

Participants in the cryptocurrency and NFT industries are also operating in a fast-changing environment, with both state and federal regulations evolving, placing cryptocurrency and NFTs in unknown legal territory.

What regulations already exist governing cryptocurrencies and NFTs vary among the states.

Aaron "Tres" Work, associate legislative director for the National Council of State Legislatures (NCSL), said that policymakers and regulators are currently working in a "massive gray area" when it comes to the cryptocurrency market.

"There seems to be some confusion as to what levels of government should be regulating crypto, whether this is a federal government role," he said. "Is this a state government role? Who is the appropriate authority?"

Some firms offer a particular kind of cryptocurrency, known as stablecoins, as a more reliable investment. Stablecoins are backed by assets such as real estate, gold, oil or other commodities.

Stablecoins were the focus of a Feb. 15 Senate banking panel hearing.

"We do want to encourage innovation. I support that. We also want to make sure that we protect consumers," Van Hollen said at the hearing. "Stablecoins are intended to be tied to a stable base. Is there any protection if the stablecoin issuer was to go belly up for consumers?"

Sen. Elizabeth Warren, D-Massachusetts, and also a banking committee member, said at the same hearing she thought stablecoins require different forms of financial regulation.

"Stablecoins have taken off," she said. "Their cap is now 35 times what it was just two years ago and instead of being used to pay for goods and services, those billions of dollars worth of stablecoins are used to lubricate speculation in the shadiest part of the crypto ecosystem, where people are lending, leveraging, and trading with no laws and no sheriff anywhere."

Warren believes that the stablecoin market could pose a significant risk to the overall financial market and that Congress and regulators need to contain these risks.

Sen. Pat Toomey, R-Pennsylvania, and advocates for stablecoins contend they are an increasingly convenient form of currency.

"One stablecoin is meant always to be worth $1," Toomey said at last month's hearing. "Because of this price stability, stablecoins have the potential to serve all the traditional functions of money by acting as a medium of exchange, unit of account, as well as a store of value."

The senator added that "stablecoins can also improve upon traditional forms of money by increasing payment speed, especially across border transfers, reducing transaction costs, and helping to combat illicit finance through the creation of an immutable and transparent transaction record."

For years, cryptocurrencies have been seen as a volatile and unpredictable market, with huge gains and losses over very short periods of time.

For example, a little-known cryptocurrency known as "KokoSwap" saw a rise of 76,200% in a single day last November, jumping from $0.009999 per token to $7.63 per coin in a 24-hour period before declining to a value of $5.85 per token at the end of the trading day.

In January, dramatic market declines shaved $1 trillion off the value of the overall crypto market.

There is an estimated $2 trillion worth of cryptocurrency currently on the market, an astronomical amount that will require increased oversight by state and federal regulators, the NCSL's Work said.

John Callas, director of technology projects for the non-profit Electronic Frontier Foundation, expressed concern over the absence of consistency in regulations dealing with the cryptocurrency and NFT markets.

"I think that the current regulations are all over the place, and there are things that we're not particularly happy with," Callas said.

Callas stated that the blockchain technology, which functions as an encrypted online ledger in which cryptocurrency and NFT transactions are recorded, was providing services that are already in place.

Securities and Exchange Commission Chairman Gary Gensler said in a speech last August before the Aspen Security Forum that cryptocurrency is subject to unverifiable claims and lacks transparency.

"Right now, we just don't have enough investor protection in crypto," Gensler said. "Frankly, at this time, it's more like the Wild West… If we don't address these issues, I worry a lot of people will be hurt."

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