Prolific Crypto Market Demands Regulation, Investor Education, Experts Say

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Financial regulation experts tell Congress a lack of regulation on digital currencies and lending exacerbates lack of consumer education.

Improved investor education and better regulation are two vital steps experts want to implement in the digital currency marketplace, as the government broadly looks to protect consumers buying and selling within the risky asset class.

The Senate Banking Committee heard testimony  on Thursday from Melanie Senter Lubin, president of the North American Securities Administrators Association, and Gerri Walsh, the senior vice president of Investor Education at the Financial Industry Regulatory Authority.

While lawmakers like Sens. Pat Toomey, R-Penn., and Sherrod Brown, D-Ohio, highlighted the Securities and Exchange Commission’s role in administering new regulations surrounding cryptocurrencies, expert witnesses also advocated better investor and consumer education.

“To ensure that our markets continue to grow for the benefit of businesses and investors alike, we need to do an even better job of promoting lasting trust in and informed use of the regulated capital markets,” Lubin said. “Promoting lasting trust starts with making improvements in how we prevent and detect investor harm, and how we ensure that those charged with enforcing the laws have the tools needed to do the job.”

Walsh concurred and noted that fraudulent information on cryptocurrency products remains prevalent on social media platforms, with scams that offer cryptocurrency payment options as particularly popular. She also added that the lack of transparency and corresponding regulation in the digital currency marketplace contributes to the rampant fraud surrounding the industry. 

“Bringing crypto and digital assets into that space of regulation could have extraordinarily extraordinary value for consumers and for the markets themselves, to the extent that you have disclosure, and our system is based on disclosure that's full, and fair, and not misleading. That adds value to our securities markets,” she said.

Lubin concurred, saying that financial penalties like fines could also help protect investors from and discourage cryptocurrency fraud.

“Those penalties need to get into the range where they're high enough that it provides a deterrent for bad behavior,” she said. 

Responding to questions from Toomey, Lubin ultimately opined that crypto lending products which loan digital currencies out at high rates fit the description of securities, thus falling under the regulatory jurisdiction of the SEC. 

“This is a new category of asset that does not look like all previous categories of assets and it's a failure of Congress to provide that clarity. And it's a failure of the SEC not to at least provide the clarity of their interpretation,” Toomey said. 

Speaking earlier in the hearing, Lubin said, "It's very important for people to be able to assess and determine whether something's a security. So our job is to take the law and to take the facts and take the case law and statutory law and apply it to what's going on in a given situation. And most securities lawyers would take a look at that and say ‘yes, that is an investment contract and that needs to be regulated.’”

Until increased federal regulation arrives, Lubin advocated for enhanced legislation that can protect consumers, such as the bill sponsored by Sen. Chris Van Hollen, D-Md., that aims to protect seniors from financial scams. 

“There are never enough resources to go around with what we do. Industry scam artists always have way more resources than regulators have,” she said. 

Walsh also said that investor education can further serve as a “complementary tool” in the absence of regulatory financial disclosures. 

“We [FIRA] work collaboratively with our fellow state securities regulators with the Securities and Exchange Commission, many other federal agencies and the network of national nonprofits to get the word out as widely as we can about the tactics that con-criminals are using to separate people from their money, including in the digital asset space,” she testified.