Congress sets sights on federal cryptocurrency rules

WASHINGTON (Reuters) - Jolted by the global investment craze over bitcoin and other cryptocurrencies, U.S. lawmakers are moving to consider new rules that could impose stricter federal oversight on the emerging asset class, several top lawmakers told Reuters.

Bipartisan momentum is growing in the Senate and House of Representatives for action to address the risks posed by virtual currencies to investors and the financial system, they said.

Even free-market Republican conservatives, normally wary of government red tape, said regulation could be needed if cryptocurrencies threaten the U.S. economy.

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A look inside the world of cryptocurrency
Workers prepare a new installation of miners, at the cryptocurrency farming operation, Bitfarms, in Saint-Hyacinthe, Quebec, Canada, February 2, 2018. Picture taken February 2, 2018. REUTERS/Christinne Muschi
PARIS, FRANCE - FEBRUARY 16: In this photo illustration, a visual representation of digital cryptocurrencies, Bitcoin, Ripple, Ethernum, Dash, Monero and Litecoin is displayed on February 16, 2018 in Paris, France. Digital cryptocurrencies have seen unprecedented growth in 2017, despite remaining extremely volatile. (Photo Illustration by Chesnot/Getty Images)
A worker checks the fans on miners, at the cryptocurrency farming operation, Bitfarms, in Farnham, Quebec, Canada, February 2, 2018. Picture taken February 2, 2018. REUTERS/Christinne Muschi
Representation of the Ripple virtual currency is seen in this illustration picture, February 13, 2018. Picture is taken February 13. REUTERS/Dado Ruvic/Illustration
A customer of an Australian bank withdraws money from an Automatic Teller Machine (ATM) next to a Bitcoin ATM at a shopping mall in central Sydney, Australia, October 1, 2015. Australian businesses are turning their backs on bitcoin, as signs grow that the cryptocurrency's mainstream appeal is fading. Concerns about bitcoin's potential crime links mean many businesses have stopped accepting it, a trend accelerated by Australian banks' move last month to close the accounts of 13 of the country's 17 bitcoin exchanges.Picture taken October 1, 2015. REUTERS/David Gray
A worker checks the fan on a miner, at the cryptocurrency farming operation, Bitfarms, in Farnham, Quebec, Canada, February 2, 2018. Picture taken February 2, 2018. REUTERS/Christinne Muschi
A man walks past an electric board showing exchange rates of various cryptocurrencies including Bitcoin (top L) at a cryptocurrencies exchange in Seoul, South Korea December 13, 2017. REUTERS/Kim Hong-Ji
A monitor shows various cryptocurrencies' exchange rates against Japanese Yen including NEM coin (middle in the top) at 'nem bar', where customers can pay with NEM coins, in Tokyo, Japan January 29, 2018. REUTERS/Kim Kyung-Hoon
A miner waits to have its fan replaced, at the cryptocurrency farming operation, Bitfarms, in Farnham, Quebec, Canada, February 2, 2018. Picture taken February 2, 2018. REUTERS/Christinne Muschi
PARIS, FRANCE - FEBRUARY 16: In this photo illustration, the icon of the the Coincheck cryptocurrency exchange application is seen on the screen of an iPhone on February 16, 2018 in Paris, France. Victims of one of the world's largest cryptocurrency hacks are suing Coincheck, the Japanese company whose network was breached in a theft worth more than dollars 650 millions. Coincheck is a bitcoin wallet and exchange service headquartered in Tokyo, Japan, founded by Koichiro Wada and Yusuke Otsuka. It operates exchanges between bitcoin/ether and fiat currencies in Japan, and bitcoin transactions and storage in some countries worldwide. (Photo Illustration by Chesnot/Getty Images)
Representation of the Ripple virtual currency is seen in this illustration picture, February 13, 2018. Picture is taken February 13. REUTERS/Dado Ruvic/Illustration
A view of Romania's first bitcoin ATM is seen in downtown Bucharest June 27, 2014. In a well-lit office with red window frames in downtown Bucharest, Romania's first bitcoin ATM attracts many who until it opened in May had to buy or sell the digital currency face-to-face or through wire transfers. The interest in bitcoin in Romania stands out in a region where national currencies are widely seen as poor substitutes for the euro. Tech-savvy and still deeply distrustful of officialdom 25 years after the end of communism, many Romanians are unfazed by warnings about the cryptocurrency. Picture taken June 27, 2014. To match Feature ROMANIA-BITCOIN/ REUTERS/Bogdan Cristel (ROMANIA - Tags: BUSINESS SOCIETY SCIENCE TECHNOLOGY)
Representations of the Ripple, Bitcoin, Etherum and Litecoin virtual currencies are seen on a PC motherboard in this illustration picture, February 13, 2018. Picture is taken February 13, 2018. REUTERS/Dado Ruvic/Illustration
Eoh Kyung-hoon, leader of a club studying cryptocurrencies, checks a chart after a meeting at a university in Seoul, South Korea, December 20, 2017. Picture taken December 20, 2017. REUTERS/Kim Hong-Ji
Eoh Kyung-hoon, leader of a club studying cryptocurrencies, attends a meeting at a university in Seoul, South Korea, December 20, 2017. Picture taken December 20, 2017. REUTERS/Kim Hong-Ji
A Bitcoin (virtual currency) paper wallet with QR codes and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015. British authorities have come out in support of digital currencies in the name of promoting financial innovation, while proposing that regulations should be drawn up to prevent their use in crime. But it is technophiles who are leading the drive to make London a real-world hub for trade in web-based "cryptocurrencies", of which bitcoin is the original and still most popular. Picture taken May 27, 2015. REUTERS/Benoit Tessier
Publican Grant Fairweather places a beer on the bar next to a Bitcoin sign as he serves a customer in Sydney, Australia, September 29, 2015. Australian businesses are turning their backs on bitcoin, as signs grow that the cryptocurrency's mainstream appeal is fading. Concerns about bitcoin's potential crime links mean many businesses have stopped accepting it, a trend accelerated by Australian banks' move last month to close the accounts of 13 of the country's 17 bitcoin exchanges. Picture taken September 29, 2015. REUTERS/David Gray
A Bitcoin (virtual currency) hardware wallet and a coin are seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, May 27, 2015. British authorities have come out in support of digital currencies in the name of promoting financial innovation, while proposing that regulations should be drawn up to prevent their use in crime. But it is technophiles who are leading the drive to make London a real-world hub for trade in web-based "cryptocurrencies", of which bitcoin is the original and still most popular. Picture taken May 27, 2015. REUTERS/Benoit Tessier
George Rotariu uses Romania's first bitcoin ATM in downtown Bucharest June 27, 2014. In a well-lit office with red window frames in downtown Bucharest, Romania's first bitcoin ATM attracts many who until it opened in May had to buy or sell the digital currency face-to-face or through wire transfers. The interest in bitcoin in Romania stands out in a region where national currencies are widely seen as poor substitutes for the euro. Tech-savvy and still deeply distrustful of officialdom 25 years after the end of communism, many Romanians are unfazed by warnings about the cryptocurrency. Picture taken June 27, 2014. To match Feature ROMANIA-BITCOIN/ REUTERS/Bogdan Cristel (ROMANIA - Tags: BUSINESS SOCIETY SCIENCE TECHNOLOGY)
PARIS, FRANCE - FEBRUARY 16: In this photo illustration, a visual representation of the digital Cryptocurrency Monero is displayed on February 16, 2018 in Paris, France. Monero is an electronic currency that has experienced an incredible surge in 2017. Monero is one of the first 15 cryptocurrencies on the market. The success of Monero is explained by its popularity in 2016 with users of the site AlphaBay, an illegal darknet platform on which were selling drugs and weapons. Cryptocurrencies including Bitcoin, Ethereum, Ripple, Dash, Monero and Litetcoin have seen unprecedented growth in 2017, despite remaining extremely volatile. (Photo Illustration by Chesnot/Getty Images)
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"There's no question about the fact that there is a need for a regulatory framework," said Republican Senator Mike Rounds, a Senate Banking Committee member.

Digital assets currently fall into a jurisdictional gray area between the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Treasury Department, the Federal Reserve and individual states.

Much of the concern on Capitol Hill is focused on speculative trading and investing in cryptocurrencies, leading some lawmakers to push for digital assets to be regulated as securities and subject to the SEC's investor protection rules.

"The SEC is properly the lead on the issue," said Republican Representative Bill Huizenga, chairman of the House Financial Services Subcommittee on Capital Markets which will hold hearings on the issue in coming weeks.

Huizenga said the recent growth of the virtual currency market had made him more comfortable with more oversight. "Six months ago, we didn't see this explosion. The marketplace has changed," he said.

Carolyn Maloney, a Democratic senior member of the House Financial Services Committee, is another lawmaker advocating for direct oversight of digital assets by the SEC.

     "A lot of people don't realize there's nothing backing these virtual currencies,” she said.

ALARM BELLS

Virtual currencies have existed for years but speculation in them has recently ballooned, along with scams promising investors returns of over 1,000 percent in weeks.

In a time of volatile markets, hackers are also active in the sector, stealing $530 million of digital currency from Japanese exchange Coincheck last month.

Bitcoin, the best known virtual currency, lost over half its value earlier this year after surging more than 1,300 percent.

"We have to look carefully at all of the cryptocurrencies and make sure individuals don't get taken advantage of," said Representative Tom MacArthur, a House Financial Services Committee Republican.

Regulators globally have raised the alarm over cryptocurrencies, saying they may aid money laundering and terrorist financing, hurt consumers and undermine trust in the global financial system.

France and Germany want cryptocurrencies on the agenda for the upcoming G20 meeting of the largest advanced and developing economies.

Conservative Republicans also recognize the potential for broader risks.

"I'm a total free-marketer, so I don't want to regulate," said Republican Representative Dave Brat, a member of the conservative House Freedom Caucus.

"But if it's a currency that could destabilize the whole economy, you're going to have that conversation," he said.

SECURITY OR COMMODITY?

The SEC and CFTC chairmen recently called for greater scrutiny of digital assets before the Senate Banking Committee. Members of the panel said the regulators will return to discuss how to move forward.

While many lawmakers agree tighter oversight is needed, there is no consensus yet in Congress on how to proceed.

While some lawmakers say speculative investments should be classed as securities, others want digital currency transactions regulated as commodities.

The SEC is already cracking down on transactions known as initial coin offerings (ICOs), while the CFTC has identified digital assets as a commodity subject to its anti-fraud rules.

Peter Van Valkenburgh, director of research at the Coin Center, a member of the growing cryptocurrency lobby, said lawmakers need to distinguish between ICOs that operate like securities and other virtual currencies including bitcoin, which he described as a commodity like gold.

Senator Rounds told Reuters there was an opportunity to regulate cryptocurrencies as both a security and a commodity.

But while lawmakers are keen to mitigate the risks digital assets may pose, they are also mindful of the need to protect innovation, including the underlying distributed ledger technology, said Democratic Senator Chris Van Hollen, a member of the Senate Banking Committee.

"The goal here is to have rules of the road that protect consumers without trying to squash innovation."

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