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SEC Faces Backlash Over Crypto Regulation from Lawmakers and State Attorneys

The U.S. Securities and Exchange Commission (SEC) is facing increasing scrutiny over its regulatory approach to the cryptocurrency industry. Criticism is arising both from within the U.S. House of Representatives and from state attorneys general, challenging the SEC’s extensive oversight.

On Thursday, the U.S. House Financial Services Committee voted to repeal Staff Accounting Bill 121, a regulation in place since March 2022 preventing banks from serving as custodians for digital assets. Critics argue that the SEC enacted the bill without proper consultation with banking regulators, highlighting concerns about the regulatory process and the need for clear guidelines.

Rep. Mike Flood (R-NE) criticized the SEC for not consulting prudential regulators, who have expertise in bank custody regulations, before issuing SAB 121. Additionally, a Government Accountability Office report criticized the SEC for not submitting a report to Congress on the bill’s enactment and relying on it as a substitute for definitive regulatory guidance.

The SEC’s recent rule updates for securities dealers have also sparked debate, as the word “crypto” appears only once, leaving the industry without the clarity it has long sought. According to Rep. Maxine Waters (D-CA), the guidance aimed to protect investors from the mishandling of crypto assets by custodians, referencing the collapse of FTX as a cautionary example.

Further complicating matters, eleven U.S. state attorneys general have filed a joint amicus brief in the SEC’s lawsuit against Payward Ventures, the parent company of the crypto exchange Kraken, challenging the SEC’s authority over crypto firms. The attorneys argue that the SEC’s actions exceed its powers and that crypto assets should not be classified as securities without an investment contract.

Amid these developments, SEC Commissioner Hester Peirce expressed concerns at an ETHDenver event about the regulator’s focus on enforcement, suggesting it hampers technological innovation by forcing developers to worry about potential lawsuits instead of focusing on building new technologies.

The ongoing debates underscore the tension between the need for investor protection and the desire for regulatory clarity within the rapidly evolving cryptocurrency industry.

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