Crypto scams must be reined in, Senate Banking Committee says

If there's one thing Democrats and Republicans can agree on, it's that rampant fraud in the cryptocurrency market must be dealt with. Exactly how to deal with it, however, is still being argued.

At a Senate Banking Committee hearing Thursday on scams and risks in the crypto and securities markets, senators on both sides of the aisle pitched legislative actions to protect investors from harm. Crypto scammers have stolen more than $1 billion from 46,000 investors since the start of 2021, according to a June report from the Federal Trade Commission, and the recent collapse of stablecoins and crypto lending platforms have wiped out some investors’ life savings.  

Committee Chairman Sherrod Brown, D-Ohio, said these crashes have exposed the enormous risks inherent to many crypto firms.

“Consumers and investors were misled with promises that their crypto would earn double digit interest rates in perpetuity,” Brown said at the hearing. “Think back to multimillion dollar Super Bowl ads and think about whom they were targeting.”

Patrick Toomey of Pennsylvania, the highest-ranking Republican on the Senate Banking Committee, chastised the Securities and Exchange Commission for not making clear rules regulating digital assets. Toomey brought up a bill to bring oversight to stablecoins — digital assets that purport to tie to assets like the U.S. dollar — as a “starting point” for bipartisan legislation. Sen. Kyrsten Sinema, D-Ariz., supported Toomey's proposal.

"The first place where we should be able to find common ground, and I actually think in many cases are close, is to chart a path forward for clear and sensible regulations on stablecoins," Toomey said.

Brown acknowledged that he's discussed the proposal with Toomey, but said he feels regulators should be able to go further in their oversight of cryptocurrency.

“Our markets are the envy of the world because of, not in spite of, the ways we protect Americans’ money,” Brown said. “Supposed innovation and opportunity don’t mean much if they come at the cost of massive fraud.”

The hearing also featured testimony from Melanie Senter Lubin, the president of the North American Securities Administrators Association and the state of Maryland’s securities commission, and Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority Inc.

Fraudulent investments tied to digital assets are one of the top threats facing retail investors, Lubin said, and regulators need increased resources to successfully patrol the market. Lubin gave support to the Empower States to Protect Seniors Against Bad Actors Act, a bipartisan bill introduced by Sens. Chris Van Hollen, D-Md.; Tim Scott, R-S.C.; Raphael Warnock, D-Ga.; and Cynthia Lummis, R-Wyo.

“Congress should oppose rushed legislation relating to digital assets that merely serves to offer special treatment to certain market participants and that weakens the importance of state and federal regulators in our economy,” Lubin said.

Finra is keeping a close eye on how scammers are exploiting the hype around cryptocurrencies and digital assets, but participation by the broker-dealers under Finra’s jurisdiction is limited, Walsh said. She also emphasized the importance of equipping investors with the knowledge to spot persuasion techniques and said the regulator has launched a sweep of so-called “finfluencers” to better understand how broker-dealers are using social media to acquire digital asset customers.

“As the contours of crypto regulation continue to evolve, we welcome greater direction from Congress and the agency’s responses to the President’s executive order in this area,” Walsh said. “Not all crypto products are fraudulent, some can be reasonable choices for certain investors. Still, market history is thin, and without clear regulatory oversight, caution is warranted.”

Sen. Catherine Cortez Masto, D-Nev., suggested the Investor Justice Act, which would require the SEC to establish a grant program for law schools to offer investor assistance clinics for those who lost money in scams, and Lummis argued for the Responsible Financial Innovation Act she introduced with Sen. Kirsten Gillibrand, D-N.Y., as the framework for properly regulating digital assets. Sen. Jack Reed, D-R.I., discussed his Insider Trading Prohibition Act to clearly define standards of insider trading.

Massachusetts Democrat Elizabeth Warren also said she's prepared to introduce a bill that will regulate the crypto market and stamp out scams.

"Crypto is an industry that is built to favor scammers, and some of the biggest players in our financial system are in on the con," Warren said.

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