A recent WSJ article provides ideas about how crypto can be regulated to prevent further implosions of crypto marketplaces like FTX. The report notes that promoters of cryptocurrency have exploited its ambiguous nature to avoid federal regulation.

Is crypto a security? A currency? A commodity? A bank product? None-of the above? Crypto proponents have sought to exploit the situation by arguing that a large portion of digital assets should not be treated as securities, but instead as commodities where the spot market has no federal regulator.   Doubling down, they have characterized their choices not to voluntarily comply with existing regulations as the result of “regulatory uncertainty,” when the real motivation is avoiding compliance and its costs. When Bitcoin was launched globally, and coupled with decentralized finance, the idea was to essentially create a new financial system that would make the old one obsolete.

Because crypto currencies have been implemented outside of national financial systems, regulating them is more challenging and complex. However, cryptocurrency was designed to make moving money between parties easier, not to avoid regulation. Indeed, there are many international industries that are well regulated by international bodies, including finance, air travel, and shipping industries.

There is no reason for crypto to be any different. In the article, Jay Clayton and Timothy Massad, former chairmen of the SEC and CFTC, weigh in on what they think will work best for regulating crypto. Their first proposal would require crypto intermediaries (including exchanges and decentralized finance platforms) to implement basic consumer protections that are standard for other assets.

We believe the SEC and the CFTC should publish a core set of standards, including (1) segregation of customer assets, (2) limits on lending, (3) restrictions on operating conflicting businesses such as trading, (4) prohibitions against fraud and manipulation including wash trading (where someone trades with themselves or an affiliate to inflate the market price or volume of a security), and (5) governance requirements. The former chairmen also proposed the SEC and CFTC require crypto intermediaries use only stablecoins that comply with certain regulations, and enforcement of existing financial laws. According to James Wester, Director of Cryptocurrency at Javelin Research, the narrative that crypto should merit special treatment when it comes to regulation is off-target.

“The idea that crypto has been ungovernable, or that it exists in an unregulated ‘wild-west’ is not accurate, and the piece by the former chairmen show how that view of crypto is off base,” Wester said. “As the chairmen say in their op-ed, frameworks and standards already exist in current financial regulations. “Their basic proposals for crypto exchanges and platforms—better governance, safeguarding customer assets, prohibiting fraud, eliminating conflicts of interest—are what we expect from institutions and actors within financial services today, and existing regulations enforce them for traditional financial services,” he added.

“Using those existing regulations, and the authority already extended to the CFTC and SEC, can—and should—be expanded to include cryptocurrencies and digital assets already. ”

By Josh Einis
Dec 21, 2022 00:00
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