How to start regulating the crypto market—immediately

This risk is partly the result of the diverse and often emotional responses that cryptocurrencies have triggered since it began. Charlie Munger has called crypto tokens “part fraud and part illusion”, while many successful venture capitalists believe that the financial infrastructure of tomorrow will be based on technology. electronic money. Each side believes that the government should act to defend its position.

The single origin of crypto assets also complicates the regulatory challenge. Unlike other financial innovations, bitcoin has been launched globally and directly to retail consumers, with claims that it will make traditional intermediaries obsolete. Because financial regulation is done on a national basis and largely through intermediaries, this path to the emergence of “global retail” has challenged regulators because traditional tools are poor. more effective. Adding to the complexity, the use-cases of many crypto assets are often unclear: Whether a particular token provides an investment opportunity, access to a good or service, or a product like a bank?

Stocks or commodities?

These factors, coupled with our fragmented financial regulatory system, in which many regulators have overlapping roles, have slowed the adoption of basic consumer-focused regulations. and cautious. Cryptocurrency advocates 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 for which the spot market has no authority. federal management.

Doubling down, they described their choices not to voluntarily comply with applicable regulations as a result of “regulatory uncertainty”, while the real motive was to avoid compliance and the cost of it. They are right that U.S. financial regulation is often expensive, even in some cases unreasonable, and that there are areas where regulations should be updated to accommodate new technology. .But those things have never been an excuse for non-compliance, especially the full and fair disclosure in order to create a level playing field between insiders and buyers.

Legal proposals have attracted attention recently, but the question is whether consensus can be reached after FTX. Cryptocurrency critics are resistant to any legislative action that could be seen as legitimizing an area they distrust and expect to die of its own weight. Many crypto enthusiasts believe that FTX shows the problem that “centralized entities” are disloyal to crypto’s promise of decentralization and will oppose any assertion of a strict approach. Some of the proposals in between—to create safe harbors in some areas and stronger regulation in others—could be contaminated by the current Sam Bankman-Fried association. disgraced, founder of FTX and proponent of moderate changes.

We, two market regulators—one serving under President Obama and the other under President Trump—believe that government action should not be based on one view of the future or another, but based on hard lessons learned in the past. We also know that finding a comprehensive plan carries a significant “Waiting for Godot” risk, the fact that billions of dollars of transactions per day continue to happen, while fraud and theft continue to take place. —in ancient forms such as bazaar and young as in our experience, the best immediate action is to pursue gradually, taking additional steps without challenge, both in authority and in principle .

We have three recommendations for US regulators:

Requires all crypto intermediaries to implement basic customer protection measures. For all the novelty and promise of blockchain technology, most cryptocurrency transactions are not recorded on-chain but instead on a traditional ledger kept by centralized intermediaries. But these entities claim that the products they trade do not subject them to registration with the Securities and Exchange Commission or the Commodity Futures Trading Commission, which means investor protection. based on state law written for the inadequate telegraph age, especially when trading and leverage are present. While we believe most of the tokens they trade are securities, we need a path of compliance that is not subject to litigation classification questions.

We believe that the SEC and CFTC should publish a core set of standards, including (1) segregation of client assets, (2) lending limits, (3) business operating restrictions conflicts such as trading, (4) prohibits fraud and manipulation including wash trading (where someone trades with themselves or an affiliate to increase the market price or volume of securities) and (5) requires management demand.

These standards can easily be drawn from existing requirements for our stock and derivatives exchanges. The two agencies will then notify the trading venues: Apply these basic standards to everything you trade if you are not registered with the SEC as a securities intermediary or with the CFTC as a securities broker. as a derivative intermediary. Agencies will not give up the ability to argue that registration is mandatory, but they will establish a temporary period during which an intermediary will not be shut down for not registering as long as it is compliant basic standards. This will assure platforms and their customers that operations will continue—on a much more responsible basis—while classification and other issues are resolved.

While we believe agencies can implement this plan using their existing authority, this will not prevent Congress from drafting this approach or pursuing other initiatives to strengthen regulation. What it will do is significantly enhance investor protection while the (which we welcome) legislative process takes place.

Provides rules for the use of “stablecoins.” The use of stablecoins has exploded.It is estimated that daily transactions around the globe use stablecoins — which are digital assets with the purpose of attaching value. their share with national currencies like the US dollar — often in excess of $50 billion, much of which facilitates cryptocurrency transactions.Stablecoins could potentially improve payments in But the fact that they lack stability poses risks to banking-like activities among stablecoin issuers, crypto exchanges, and investors.

Banking regulators should take the lead in creating a regulatory framework — a topic we’ve each written about recently — but the SEC and CFTC can help by requiring that intermediaries only use compliant stablecoins, bringing a stable additional basis to the trading market. At a minimum, they should be issued by a managed entity that holds reserves of cash and high-quality liquid assets.

Continue to strictly enforce the law. Cryptocurrency advocates complain about “regulation by enforcement,” but enforcement is needed as many in the industry will use any colorable complaint to avoid or delay compliance. The SEC’s successful crackdown on “initial coin offerings” or unregistered ICOs, starting in 2017, was necessary because these offerings flouted public offering rules them, often do not provide even basic financial information or disclose risk. Both agencies have also taken action against unregistered or illegal products, Ponzi schemes and other scams, and they should continue to do so. But these efforts – targeted by their very nature – should be complemented by broader steps of the types we recommend.

‘DeFi’ Platform

Our recommended initiatives, focused on intermediaries, should not be read to suggest that we are moving to “DeFi” (decentralized finance) platforms, which find by eliminating middlemen by providing software protocols, such as order matching or asset lending schemes, on public blockchains, on the contrary. may vary, but many of the same risks still exist—phishing, hacking, lack of resiliency and protocol manipulation, and many DeFi platforms, as opposed to their idea of ​​claiming rights. owning, controlling and identifiable beneficiaries It may take some creativity to fulfill the core regulatory requirements for the DeFi platform, but we expect regulators to complete it They will certainly be supported by centralized intermediaries in this effort as they will have new incentives to ensure their DeFi competitors are provide equivalent safeguards.

For years, we have shared the same views on crypto regulation. Regardless of the promise of this new technology, cryptocurrencies are subject to a strong regulatory framework. Concerns about the United States acting unilaterally or getting tougher should not hold us back either. Each of us has taken initiatives—the SEC in cracking down on ICOs and the CFTC in regulating swaps—where industry critics proclaimed that the US would be out of sync and the innovation will move abroad. That did not happen; Instead, other countries have followed our lead or expect them to follow. Those who invest—and risk—the hard earned money in our financial markets should know that the playing field is level and stable, and the bad guys will be eliminated. We hope Congress and our successors are guided by that common ground and launch these initiatives in the spirit of moving forward.


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