Encryption rule proposal from US panel seeks to plug holes

Although a panel of state and federal financial regulators has identified three areas where new laws could help close gaps in U.S. cryptocurrency regulations, widely seen as a necessary precursor to broader adoption of blockchain-based finance, Congress may not be able to act on them. anytime soon. That could leave the market overseen by regulators competing for jurisdiction, encouraging the crypto industry to move offshore.

“New technology often requires a new look at regulation. It is clear that we need a regulatory framework for stablecoin and crypto spot markets, says Kristin Smith, CEO of the Blockchain Association. Forbes. She is more optimistic than other observers about the prospects for rapid progress “Legislation is moving quickly in Congress, and it’s possible we’ll see something before the end of the year. If not, we expect swift action in 2023.”

With midterm elections looming next month, however, it’s hard to see how legislation can pass in 2022.

The three areas identified in an Oct. 3 report by the federal Financial Stability Oversight Council, created after the Great Recession that began in 2007, are:

• Spot trading of cryptoassets that are not considered securities
• Regulatory arbitrage, where market participants seek to take advantage of differing rules among agencies
• Lack of traditional intermediaries, such as brokers and clearing houses, in transactions involving retail investors

“There is no state or federal regulator with the authority to regulate spot market trading. If done properly, regulation can provide better consumer protection and lead to additional investment by institutions,” says Smith.

The report considers spot trading of cryptoassets a regulatory gap because the lack of rules could lead to conflicts of interest and market manipulation that would be harmful to investors and the economy.

Arbitrage problems arise when “the same activity can be conducted legally under more than one regulatory framework.” Accordingly, Smith says, the report indicates that there could be “a wide range of financial stability implications if activities that carry the same risk are subject to different rules, or if firms may operate in a way that prevents regulators from assessing the totality of an entity’s risk.”

The third area of ​​concern is the lack of buffers in financial transactions with private investors. In the stock market, investors are protected by intermediaries such as brokers, stock exchanges and clearing houses. Many crypto firms offer vertically integrated services that allow retail clients to directly access the markets. According to the report, risk arises from credit, or leverage, provided by the platforms. Automatic liquidations and margin requirements raise investor and consumer protection issues.

“With legislation, the devil is in the details. We believe the political environment is in a place where legislation is inevitable. The key for us is that we get the legislation right, and we are willing to take the time needed to ensure that there are no unintended consequences, says Smith.

Since Congress has failed to define rules in these areas, regulators are taking matters into their own hands by filing lawsuits against crypto market participants based on the assumption that certain digital assets fall under their jurisdiction.

Last week, Kim Kardasian settled with the Securities and Exchange Commission for $1.2 million for promoting EthereumETH
Max, a cryptocurrency built on the Ethereum blockchain, without disclosing that she was paid $250,000 to provide the publicity. This high-profile settlement ended with the crypto industry still unsure whether Ethereum Max – which the agency considers an “unregistered security” – is really a security. If the case had gone to trial, the ruling would have provided more clarity on which cryptocurrencies are considered securities versus commodities.

Currently, SEC Chairman Gary Gensler considers most cryptocurrencies to be securities; while he maintains the grandfather of crypto and the largest by market capitalization, BitcoinBTC
a commodity.

Meanwhile, the Commodities Futures Trading Commission accused Ooki DAO, a decentralized autonomous organization, on September 22 of illegally offering leveraged and margined trades without a know-your-customer program. The CFTC generally oversees commodities, while the SEC is primarily concerned with securities including stocks and bonds.

As regulators battle over jurisdiction, the financial services industry anxiously awaits regulatory clarity to incorporate digital assets into their services. Just last week, Nasdaq, the second largest exchange in the world, announced that it had no plans to launch a cryptocurrency exchange in the United States without clear rules.

“The education gap in legislators’ crypto knowledge is always a challenge. At the Blockchain Association, we have worked hard to be a resource for members of Congress. This is an ongoing process. Better education for policymakers will lead to better legislation,” says Smith.

Although there have been many proposals for crypto regulation, there is still uncertainty about what might prompt Congress to act.

Ironically, while the US has no official crypto regulation, it still has some of the tightest crypto rules in the world, according to market intelligence provider Forex Suggest.

The company ranked the United States along with seven other countries five out of five for each of these categories: Legalizing the ownership of crypto, requiring a license for crypto business, taxing crypto as an asset, having crypto widely used to purchase goods, and having central banks developing their own digital currency to protect investors by offering less volatile alternatives to traditional cryptocurrencies.

Australia, South Korea, Great Britain, Denmark, Japan, Norway and Canada joined the United States in top rankings.