Over the past decade, the development of appropriate regulatory standards for the crypto industry has been hampered by endless debates about whether certain digital assets are securities or commodities or something else. The recent crash in crypto prices and the collapse of several crypto firms has led to renewed calls for better regulation. The fact is that the industry today does not adhere to investor protection standards comparable to other financial markets, and hundreds of thousands of people have suffered losses. But there is no consensus on the way forward to achieve better regulation. Crypto industry participants have long complained about a lack of regulatory clarity, and have argued that existing securities and derivatives laws don’t really fit the bill. Others – including Securities and Exchange Commission (SEC) Chairman Gary Gensler – say the problem is a lack of compliance with existing legal requirements, and certainly industry participants have taken advantage of jurisdictional loopholes. Some look to Congress to intervene, but views differ widely on what kind of legislation is needed.
In this article, we propose that the SEC and the Commodity Futures Trading Commission (CFTC) jointly create and oversee a new self-regulatory organization (SRO), similar to the Financial Industry Regulatory Authority (FINRA) or the National Futures Association (NFA). The mission of this new SRO will be to protect investors and financial markets by developing and enforcing much-needed standards for the crypto industry. Creating an SRO overseen jointly by the SEC and CFTC could avoid the need to dispute whether digital assets are securities or commodities; it can develop standards common to platforms trading in different types of cryptoassets. An SRO would not change our traditional securities and derivatives standards, nor would it undermine the authority of either the SEC or the CFTC. An SRO can also be a means of determining whether additional legislation is actually needed and can help build consensus on what that legislation should look like. The work of an SRO can be financed by industry. SROs recognized by the SEC and CFTC have been and continue to be critical to the regulation of our securities and derivatives markets.
To be clear, the industry-initiated efforts to date that have been labeled “self-regulatory organizations” fall far short of what we envision. An SRO can only succeed if the authorities aggressively monitor its work – including by exercising control over management, approving all SRO rules and ensuring that the SRO enforces those rules. The SEC and CFTC can create such an SRO today, under existing law, without congressional action. While the agencies may not have the formal power to require crypto firms to join SROs, we believe they can create powerful incentives to encourage membership and compliance with SRO rules. The responsible members of the crypto industry will have every reason to join such a well-regulated SRO once it is established.
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Timothy Massad is a member of PayPal’s Blockchain, Crypto and Digital Currencies Advisory Council. Howell Jackson is an independent trustee of CREF and affiliated TIAA-CREF mutual funds and also serves on the board of directors of Commonwealth, a non-profit organization that promotes financial inclusion and access. The authors did not receive financial support from any company or person for this article or from any company or person with a financial or political interest in this article. Except as noted, the authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
The Brookings Institution is funded through support from a diverse range of foundations, corporations, governments, individuals, and an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this article are solely those of the authors and are not influenced by any donation.
