Crypto assets regulation has been a big concern for authorities in the short lifespan of the blockchain industry. Although countries such as the United States and others have taken steps towards keeping tabs on the exchanges, traders, and investors in this wild market, many of these efforts have not been comprehensive enough to keep bad actors in check.
In the United States, cryptocurrency regulation is highly inconsistent. Different states have different regulations concerning trading and investing in virtual currencies. At the federal level, bodies such as the Financial Crimes Enforcement Network (FinCEN) and the IRS have different definitions of the term ‘cryptocurrency’. Authorities’ grip on the industry is not strong, and regulatory oversight is not clearly defined. What’s the way forward?
More stringent federal regulation is the answer according to the former chairman of the Commodity futures trading commission (CFTC) Timothy Massad. In a comprehensive report titled “It’s time to strengthen the regulation of crypto assets”, the former CFTC chairman outlined his case towards a ‘stricter crypto asset regulation’ implementation.
Written for the Brookings Institute, the document outlines the gaps in the crypto regulation scene, the importance of strict regulation in fishing out bad nuts from the industry, including protecting investors and preventing digital assets from being used for fraudulent online activities.
Through this report, Timothy Massad, currently serving as a senior fellow at Harvard University’s John F. Kennedy School of Government, also expounded on the gap between the potential of Bitcoin and the current reality it faces as the world’s biggest crypto asset. The document also outlined the specifications on how to regulate the industry.
Current dangers associated with crypto assets
In the first part of the report, Massad talked about the hype around virtual currencies and how this has shied authorities away from instituting the necessary regulations.
“The hype surrounding Bitcoin and other crypto-assets have contributed to regulatory distraction,” per the report. “Bitcoin’s creators promised it would solve the ‘trust problem’ and reduce our reliance on centralized financial intermediaries. However, it has not reduced our reliance on financial intermediaries or eroded the power of our largest institutions. Instead, crypto-assets have created new financial intermediaries that are less accountable than big banks.”
The report hammered on the fact that although these digital assets work without banks in some ways, the industry still has middle-men like exchanges. These intermediaries, according to Massad, do not adhere to rules and regulations pertaining to investor protection.
Going forward, Massad touched on the use of crypto assets for unlawful economic activities.
“Crypto-assets are used increasingly to avoid government-sponsored sanctions and for illicit payments — including ransomware for cyber attacks and transactions in narcotics, firearms or other dark market goods. The lack of transparency on the part of the crypto intermediaries contributes to this problem.”
Massad is speaking from his experience with crypto assets regulations when he was chairman of the CFTC during President Barack Obama’s administration. As a chairman, he managed the agency’s role to protect the market and consumers from fraudulent futures contract trading. Additionally, since the rise of cryptocurrencies, the agency has been outspoken about the overall impact of these assets, especially on sectors that it oversees.
Closing the crypto asset regulation gap
On solving the issues surrounding crypto asset regulation, the report focused on where other traditional regulatory authorities have not been able to cover. Notably, the Securities and Exchange Commission (SEC) only oversees virtual currencies that are deemed securities. The CFTC’s jurisdiction covers crypto asset derivatives, examples including Bitcoin futures and swaps. The best way out is to include areas that these institutions do not oversee.
On a broader outlook, Massad is, however, against state-based regulations, and rather advocates for federal-wide laws, touting the borderless nature and global reach of these virtual currencies as reasons.
“Congress needs to fix this by creating regulatory oversight of the cash market for crypto-assets, and the trading platforms and other intermediaries that operate in that market,” Massad wrote. “Either the SEC or the CFTC is competent to regulate this area if given the power; it would be inefficient to create a new agency. I recommend making the SEC the lead agency.”
The strict regulation vs crypto innovation argument
As crypto gains popularity among the general public and attention from authorities, many experts have warned against strictly regulating the industry. It is a fact that the cryptocurrency industry is still young. Additionally, authorities around the world still haven’t grasped the full nature of these assets.
Regulating such a young industry, according to many experts, will stifle innovation and prevent or limit the creation of probably best ideas that could save the world’s economic system. However, in his report, Timothy Massad thinks differently.
According to the report, stringent regulations will not hamper innovative projects in the crypto industry. Massad, however, admitted that more rules might favor institutional blockchain and crypto firms over smaller innovators.
“Innovative technology does not inherently require a loosening of regulation,” the report reads. “It is not necessary to relax the rules on initial coin offerings or create ‘regulatory sandboxes’ where regulations are waived. Whether better regulation favors larger institutions and more centralized applications of DLT and thereby undermines the potential that DLT contributes to more decentralized financial processes is an open question that deserves more analysis.”
What is the way forward for crypto assets? Massad’s recommendations
In his recommendations, Massad touched on a lot of areas in the cryptocurrency industry that should be regulated. He posits that:
Congress should pass legislation providing SEC or CFTC with the authority to regulate the offering, distribution, and trading of crypto assets, thus regulating trading platforms, wallets, custodians, advisors, and brokers.
The SEC and CFTC should be armed with the needed resources to administer a comprehensive crypto asset regulatory oversight.
There should be legislation over the core principles for the crypto industry, as has been done to the futures market and crowdfunding.
Regulatory agencies (SEC or CFTC) should be given the authority to determine the fate of offshore platforms that provide crypto asset services and products to the US market, including the standards these offshore firms should comply with among others.
According to Massad, Bitcoin and other cryptocurrencies promised to reduce reliance on third-party firms, but have instead created more intermediaries. In this case, it’s about exchanges and custodian service providers.
The issue is, these intermediaries are not subjected to the customer protection regulations in the country, creating a gap and serving as a breeding ground for other fraudulent activities. As much as these issues are true and haunt the crypto industry, the idea of strictly regulation would undoubtedly stifle innovation, especially when viewed in the long-term.