Over the last several years there has been a flurry of regulatory activity, rule-writing, and proposed frameworks trying to keep pace with the rapidly growing and expanding cryptoasset sector. Most recently there have been several proposed pieces of legislation focused around stablecoins, including but not limited to the STABLE Act, the TRUST Act, statements from the NYDFS, and propsoed regulations from several high profile, and pro-crypto, senators.
On top of that there have been any number of pronouncements from agencies such as the Office of the Comptroller of the Currency (OCC), and the Internal Revenue Service (IRS), which have further muddied the regulatory outlook. Given the volatility of crypto recently, and especially the economic pain caused by the recent price declines, it would be a simple matter to conclude that the focus should be on investor protection versus fostering innovation.
Simple, but an incomplete perspective.
Despite the ideal and potential for blockchain and cryptoassets to fundamentally transform every aspect of financial lives, the reality is a bit more nuanced. Adoption and investment, both during bull markets and the current crypto winter, of blockchain applications by institutional investors continues to increase. Simultaneously the strong interest and appetite for crypto products and services is demonstrated via the ongoing efforts to have a bitcoin exchange-traded-fund (ETF) approved for trading by the Securities and Exchange Commission. In other word, there is a lot happening in the wider cryptoasset sector, and regulators seeking to add some value to these conversations face a difficult task. Difficult, but not impossible.
Let’s take a look at a handful of areas that would seem to deliver the ideal combination of 1) increased clarity for investors and users of crypto, and 2) help foster an innovative an open ecosystem.
Which regulator is responsible. One of the largest, and most controversial, aspects of the entire regulatory conversation is which agency or body should be tasked with regulatory authority over the space. The S.E.C. might strike some market participants, and the current chairperson Gary Gensler, as the obvious choice for this role, but the lack of guidance and rule-making out of the Commission seems to work against this narrative. An alternative that has gained significant support is that crypto marketplace should be regulated primarily by the Commodities and Futures Trading Commission (CFTC).
Clearly there are market participants that have a vested in these positions, but what should be the major point of debate is as follows. The regulatory agency that oversees crypto (and blockchain applications) should be the agency that has the staffing, expertise, and willingness to do so. In an ideal marketplace this would take the form of a specialized regulator that could allocate the totality of resources to understanding and regulating crypto. Given the current marketplace, however, this stalemate between supports of SEC oversight versus CFTC oversight remains a major obstacle toward both wider adoption and better rule making.
Designating where exchanges, investors, and users should look to for guidance and enforcement is a major step that must be addressed.
Stablecoins. Stablecoins have become the focal point of multiple proposed pieces of regulation during the last several years, and it is easy to see why. Developed to combine the functionality of cryptocurrencies with the price stability of fiat currencies, stablecoins have rapidly grown to a subset of the crypto market worth in excess of $100 billion. The use case of stablecoins for payment purposes is an obvious one, but one that should not be overlooked. In order to get mainstream entrepreneurs, institutions and individuals to utilize crypto as a medium of exchange versus simply as an asset class there must be confidence that these instruments will hold value. That said, and as widespread as stablecoin payments might become, the importance of stablecoins cannot be relegated to any one specific area.
For projects that seek to develop innovate ways to integrate blockchain into the mainstream financial market conversation – decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs) – will have to have utilize an incentive tool that has a stable value. Stablecoins, in other words, are the proverbial glue that holds together many of the most exciting blockchain applications currently entering the marketplace.
Regulators will be well served to keep this in mind when develop regulations around which type of institutions can issue stablecoins, how the processing of these stablecoins are handled
Insurance and protection. Something that has been highlighted during the recent drawdown in prices, massive investor losses, and decrease in confidence in the space overall has been the need for better investor protection, insurance, or other such products commonly available to investors in other asset classes. With the allegations of fraud and other unethical dealings in the marketplace being leveled against formerly high-profile and popular exchanges, the importance of clear, consistent, and understandable legislation is clear.
Investors, both retail and institutional, understand that there are risks to be taken when allocating capital to certain assets, but in order for cryptoassets to be considered investable alongside other more traditional assets, guard-rails must be established. To achieve mainstream understanding and adoption, there should be an emphasis on safe-guarding both investor rights and the ability of investors to recover from losses, especially those resulting from unethical activities.
Cryptoassets are rapidly evolving, and even during the ongoing crypto winter there continues to be an increasing appetite by individuals and institutions to gain exposure to this asset class. As the calendar rolls forward, and as regulations continue to be debated there is no shortage of issues that need to be addressed. Instead of focusing on niche areas, bad actors (which are evident in every industry), regulators should instead be focusing on developing an open, innovative, and global ecosystem that will encourage further development and proliferation of the cryptoasset class. Blockchain based applications, including cryptoassets, have tremendous potential, and well-reasoned regulation can help in the further development of the space. Policymakers should take notice, collaborate with private sector leaders, and focus on developing well-rounded and sensible rules to help the sector thrive moving forward.