How to improve regulation of crypto today—without congressional action—and make the industry pay for it
Over the past decade, the development of proper 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 have prompted renewed calls for better regulation. The fact is that today the industry does not comply with 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, arguing that existing securities and derivatives laws don’t really fit. 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 exploited gaps in case law. Some expect Congress to intervene, but opinions differ widely on what kind of legislation is needed.
In this paper, 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 these new SROs would 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 argue whether digital assets are securities or commodities; it could develop standards common to platforms trading different types of crypto assets. An SRO would not change our traditional standards for securities and derivatives, nor would it undermine the authority of the SEC or the CFTC. An SRO could also be a means of determining whether further legislation is actually needed and could help build consensus on what that legislation should look like. The work of an SRO could be funded by industry. SEC and CFTC-recognized SROs have been and continue to be critical to the regulation of our securities and derivatives markets.
To put it bluntly, the industry-led efforts that have hitherto been referred to as “self-regulatory organizations” fall far short of our imaginations. An SRO can only be successful if the government aggressively monitors its work – including exercising control over its governance, approving all SRO rules, and ensuring that the SRO enforces those rules. The SEC and CFTC could create such an SRO under current law today without congressional intervention. While agencies may not have the formal authority to require crypto firms to join SROs, we believe they could provide powerful incentives to encourage membership and compliance with SRO rules. The responsible members of the crypto industry would have every reason to join such a well-regulated SRO once created.
Download the full paper here»
Timothy Massad is a member of the PayPal Advisory Council on Blockchain, Crypto and Digital Currencies. Howell Jackson is an independent trustee of CREF and affiliated TIAA-CREF investment funds and also serves on the board of Commonwealth, a non-profit organization that promotes financial inclusion and access. The authors have received no 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. Aside from the above, the authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
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