Cryptographic Rule Proposals from the U.S. Panel

Although a panel of state and federal financial regulators has identified three areas where new laws could help fill holes in US cryptocurrency rules that are widely seen as a necessary precursor to the broader adoption of blockchain-based finance, Congress may not be able to act on them. anytime soon. This could leave the market under the scrutiny of regulators competing for jurisdiction, encouraging the crypto industry to move abroad.

He is more optimistic than other observers about the prospects for rapid progress. If not, we expect swift action in 2023.” But with midterm elections looming next month, it's hard to see how the legislation could pass in 2022.

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

• Spot trading of crypto assets that are not considered securities

• Regulatory arbitrage, where market participants try to take advantage of different rules between agencies
  Lack of traditional intermediaries such as brokers and clearing houses in transactions involving retail investors
  If done right, regulation could provide better consumer protection and lead to further investment by institutions,” says Smith.

• The report considers spot trading of crypto-assets a regulatory loophole, as the lack of rules could lead to conflicts of interest and market manipulation that would harm investors and the economy.

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Arbitrage problems arise when "the same activity may be legally conducted under more than one regulatory framework." As a result, Smith says, the report says there could be "a wide range of financial stability implications if activities that carry the same risks are subject to different rules, or if firms can operate in a way that prevents regulators from assessing the overall level of the entity. risks.”

The third area of ​​concern is the lack of reserves in financial transactions with retail 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 customers direct access to the markets.

According to the report, the risk arises from the credit or leverage that the platforms provide. Automatic liquidations and calls for additional payment raise problems with the protection of investors and consumers.

"With legislation, the devil is in the details. We believe the political environment is at a point where legislation is inevitable. It is crucial for us to get the legislation right and we are willing to take the time to ensure there are no unintended consequences,” says Smith.

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

Last week, Kim Kardashian settled with the Securities and Exchange Commission for $1.2 million for promoting EthereumETH 0.0% Max, a cryptocurrency built on the Ethereum blockchain, without disclosing that she was paid $250,000 for the promotion. This landmark settlement with the crypto industry is still uncertain whether Ethereum Max — which the agency considers an "unregistered security" — is actually a security. If the case were to go to trial, the verdict would provide 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 granddaddy of crypto and the largest by market cap, BitcoinBTC 0.0%, a commodity.

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

As regulators battle over jurisdiction, the financial industry is anxiously awaiting clear regulation for incorporating digital assets into its services. Just last week, Nasdaq, the world's second-largest exchange, announced that it has no plans to launch a cryptocurrency exchange in the US without clear rules.

“The education gap in legislators' knowledge of cryptocurrencies is always a challenge. This is an ongoing process. Better education for policymakers will lead to better legislation,” says Smith.

While many proposals have been put forward to regulate cryptocurrencies, uncertainty remains about what might prompt Congress to act.

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

The company ranked the U.S., along with seven other countries, five out of five for each of these categories: Legalizing cryptocurrency ownership, requiring a license for crypto-businesses, taxing cryptocurrencies as assets, using cryptocurrencies widely to purchase goods, and central banks developing their own digital currency to protect investors by, that they offer less volatile alternatives to traditional cryptocurrencies.

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