The world of cryptocurrencies and digital assets has grown exponentially and become increasingly complex.
The market value of the digital asset ecosystem expanded significantly from approximately $500bn in 2020 to almost $3trn as of November 2021, according to data from CoinMarketCap.
However, while the technology is moving fast, regulatory clarity at the national level, much of which would require congressional authority, has been slow to develop, according to Episode 14 of STA Trading Views: Digital Assets – Surveillance & Needed Regulatory Elements.
Currently, cryptocurrency markets have no overarching and centralized regulatory framework, leaving investments in the digital assets space vulnerable to fraud, manipulation, and abuse.
In the latest episode of STA Trading Views, Jim Toes, President & CEO of STA and Joe Schifano, Global Head of Regulatory Affairs, Eventus discussed the initial elements needed in the regulation of digital assets.
The two congressional hearings held in December on digital assets and stablecoins formed a backdrop for their discussion.
Schifano argued that there are three critical areas that should be addressed, and the first one relates to stablecoins generally.
The President’s Working Group Report on Stablecoins noted some key risks and some key gaps relative to stablecoins as a means of payment.
The report recommended that Congress act promptly to enact legislation, and that legislation should ensure that payments, stablecoins and related arrangements are subject to some sort of federal prudential framework.
“I think some of that is there already, but clearly, there are some risks and some gaps,” Schifano said.
He added that the risks generally relate to market integrity and investor protection, financial integrity and illicit financial concerns and the prudential concerns around payments.
The second area Schifano highlighted was around definitional uncertainty.
“This relates to how do we make sure that the US becomes the dominant player in the space, attracting the right kind of talent keeping businesses here and leading in technological innovation,” he said.
“Definitional clarity would be incredibly helpful. I think we should be able to come up with some definitions and point to a method to work with regulators closely to innovate within this regulatory framework. That could be reasonably designed to protect consumers as well allowing technological and financial innovation to advance,” he said.
According to Schifano, the third critical area is around regulator clarity.
He said that there’s the convergence of AML/CFT regulations of payment arrangements and the jurisdiction of the SEC/CFTC.
For instance, Coinbase Global, an exchange for cryptocurrency trading, suggested Congress assign the regulation of digital assets to one entity.
“Others have suggested some definitional clarity that could better assign coverage amongst existing regulators like the SEC and the CFTC,” said Schifano.
SEC Chair Gary Gensler has voiced concerns regarding the lack of a regulatory framework for cryptocurrency exchanges, stating, “exchanges trading these crypto assets do not have a regulatory framework … right now there is not a market regulator around these crypto exchanges, and thus there’s really not protection against fraud or manipulation.”
Schifano said that particularly as it relates to an exchange environment, there should be established an SRO environment (self-regulatory organization).
“That type of organization can work closely with the venues and the prudential regulators to ensure market integrity. It can issue related guidance for compliance frameworks, provide guidance where necessary as things come up, and be that sort of intermediary to help think through some of the thorny issues that come up,” he concluded.