Over the past decade, the development of proper regulatory standards for the crypto industry has been hampered by endless discussions about whether certain digital assets are securities, commodities, or something else. The recent crash in cryptocurrency prices and the collapse of several crypto companies have led to renewed calls for better regulation. The fact is that the industry today does not comply with the same investor protection standards as other financial markets, and hundreds of thousands of people have suffered losses. But there is no consensus on the path forward for better regulation. Cryptocurrency industry participants have long complained about a lack of regulatory clarity, and argue that existing securities and derivatives laws are not really appropriate. Others — including Securities and Exchange Commission Chairman Gary Gensler — say the problem is a lack of compliance with current legal requirements, and industry participants have certainly exploited judicial loopholes. Some are looking to Congress to intervene, but opinions vary widely on what kind of legislation is needed.
In this paper, we propose that the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) create and oversee a new self-regulatory organization (SRO), similar to the Financial Industry Regulatory Authority (FINRA) or the National Future Association (NFA). . The mission of this new SRO is to protect investors and financial markets by developing and enforcing much-needed standards for the cryptocurrency industry. Creating an SRO that is jointly supervised by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) can avoid the need for litigation over whether digital assets are securities or commodities; It can develop common standards for trading platforms of different types of crypto assets. The SRO will not involve changing our traditional standards for securities and derivatives, nor will it undermine the authority of either the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). The SRO can also be a means of determining whether more legislation is really needed and can help build consensus on what such legislation should look like. Industry can finance the work of the SRO. CSRs recognized by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have been and continue to play an important role in regulating our securities and derivatives markets.
To be clear, the efforts the industry has initiated thus far that have been labeled as “self-regulatory organizations” fall far short of what we imagine. An SRO can only succeed if the government strongly oversees its work—including by exercising control over its leadership, agreeing to all of the SRO’s rules, and making sure that the SRO enforces those rules. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) could create such a type of SRO today, under current law, without action from Congress. Although agencies may not have the formal authority to require crypto companies to join the SRO, we believe that they can create strong incentives to encourage membership and compliance with SRO rules. Responsible members of the cryptocurrency industry will have every reason to join a well-regulated SRO once it is established.
Download the full paper here »
Timothy Massad is a member of PayPal’s advisory board on Blockchain, Cryptocurrency, and Digital Currencies. Howell Jackson is an independent trustee of TIAA-CREF’s CREF Mutual Funds and is also a member of the Board of Directors of The Commonwealth, a nonprofit organization that promotes financial inclusion and access. The authors have not received 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. Other than the foregoing, the authors are not currently an official, director, or board member of any organization with a financial or political interest in this article.
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