It is Finally Spring: Our View on Regulations for Crypto Trading
I am excited to be participating in the next Crypto Task Force roundtable on April 11, discussing how we can design a regulatory regime for crypto trading. With 10 year’s experience in digital assets, and a prior career in market structure and electronic trading, I am looking forward to bringing my perspective to the table. With a new crypto-friendly administration in place, we have a unique opportunity to correct the policy gaps of the past and design a framework with clear rules, that encourages fair and orderly markets, protects investors, encourages innovation, and cements the US position as the dominant market for digital assets.
Texture Capital has already shared our viewpoint with the CTF, which you can read here. The thrust of our position is that we should leverage and adapt our existing regulatory structures to rapidly create a federal rules-based framework for crypto trading. For decades, investors have accessed capital markets through a broker-dealer, and the rules and policies defining this framework have evolved over the years, correcting and adapting as markets have changed. It is now time that the broker dealer regime evolves further to incorporate crypto and digital assets.
There are some who advocate for a brand-new regulator and Self-Regulatory Organization (SRO)[1], or that regulatory oversight be divvied up between the CFTC and the SEC (indeed this was a central crux of the FIT21[2] ). This would be a mistake. Firstly, we need to recognize that investors do not view their portfolio as containing ‘SEC-regulated assets’ and ‘CFTC-regulated assets’, they increasingly look at their portfolio as comprising stocks, bonds and crypto, and financial institutions including Blackrock are now recommend an allocation to crypto both for alpha and diversification benefits[3]. Investors should be able to hold Bitcoin in their portfolio, in just the same way they can now hold a Bitcoin ETF.
Secondly, I believe that crypto investors should have similar kinds of protections as securities investors. This means investors should receive appropriate disclosures, and discussion of risks, and be confident that the intermediaries they interact with adhere to high standard of financial controls, anti-money laundering, cybersecurity, best execution and communication policies and operational resilience. Without this they are forced to interact with unregulated or less regulated intermediaries, and are at increased risk of fraud, rug-pulls and hacks.
And thirdly, I believe this is the fastest and most logical way to comprehensive regulatory regime to crypto is to apply the tried and tested formula that has made the US capital markets the envy of the world. This is not just my opinion. Among other submissions to the CTF you will find proposals from the Alternative Investment Management Association that argues for an adapted broker-dealer regime to facilitate side-by-side trading of crypto and securities and Andreesen Horowitz advocating for broker-dealers to operate in crypto assets and securities. There are similar proposals from Virtu, Coinbase, SAGINT and others.
Contrary to the Gensler SEC stance, I am encouraged to see some support for an inclusive, holistic approach to crypto regulation from this new administration. In Commissioner Peirce’s remarks before The Digital Chamber's Blockchain Summit she emphasized that Congress can work with existing regulators rather than creating a new one. And noted that: “While nothing in the SEC’s statutes or regulations currently prevents non-securities from trading alongside securities… Congress could expressly authorize exchanges and Alternative Trading Systems (“ATSs”) regulated by the SEC to trade non-security crypto assets and give the SEC explicit authority to regulate these transactions.”
Of course, none of this is to say that the existing regulatory structures are perfect – this is what former commissioner Gensler spent four years trying (and failing) to convince markets of. There is no doubt that new and updated rules are required, and that Congress will need to pass new laws. The SEC, along with Congress, the investment community and other regulators will need to decide how to modernize existing regulations to make them fit for new digital asset markets. Key themes will include:
Token taxonomy – while there should not be constraints on the types of crypto assets that can be offered to investors by broker dealers, it is important to clear definitions of the types of crypto tokens, and a flexible rule set reflecting the differences. A number of submitters referenced the need to a token taxonomy[4]. Investors should understand if a token is just a meme coin with no intrinsic value, or a utility token or a digital asset security.
Registration / Disclosure – how should the appropriate information about a crypto token be disclosed to investors when there is no centralized issuer?
Custody – one of the most important areas to address, as the concept of custody is very different in a digital asset world compared to a traditional world, and an act of Congress will likely be necessary. For example, rule 15c3-3, the Customer Protection Rule, specifically references “Physical Custody” which doesn’t make sense for digital, decentralized assets. How should the different banks, trust companies, qualified custodian and clearing agencies provide custody for crypto and digital assets?
I look forward to discussing these issues and others at the crypto roundtable with the SEC and a panel of my peers. Furthermore I hope that this discussion, and other feedback from the industry and other regulators can help inform the upcoming Market Structure bill, and secure the US position as the leader in crypto innovation and trading.
[1] https://www.gemini.com/blog/geminis-principles-for-the-crypto-revolution and https://www.coinbase.com/blog/digital-asset-policy-proposal-safeguarding-americas-financial-leadership
[2] https://www.congress.gov/bill/118th-congress/house-bill/4763
[3] See https://www.ey.com/en_us/insights/financial-services/how-institutions-are-investing-in-digital-assets and https://www.usfunds.com/resource/blackrock-says-bitcoin-deserves-a-spot-in-your-portfolio/
[4] For example, Sidley Austin; Andreesen Horowitz.