Regulation

Former CFTC chairman calls on Congress to strengthen crypto regulation

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Quick Take

  • Former CFTC chair has called on Congress to better regulate the crypto industry
  • Currently, firms have to navigate a tangled web of state regulations 
  • The report out this week is backed by the Brookings Institution

It doesn’t take an advanced degree in cryptography or law to know that the regulatory landscape for bitcoin and crypto assets is complicated. 

Actors in the space — from brokers to exchanges — are required to navigate a tangled web of state and federal agencies and laws to operate their businesses compliantly (of course, some don’t), and unlike other markets there is no single regulator to which crypto firms answer. One former CFTC chairman wants to change that. 

In a wide-ranging report backed by the Brookings Institution, Timothy Massad outlined a path forward for crypto regulations, urging Congress to act to bring authority over the nascent market under one house. 

“Congress needs to fix this by creating regulatory oversight of the cash market for crypto-assets, and the trading platforms and other intermediaries that operate in that market,” Massad, who led the CFTC from 2014 to 2017, said in the report. “Either the SEC or the CFTC is competent to regulate this area if given the power; it would be inefficient to create a new agency. I recommend making the SEC the lead agency.”

To be sure, Massad isn’t the first to make a case for simplifying the regulatory landscape for crypto firms, which have to operate on a state-by-state basis.

Elsewhere, Hehmeyer Trading + Investments, a high frequency trading firm, said the CFTC was “best suited” to regulate the crypto space.

Still, the depth of the report and the suggestions it contains are notable, said Drew Hinkes, an adjunct professor at NYU Law.

“This isn’t a regulator that said I ran this entity five years ago, here’s what I think,” Hinkes said in a phone interview with The Block. “Clearly this is someone who studied and understands the current state of affairs of the industry.”

Coin Center, a leading industry think tank, has long called for an overhaul of crypto’s regulatory landscape in the U.S., agreeing with Massad for the most part. 

“We would potentially support the creation of a new, unified federal regulator for trusted parties in the cryptocurrency ecosystem (exchanges, custodians, etc.) but it must come alongside full federal preemption of existing, vague, and innovation-chilling state money transmission licensing laws as they are applied to cryptocurrency activities.”

Coin Center thinks the CFTC should be the agency charged with regulating crypto. Currently, the agency regulates futures and commodities markets. 

Still, it’s not clear which crypto assets — outside of bitcoin — would be deemed securities (which are regulated by the SEC) or commodities (which are regulated by the CFTC). Currently, crypto assets are interpreted by various agencies as property, commodities, or securities — adding to the confusion hanging over the market. 

Some proponents of state-led crypto regulation have argued it allows for more innovation. Massad, however, said such a framework would impede the development of an asset so global in nature. 

“When regulatory requirements vary by state, it is expensive to build compliance systems, and difficult to create national, let alone international, markets,” Massad noted. “Our securities markets would not have become the envy of the world if we had relied solely on state blue sky laws and never adopted the Securities Act and Securities Exchange Act.”

Guiding the new regulating framework would be a set of principles, which Massad outlines at the report’s outset. 

“He seemed to suggest that the SEC should be given the power to make new rules, expressly approved by Congress, but that it should be principles-based and allocate responsibilities to the regulator to put together the proper means to implement the principles,” Hinkes said.

Those principles reflect a number of the trouble spots that have plagued the cryptocurrency market including conflicts of interest and the lack of proper recordkeeping. Specifically, they include regulations to prohibit or restrict “the performance of multiple functions by the same entity.”

Still, it’s unclear if Congress will be receptive, Hinkes said. 

“If a report like this ends up in front of the right member of Congress you might see action on it or if it misses the right member of Congress it might be another voice screaming into the void.”

Another source was more candid in questioning the impact of the report, saying “if this was published by something like the ABA or one of the payment/financial services groups I’d be worried. But this is just a Brookings yellow paper.”

“Isn’t moving any congressional needles.”