Financial experts are coming out against an industry call for a single regulator for crypto markets, saying it would add a layer of complexity to an already knotty marketplace.
Proponents of a single regulator say it could help answer common questions about crypto products, such as whether they should adhere to rules governing a security or a commodity and how bank laws may apply. Multiple federal and state regulatory agencies currently must weigh in to answer those questions.
Coinbase Global, an exchange for cryptocurrency trading, suggested Congress assign the regulation of digital assets to one entity, although it did not explicitly call for the creation of a new agency.
“To avoid fragmented and inconsistent regulatory oversight of these unique and concurrent innovations, responsibility over digital assets markets should be assigned to a single federal regulator,” Coinbase wrote in its proposal in October. “Its authority would include a new registration process established for marketplaces for digital assets and appropriate disclosures to inform purchasers of digital assets.”
Robert Hockett, a professor at Cornell Law School, said financial regulation is already too “siloed,” a situation that would only worsen with a new agency.
“It would be very strange indeed to go back and fragment the regulatory structure at precisely the time when more consolidation would be called for,” he said.
As it stands, money market mutual funds replicate accounts offered by commercial banks, and derivatives offer similar functions to insurance products. The regulators ignored these similarities, with the bank regulators looking only at banks, the Securities and Exchange Commission only at the securities markets and the state insurance commissioners only at the insurance companies, he said.
He warned that a similar situation could happen in crypto with digital assets taking over “shadow banking” functions, moving into unregulated cracks in the system.
Kevin Werbach, a professor of legal studies and business ethics at the University of Pennsylvania's Wharton School and author of a book on blockchain technology, said the U.S. should integrate its financial regulators, like every other major nation.
“Our laws and regulations should be updated to better address the novel aspects of digital assets and blockchain platforms,” he said in an email. “We don’t need a new, separate regulator for crypto; we need to revamp our financial regulatory system to address the unique aspect of crypto along with other innovations in finance.”
Joe Dewey, a partner with the law firm Holland & Knight LLP, is skeptical that crypto is unusual enough to need a single regulator. Congress would have to decide if such an agency would also need authority over tax and anti-money laundering requirements, he said. It is unclear if this would be efficient.
Still, he said existing regulators could provide more clarity over crypto policy and help remedy a common complaint within the industry. One example is the sale of digital tokens by blockchain companies. There is a lack of clarity about what happens when the tokens stop acting like securities.
“There is no good pathway right now from going from the company that sold the tokens to raise capital and treated them as a security to transitioning to a system that uses the token for a utility,” Dewey said.
As a result of the uncertainty, much of the minting of digital tokens has moved to Europe and Asia, he said.
Dylan Bruce, financial services counsel at the Consumer Federation of America, said a lot of the discussion misses the central issue.
“The primary goal when assessing regulatory approaches to digital assets should be protecting investors, and that should be what drives policymaking in this space,” he said in an email. “As these volatile assets increasingly encroach into retail and retirement accounts, it should be the priority of regulators to make sure that the people who are saving for retirement, for their kids’ education, or young people investing for the first time, aren’t left holding the bag if something goes awry.”
While the SEC’s role is clear, he urges other regulators “to proactively apply the laws and rules within their respective jurisdictions as well.”
Follow the political spending
Dennis Kelleher, the president of Better Markets, a consumer-focused nonprofit founded after the 2008-09 financial crisis, attributed the attention to the call for a single regulator to political spending.
“It's only getting talk on the Hill because the crypto industry is now one of the top spenders in lobbying in Washington,” Kelleher said.
Coinbase spent $625,000 on lobbying in the third quarter of 2021, it reported on Oct. 20. The only previous lobbying expenses it reported were $55,000 in 2015, according to disclosure reports.
This effort is the standard playbook for the industry, Kelleher said. “If they can’t capture a regulator to effectively not regulate them, then they shop around for a more friendly one. If you can’t find one that you can control, then you go to Congress and you claim regulators are killing innovation and claim that the U.S. industry will lose out to foreign competitors.”
A similar situation occurred, he said, with financial derivatives in the 1990s. The industry called them an innovation, and Congress restricted the regulation of them, only to later reestablish control after their contribution to the financial crisis.
A new regulator would not be better than the SEC, Kelleher said, and the existing regulatory authority is largely adequate. “Coinbase is the tip of the industry spear to kill as much regulation and oversight as possible,” he said.
One area in Coinbase’s proposal that has promise is its call for a new self-regulatory organization, or SRO, according to Michelle Bond, CEO of the Association for Digital Asset Markets, a group of crypto organizations. Coinbase is not a member.
Such an entity under joint SEC and Commodity Futures Trading Commission jurisdiction could help address one of the biggest questions in the crypto world, determining what is a security and what is a commodity, she said in an interview.
The SRO model is how the brokerage industry polices itself through the Financial Industry Regulatory Authority. It also could regulate the “spot” cryptocurrency market, which isn’t addressed at the federal level, she said. The CFTC has authority over futures contracts but not over direct trades of crypto for cash or other assets.
The last time Congress reorganized financial regulators was in 2010, when it passed the Dodd-Frank Act. That legislation created the Consumer Financial Protection Bureau and merged the Office of Thrift Supervision into the federal bank regulator, the Office of the Comptroller of the Currency.