US panel’s suggested crypto rules seek to plug holes

Although a panel of state and federal financial regulators have identified three areas where new laws could help close loopholes in U.S. cryptocurrency rules, widely seen as a necessary precursor to broader adoption of cryptocurrency-based finance. on the blockchain, Congress may not be able to act on them soon. This could leave the market overseen by regulators competing for jurisdiction, encouraging the crypto industry to move overseas.

“New technologies often require a fresh look at regulations. Clearly, we need a regulatory framework for the stablecoin and cryptocurrency markets,” said Kristin Smith, executive director of the Blockchain Association. Forbes. She is more optimistic than other observers about the prospects for rapid progress. “Legislation is moving quickly through Congress, and we may see something before the end of the year. Otherwise, we expect swift action in 2023.”

However, with midterm elections looming next month, it’s hard to see how any legislation could pass in 2022.

The three areas identified in an October 3 report by the Federal Financial Stability Supervisory Board, created after the Great Recession that began in 2007, are:

  • Spot trading of crypto assets not considered securities
  • Regulatory arbitrage, where market participants seek to take advantage of different rules between agencies
  • Lack of traditional intermediaries, such as brokers and clearinghouses, in transactions involving retail investors

“There is no state or federal regulatory body with the authority to regulate trading activity in the spot market. If done properly, regulation could provide better consumer protection and drive investment from institutions,” says Smith.

The report views spot trading of crypto assets as a regulatory loophole, as the lack of rules could lead to conflicts of interest and market manipulation that would be detrimental to investors and the economy.

Arbitration issues arise when “the same activity can be legally performed under more than one regulatory framework”. Therefore, says Smith, the report says there could be “a wide range of implications for financial stability if activities that carry the same risks are subject to different rules or if companies can operate in a different way. which prevents regulators from evaluating all of an entity’s assets”. risks.”

The third area of ​​concern is the lack of buffers in financial transactions with retail investors. In the stock market, investors are protected by intermediaries such as brokers, exchanges and clearing houses. Many crypto firms offer vertically integrated services that allow retail clients direct access to markets. According to the report, the risk stems from the credit, or leverage, provided by the platforms. Automatic liquidations and margin calls raise investor and consumer protection concerns.

“With legislation, the devil is in the details. We believe the political environment is in a place where legislation is inevitable. For us, the key is to get the legislation right and we are prepared to take the time necessary to ensure there are no unintended consequences,” Smith said.

With Congress failing to set rules in these areas, regulators are taking matters into their own hands by filing suits against crypto market participants on the premise that certain digital assets are within their jurisdiction.

Last week, Kim Kardasian settled with the Securities and Exchange Commission for $1.2 million for promoting Ethereum
Max, a cryptocurrency built on the Ethereum blockchain, without disclosing it was paid $250,000 to provide advertising. This high-profile settlement concluded with the crypto industry still uncertain about whether Ethereum Max – which the agency considers “unregistered security” – is really a security. Had the case gone to trial, the verdict would have clarified which cryptocurrencies are considered securities versus commodities.

Currently, SEC Chairman Gary Gensler considers most cryptocurrencies to be securities; while he maintains the grandfather of crypto and largest by market capitalization, Bitcoin

Meanwhile, the Commodities Futures Trading Commission charged Ooki DAO, a decentralized autonomous organization, on September 22 with illegally offering leveraged and margined trading without a know-your-customer program. The CFTC generally oversees commodities, while the SEC mainly deals with securities, including stocks and bonds.

As regulators fight for jurisdiction, the financial industry eagerly awaits regulatory clarity to integrate digital assets into its services. Just last week, Nasdaq, the world’s second largest stock exchange, announced that it has no plans to launch a cryptocurrency exchange in the United States without clear regulations.

“The education deficit in cryptographic knowledge of legislators is always a challenge. At the Blockchain Association, we have worked hard to be a resource for members of Congress. This is an ongoing process. Better education of policy makers will lead to better legislation,” Smith says.

While there have been many proposals on crypto regulation, uncertainty remains as to what might get Congress to act.

Ironically, although the United States has no official crypto regulations, it still has some of the strictest crypto rules in the world, according to market information provider Forex Suggest.

The company ranked the United States, along with seven other countries, in the top five out of five for each of these categories: legalizing crypto ownership, requiring licensing of crypto activities, taxing crypto as an asset , having the crypto widely used to purchase goods and having central banks are developing their own digital currency to protect investors by offering less volatile alternatives to traditional cryptocurrencies.

Australia, South Korea, the United Kingdom, Denmark, Japan, Norway and Canada joined the United States with the top rankings.

About Wanda Dufresne

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