The one constant in the crypto markets over the past few weeks is the speed at which things seem to be getting worse.
Even the most seasoned observers were shocked as Bitcoin lost more than half of its value in a matter of months and the total cryptocurrency market cap fell below the $1 trillion mark after hitting $3 trillion in November.
It is a chain of events that began with the overnight collapse of algorithmic stablecoin TerraUSD and its companion token Luna. The contagion effects destroyed Three Arrows Capital, Celsius and Voyager.
Now, critics are stepping up their claim that crypto markets are nothing more than a “wild west” of costly speculation. The crypto industry and traditional finance await further — and potentially far more aggressive — government regulation.
Only time will tell what this regulation will look like and whether it will be effective. One thing is currently clear: the application of traditional regulatory frameworks will not be sufficient.
Cryptocurrency is a unique asset class based on unique technology. For crypto regulation to really make a difference, it needs to protect investors without suffocating financial innovation.
My experience as a Treasury regulator, architect of one of the first crypto compliance functions, and co-founder of a regtech company has led me to the conclusion that a strong and comprehensive regulatory framework for cryptocurrencies can only be achieved by prioritizing a few key goals.
Clear, workable definitions
The SEC has made clear its desire to regulate and monitor cryptocurrencies. The recent near-doubling in size of its cyber unit (now renamed “Crypto Assets and Cyber Unit”) shows it’s willing to commit more resources and staff to bring crypto fully under its regulatory umbrella. But while an increase in staffing will inevitably expand the SEC’s enforcement capabilities, crypto platforms are still awaiting answers on how exactly cryptocurrencies are to be classified and how regulatory authority will be divided or shared between the SEC and the Commodity Futures Trading Commission (CFTC).
It will be up to Congress to step in and settle these issues. Crucial legislation in the near future doesn’t seem particularly likely, however, considering lawmakers only recently started prioritizing crypto hearings.
When lawmakers invited crypto CEOs to a meeting last December, a key presentation was a “level-setting” explanation of blockchain and the fundamentals of web3 by former acting Comptroller of the Currency Brian Brooks (specifically the first agency head with background) . in crypto). This was a good first step, but educating legislators will be key to closing the knowledge gap to create effective regulation.
So far, potential regulators have defined crypto by comparing it to the closest approximation from the world of traditional finance. This “if-it-looks-like-a-duck” approach has led to definitions based on what cryptocurrency has in common with traditional finance, not what makes them different.
Crypto regulators need to create New Definitions – those that speak directly to the technology and processes unique to crypto. This, in turn, will allow regulators to create a regulatory framework specifically tailored to the assets they wish to oversee.
Some of these definitions have been included in the recent Gillibrand-Lummis bill. Should the law pass, these definitions would become the literal “letter of the law.” However, it remains to be seen whether the information and information provided would be sufficient for the authorities tasked with creating and enforcing regulations.
Develop regulations that are strong yet flexible
It’s an old truism that innovation doesn’t happen in the boardroom. Technological innovation often requires an independent streak that doesn’t play well with the status quo.
The problem, of course, is when that independent streak violates traditional legal guarantees. But regulation and innovation can work together if we remain flexible and focused Consumer. As far as a crypto token fits into an existing regulatory framework, the regulation should apply.
However, if a token fits into multiple regulatory frameworks depending on usage, individual use cases should not automatically extend the regulatory scope beyond its scope. A good litmus test for regulators is to ask: Does this rule protect the end user? Or am I protecting existing businesses at the expense of new product innovations that could improve consumer outcomes or increase competition?
Regulators cannot be expected to see the future better than anyone else. But by being aware – not only of the limits that are set, but also of the scope that products and processes have grow– they can write strong, comprehensive regulations while allowing finance and technology to evolve.
Enforce regulations at the speed of technology—and let technology help you
Future conversations about the crypto market crash of 2022 will inevitably focus on how quickly things went wrong. Lawmakers and regulators will keep this in mind when developing new policies specifically designed to protect consumers and counteract extreme market volatility.
As these new laws solidify, it will be critical that these groups consider an often-overlooked policy goal: developing an enforcement framework that allows regulators to act as fast as the crypto market itself.
Speed has traditionally not been a regulator’s forte – and intentionally so. Regulators are by nature thoughtful, prudent and measured. But unlike the opacity of the traditional finance industry, crypto-specific regulations have the potential to leverage crypto’s own native properties, such as: B. the digital-first format and the inherent transparency.
Not only does this mean that blockchain-enabled tools can be used to enforce regulations, but future regulations will also benefit from the technological advances that have emerged as part of the larger crypto ecosystem.
This will require work from both legislators and regulators, as well as work to establish clear definitions and write flexible policies. But the reward for doing so could be a regulatory enforcement framework that paves the way not only for crypto regulation but also for the next generation of traditional financial markets regulation.
A way forward
The silver lining to crises and difficulties is that they often spur action on those who have the power to bring about lasting change.
However, there is always a danger that the desire to “fix broken things” will lead to overly conservative and short-sighted decision-making and stifle growth in the long run.
Crypto regulation is needed – and the time to write and implement it is clearly here. Policymakers would do well to remember that ignoring what makes cryptocurrencies unique and valuable is just as foolish as never regulating them at all.
Matt Van Buskirk is co-founder and CEO of Hummingbird Regtech.
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