Crypto regulation comes under the spotlight at Boca

Panelists from US and EU regulators discuss who should be the crypto sheriff in their jurisdictions

17 March 2022


Speakers from regulators in the US and EU discussed the supervision of crypto assets in their jurisdictions and debated on who should be the chief regulator in the US cryptocurrency market during a panel discussion at FIA's International Futures Industry Conference in Boca Raton, Fla.

Dan Berkovitz, general counsel at the US Securities and Exchange Commission and a former member of the US Commodity Futures Trading Commission, noted that multiple branches of the government have a role in the regulation of crypto assets in the US and regulators need to work together to address gaps and overlaps.

"With crypto assets, we're dealing with a new type of product, a novel product, that has many uses. It's not just a security. It cuts across a number of agencies' jurisdiction – our jurisdiction, the CFTC's jurisdiction, the bank regulators' jurisdiction and states have jurisdiction over it," Berkovitz said.

"Legitimately there are questions that arise when you have multiple agencies and multiple jurisdictions implicated – for instance, can this be streamlined? Regulators and industry must come together and work to address any gaps or overlaps."

The discussion, which took place on 16 March, came a week after US President Joe Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets. The order directs federal agencies to coordinate their efforts to come up with a regulatory plan.

Although the order puts in motion a process to develop a comprehensive framework for the regulation of digital assets in the US, it does not on its own resolve many important issues. For example, the order does not specify whether crypto should be treated as a security, a commodity or a banking product, or which branch of government should be the chief crypto regulator.

The order also does not resolve the gap that currently exists in the regulatory framework – although the SEC regulates digital assets if they are deemed to be securities and the CFTC regulates derivatives based on digital assets, neither agency has sufficient authority to regulate spot trading in all digital assets.

Asked whether the CFTC should be responsible for the regulation of the crypto cash market, CFTC Commissioner Dawn Stump told the audience that it was for Congress to decide.

"Congress is going to have to think about which regulatory structure would fit best for the cash trading market space. Certainly, the CFTC has expertise in regulating the infrastructure that can support a market. We've just never done it in the cash space before, so this would be a very different thing for us to embark upon, but we are capable of doing it," Stump said.

"We also can't go to Congress and say, 'figure it out' until we make sure all policymakers understand where the lines are drawn today," she added.

"I can say the CFTC regulates digital asset derivatives, but we haven't written all the rules. For example, we have taken the position in enforcement proceedings that some exchanges offering derivative products should also be registered as FCMs [futures commission merchants], but we've never written any rules that explain how an exchange might go about doing that, nor have we written rules as to how smart contracts on the blockchain can fit the DCM [Designated Contract Market] or the SEF [swap execution facility] model. So, there's more work to be done in our own house," she said.

Kimberly Johns, managing director and senior counsel at Goldman Sachs, agreed that there are limitations in the CFTC's authority to regulate crypto assets currently and noted that there are efforts from the crypto exchange market to move towards a CFTC infrastructure and regulatory framework.

"The crypto spot market has a very different structure to the derivatives market and the issue is going to be, are there components of that newer structure under the spot crypto market that can be imported into the CFTC regulatory framework," she added.

"You have to look at what the existing regulations are, what they require. One of the great things about CFTC regulation is that it is principles-based, so there is some leeway to have innovation and change in the market structure, but there are certainly basic requirements that still need to be addressed."

The European approach

Klaus Löber, chair of the CCP Supervisory Committee at the European Securities and Markets Authority, discussed Europe’s Markets in Crypto Assets (MiCA) regulatory framework, which earlier this week passed a major threshold on its way to ratification when the EU Parliament voted in favor of a revised draft.

MiCA aims to create a common regulatory framework for crypto companies trying to conduct business in any of the EU's 27 member nations. The new draft removes a provision that sought to limit the use of cryptocurrencies that rely on an energy-intensive consensus mechanism known as proof-of-work. The rule could have, in effect, banned bitcoin across the EU.

Speaking on the panel, Löber explained that MiCA, part of the EU's wider Digital Finance package, aims to capture assets that do not fall under existing regulation.

"We are looking more at the types of products, which are potentially outside the remit of providing a stable framework, and trying to address the issuance and the trading of those assets," he said. "We are having similar discussions on who is the most appropriate regulatory authority to deal with this but ESMA clearly with its mandate for stable markets and investor protection has a key role to play here."

He said ESMA's CCP Supervisory Committee, which guides policy related to central counterparties, has two main areas of focus in crypto regulation.

"One is looking at the interest of CCPs to clear products that directly or indirectly reference crypto assets and what kind of risk issues may arise. The second is to see to what extent new technology could support, but also leverage, the clearing and settlement ecosystem," he said.



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