Last week, FIA’s board held its annual Washington policy meetings virtually with key US regulators and government officials. While we would have preferred to be in-person, these Zoom meetings were incredibly productive with global board members able to access important US policymakers without the hassle of travel, security checks and logistical snafus. We even had a board member join from Hong Kong! There are two topics that everyone seems to be talking about: climate change and crypto assets. These are the sexy issues that seem to be on everyone’s lips from Members of Congress to Administration officials to FIA’s board members.
While these topics are clearly top of mind, the policy agenda around them remains cloudy. Regarding digital assets, government officials in the US are still trying to figure out the relevance and importance of this growing asset class. For those digital assets that are futures or securities, there are existing regulatory regimes at the Commodity Futures Trading Commission and the Securities and Exchange Commission that protect customers and the integrity of the markets. Unfortunately, it is often unclear whether these crypto assets are futures or securities. Even our board members were querying about the “Howey Test”, the 1946 Supreme Court decision that lays out the test for determining a security. Based on our visits, I expect both the SEC and CFTC to begin to provide guidance on certain crypto assets to clarify these jurisdictional lines and to utilize their enforcement authority for those in violation of these laws.
Two areas to keep a close eye on: stablecoins and spot crypto markets. The President’s Working Group for Financial Markets (PWG), which includes the Secretary of Treasury and the Chairs of the Federal Reserve, the Federal Deposit Insurance Corporation, the SEC, and the CFTC, recently met to discuss what to do about stablecoins. Stablecoins are digital currencies backed by other traditional assets like fiat currencies, gold, or securities. Because these coins could cause a run or panic in the underlying asset, policymakers are concerned by the lack of a regulatory regime. The PWG plans to release a report in the coming weeks on how the government may treat stablecoins. Stay tuned!
The other area to watch is the spot crypto market. Many crypto assets fall outside the securities and futures regulatory regimes and as a result, remain without oversight. This is complicated by the fact that most investors in these markets are retail. Recent Congressional testimony by SEC Chair Gary Gensler highlighted this regulatory void with Chairman Gensler suggesting these markets may need oversight. However, it is unlikely that the SEC or CFTC could unilaterally step in to regulate the spot crypto market without legislative changes. This may be another area that the PWG voices its recommendations to Congress.
Climate change was the other universal topic of interest during our meetings. Addressing climate change is a top priority of the Biden Administration but there are various opinions on the best way to move the needle. CFTC Acting Chair Russ Behnam produced a comprehensive report on climate change last fall coming from his Market Risk Advisory Committee (MRAC). This report contained many recommendations for the marketplace and government to address climate risk, but it is less clear on the role of the exchange-traded derivatives markets. The SEC is focused on supplementing its disclosure regime with information on climate risks for public companies. There is a healthy debate in Washington on whether a separate disclosure regime should be adopted or whether the existing “materiality” test for disclosure covers this area. Climate is also high on the list of priorities for central bankers around the world with the G20 coordinating several workstreams on financial climate risks.
Regardless of the evolving regulatory landscape, I believe our markets can play a significant role in both crypto and climate. Our markets are designed to help manage risk in various forms in our economy. I’m sure in 1973 when governments took currencies off the gold standard, people could not imagine a marketplace being developed to manage the price risk of foreign currency. Innovators like Leo Melamed and Milton Friedman saw the potential. Today the global FX market is the largest in the world with $6.6 trillion traded daily. Yes, the markets for carbon offsets and crypto currencies are minuscule compared to more mature products. Yet the upside potential for both is enormous. And in the case of climate risk, the need to act is becoming more urgent by the day.
If intensity and focus are leading indicators, our summer policy meetings have shown that climate change and crypto assets will drive the Washington agenda for years to come. I am confident that our markets will be front and center in that debate.
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