For years, the crypto industry has struggled with regulatory standards due to ongoing debates about whether digital assets should be classified as securities, commodities, or something else entirely. Recent market volatility and the collapse of various crypto firms have highlighted the need for better regulation. As it stands, the industry fails to meet investor protection standards established in other financial markets, leading to significant losses for countless individuals. However, achieving consensus on the best path to improved regulation is challenging. While some argue for increased regulatory clarity, others, including Chairman Gary Gensler of the Securities and Exchange Commission (SEC), believe that the problem lies in non-compliance with existing legal requirements and the exploitation of jurisdictional loopholes. With differing views on the role of Congress in this matter, finding a solution has become increasingly complex.
In this article, we propose a solution that would involve the creation of a new self-regulatory organization (SRO) overseen jointly by the SEC and the Commodity Futures Trading Commission (CFTC). This SRO would be similar to existing organizations like the Financial Industry Regulatory Authority (FINRA) or the National Futures Association (NFA). Its mission would be to protect investors and financial markets by establishing and enforcing crucial standards for the crypto industry. By creating an SRO, we could sidestep the need for litigation to determine whether digital assets are securities or commodities, focusing instead on developing common standards for platforms trading different types of crypto assets. Importantly, the introduction of an SRO would not require a change in existing securities and derivatives standards, nor would it undermine the authority of the SEC or the CFTC. In fact, it could pave the way for determining whether further legislation is required and help build a consensus on what that legislation should entail. The funding for the SRO’s work could come from the industry itself. SROs, recognized by the SEC and the CFTC, have played a critical role in regulating securities and derivatives markets.
It’s important to note that the industry’s previous attempts at self-regulation have fallen short of expectations. For an SRO to succeed, the government must actively supervise its operations, exercising control over its leadership, approving all SRO rules, and ensuring enforcement of those rules. Without Congressional action, the SEC and the CFTC could establish such an SRO today. While they may not have the formal authority to require crypto firms to join the SRO, they could create incentives to encourage membership and compliance with SRO rules. Once a well-regulated SRO is established, responsible members of the crypto industry would have every reason to join.
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Authors: Timothy Massad and Howell Jackson
Timothy Massad is a member of the PayPal Advisory Council on Blockchain, Crypto, and Digital Currencies. Howell Jackson is an independent trustee of CREF and affiliated TIAA-CREF mutual funds and also serves on the board of Commonwealth, a nonprofit organization that promotes financial inclusion and access. The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. Other than the aforementioned, the authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this article are solely those of its authors and are not influenced by any donation.
FAQs
Q: What is the proposed solution for better regulation of the crypto industry?
A: The authors suggest the creation of a new self-regulatory organization overseen jointly by the SEC and the CFTC, similar to existing organizations like FINRA or NFA. This SRO would establish and enforce standards for the crypto industry, protecting investors and financial markets.
Q: How would an SRO help resolve the debate surrounding the classification of digital assets?
A: By focusing on developing common standards for platforms trading various types of crypto assets, an SRO could bypass the need for litigation to determine whether these assets are securities or commodities.
Q: How would the SRO be funded?
A: The authors propose that the SRO be funded by the industry itself.
Conclusion
Achieving improved regulation in the crypto industry is a pressing matter, given recent market turmoil and the need to protect investors. While differing views on the role of Congress have complicated the path forward, the creation of a self-regulatory organization overseen jointly by the SEC and the CFTC could provide a viable solution. By developing and enforcing industry-wide standards, this SRO would foster investor protection and financial market stability. Through the active supervision and control of the government, an SRO could be established without the need for Congressional action. It is vital for all stakeholders to come together and work towards a well-regulated crypto industry that is trusted and respected by both participants and regulators alike.
