In April, web3 investment firm CoinFund published its white paper outlining a proposed way forward for digital asset regulation in the United States, titled “Better Technology, Better System.” It came with 10 proposed regulatory principles and a plea for lawmakers to have a “rethink of the market structure and elements of legacy regulation that now can be rendered moot.”
The paper was authored by Christopher Perkins, president of CoinFund and member of the U.S. Commodity Futures Trading Commission’s (CFTC) Global Markets Advisory Committee (GMAC), who explains the intention behind the publication:
“From the beginning, we’ve suggested a ‘principles-based’ approach to crypto regulation, and we thought that it was appropriate to provide additional transparency and detail around our ideal approach in this whitepaper.”
Speaking with CoinGeek, Perkins elaborates on the need for this new approach to digital asset regulation in the U.S. but suggests that it was not meant solely as a critique of current regulatory efforts.
“In the end, we are supportive of nuanced and proactive policy and regulation,” says Perkins. “Our goal is to be engaged and thoughtful -not antagonistic or combative.”
The company’s white paper comes out of a difficult few months for the industry as it continues to grapple with the fallout from the FTX scandal and the recent collapse of several tech banks. This month digital asset exchange Bittrex joined the ranks of bankrupt digital asset entities, filing Chapter 11 on May 8 after several months of regulatory woes. The company had previously planned an orderly exit from U.S. markets due to “continued regulatory uncertainty.”
This “uncertainty” includes a jurisdictional tug-of-war between leading regulators in the U.S., namely the Securities and Exchange Commission (SEC) and the CFTC, over the nature of certain digital assets—a debate on which key market players such as Coinbase have also attempted to give their two cents.
This confused situation is combined with what CoinFund described, in its press release announcing the white paper, as “increasing regulatory action,” coming from both the SEC and CFTC. It’s this situation that the proposals hope to address.
10 regulatory principles
The core of Coin Fund’s white paper is 10 concrete recommendations offered to policymakers, to “Guide Industry’s Regulatory Engagement.”
These include a call for the regulation of centralized intermediaries but not decentralized technology, and prioritizing sandboxes and safe harbor programs, which the paper states is aligned with SEC Commissioner Hester Peirce’s proposals.
The full outlines of the 10 policy proposals can be found in the white paper blog post, but are summarized as follows:
- Legislation must form the foundation of digital financial policy.
- Legacy regulation should evolve with advances in technology to effectively deliver on certain core principles, which include client asset protections; risk disclosures; cost efficiency; inclusivity; transparency; engagement; and privacy.
- Regulations must be clear, consistent and predictable, and processes for compliance should be straightforward and seamless.
- Centralized intermediaries should be regulated, but decentralized technologies should not.
- Regulation should encourage and incentivize the adoption of the best technology.
- Legislation and regulatory policy should recognize that the resiliency and inclusivity of public blockchains.
- Sandboxes and safe harbor programs and engagement should be encouraged.
- Rulemaking must include reasonable public comment periods and community.
- Fraud, manipulation and abuse must never be tolerated, and its perpetrators held accountable.
- Across the globe, passporting, substitute compliance and third country recognition should be embraced.
Perkins believes these guidelines could produce a “proactive and nuanced approach- informed by legislation—that is principles centric and tailored to unlock the promise of decentralization technologies.”
The alternative and less desirable option, Perkins suggests, is “an approach that seeks to leverage legacy regulatory infrastructure.”
The inference here is that the current state of play in the U.S. is more akin to this latter approach. An example might be the SEC labelling large sections of the digital asset market as securities under the Howey test, and forcing those who deal in them to a securities regime that was not designed with digital assets in mind.
The SEC further ramped up its enforcement activity in the wake of the FTX collapse, which led to much debate in Washington D.C. and the U.S.-based industry about the best way forward for regulation of digital assets.
The state of regulation in the industry
Such soul searching about regulation is where CoinFund’s white paper was born, and Perkins points to examples outside the U.S. as inspiration for some of the changes he recommends.
“In other jurisdictions including the EU, UK, UAE, Bermuda, and Hong Kong, policy makers are moving quickly to pass new legislation to cultivate responsible innovation in order to lead, catalyse their economies and stimulate job creation.”
This is in contrast to the U.S., says Perkins.
“We have failed to lean forward and capture the opportunity that web3 innovation presents through similar nuanced legislation that would empower regulators to deliver clarity for industry participants.”
One of the jurisdictions that Perkins highlights as ahead of curve on progressive digital asset legislation is the EU, which in April finally passed its landmark Markets in Crypto Assets (MiCA) bill into law.
When it comes into force in 2024, MiCA will bring with it requirements for digital asset service providers, such as exchanges and wallet providers, to obtain a license from national regulators in order to offer services to EU citizens. As part of this licensing requirement, service providers must comply with various new mandates to improve transparency and reduce risk, including requiring service providers to demonstrate that they are stable, can safeguard user funds, adhere to prudential standards, and can defend against market manipulation. There are also specific provisions addressing stablecoins, providers of which will have to obtain a license from a national regulator to do business.
MiCA is the culmination of a long development and consultation process going back to its announcement in September 2020, and through rounds of industry feedback and revisions it goes some way toward the more nuanced approach for which Perkins advocates.
Despite advocating for a more nuanced regulatory approach in the U.S., Perkins, unlike some anti-regulation voices, does have praise for the efforts of regulators.
“Current regulations do empower regulators to root out fraud, manipulation and abuse, and this should remain an important focus across traditional finance as well.”
This positive regulatory effort includes the much-maligned SEC, but Perkins has particular praise for the CFTC’s efforts.
“I would like to commend the CFTC for their engagement with the community. It was great to see them add a number of crypto-native companies to their global markets advisory committee (GMAC). This sort of engagement is critical.”
The CFTC has long been seen as a more industry friendly regulator, in contrast to the SEC’s regulation by enforcement approach, though whether or not this reputation is justified is up for debate and the CFTC is no stranger to enforcement action. This can be seen by some of the CFTC’s recent action in the wake of the FTX collapse—in March the regulator filed a civil suit accusing Binance, the world’s largest digital asset exchange, of a “calculated, phased approach” to violating U.S. commodities regulations.
Recent enforcement actions aside, collaborative organizations such as the GMAC referenced by Perkins could represent a route through the regulatory quagmire the U.S. digital asset space is in, where industry players and enforcers argue over the nature of assets rather than focusing on protecting investors.
The GMAC
The Global Markets Advisory Committee (GMAC) was created in 1998 to advise the CFTC on issues that affect the integrity and competitiveness of U.S. markets and U.S. firms. The GMAC also makes recommendations regarding international standards for regulating futures, swaps, options, and derivatives markets, as well as intermediaries; and its membership includes financial market infrastructures, market participants, end-users, service providers, and regulators.
The group’s last meeting, held on February 13 of this year, discussed, amongst other things, what topics to prioritize in terms of global market structure and digital asset market topics, in order for the GMAC to make the best policy recommendations to the CFTC.
This is the kind of engagement that Perkins, a member of the GMAC, sees as the route to better regulation. By way of a case study, he points to how Bermuda is dealing with the challenges of digital asset regulation as a good benchmark for the way this collaborative method can be approached and can succeed.
“I spoke to the Premier of Bermuda last week, the Honorable David Burt. Premier Burt underscored the importance of the “Bermuda Triangle” when crafting financial regulation. This is thorough engagement between, 1) government, 2) business and 3) Academia.”
There’s evidence that this increased engagement can bear fruit.
Bermuda has one of the most stringent registration requirements in the Caribbean, and yet the territory still attracts international digital asset service providers. The Bermuda Monetary Authority (BMA) has issued over 14 firms with operational licenses, a third of which received their approvals in 2022.
Jason Hayward, Bermuda’s Minister for Economy and Labor, noted recently that the reason for the country’s heightened scrutiny is to prevent the proliferation of bad actors in the region and protect investors’ interests:
“Obviously, the persons that we want in Bermuda must be fit and proper because, essentially, we’re looking at maintaining the jurisdiction’s quality name,” said Hayward.
This approach has been a success for the country in attracting the right digital asset firms and avoiding the scandals of less regulated countries—fellow Caribbean nation the Bahamas provides a helpful example of these pitfalls, having been in the negative spotlight since Bahamas-based FTX spiralled into bankruptcy.
“Rulemaking by regulators requires education, academic study and collaboration with subject matter experts from industry, government and academia. Thoughtful and diligent processes tend to help alleviate the unintended consequences of poor rulemaking,” wrote Perkins in his white paper.
This collaboration is the most effective method to Perkins sees to solve the regulatory uncertainty and frustration hampering the digital asset market in the U.S., and provide the “better financial system” which the whitepaper seeks to inspire.
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