Brookings’s Center on Regulation and Markets and the Hutchins Center on Fiscal and Monetary Policy recently hosted “The future of crypto regulation,” keynoted by Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam. Benham’s keynote was followed by a discussion with experts representing an array of perspectives, including that of regulatory agencies, academia, and industry. Here are five takeaways from the event, which you can watch in its entirety.
High levels of retail participation in crypto
One in five Americans report having traded cryptocurrency, and polls suggest crypto trading is more common among younger adults, men, and racial minorities. This is quite different from other financial instruments regulated by the CFTC, Benham noted. “You’re going to have more vulnerable investors… It’s incumbent on us to educate, to inform, to disclose risks involved.”
Michael Piwowar, a former Securities and Exchange Commissioner and now executive director of the Milken Institute Center for Financial Markets, linked increased Congressional attention to growth in retail crypto; “If you got one in five households that have interacted with crypto… [members of Congress] are going to start hearing it from their constituents.” Legislation to regulate digital assets has been introduced by Senators Lummis and Gillibrand, Stabenow and Boozman, and Toomey, as well as Representative Gottheimer. The Treasury is actively negotiating bipartisan stablecoin legislation with House Financial Services Committee Chair Waters and Ranking Member McHenry. Benham said that stablecoins, digital currency meant to always be equal to one dollar, are more of a “payment mechanism” and thus should be regulated by prudential banking regulators.
Digital asset regulation may require addressing crypto exchanges and digital wallets. American University Law Professor Hilary Allen noted that the stablecoin legislation under discussion does not, saying, “That is a gaping hole… Almost every major stablecoin… is affiliated with an exchange that profits from trading in that stablecoin.” Mark Wetjen, a former CFTC commissioner and current head of policy and regulatory strategy for FTX (one of the largest crypto exchanges), agreed; “The exchanges are the gateways to the entire crypto space, and so oversight of them is probably most important.”
Crypto challenges traditional regulatory distinction between securities and commodities
Traditionally, the SEC regulates securities while the CFTC regulates commodities and derivatives. Whether crypto is a security or commodity remains unclear, as various subcomponents of the crypto ecosystem challenge existing regulatory divisions. For instance, the SEC recently argued that nine different crypto tokens were securities in an insider trading case; while a federal judge ruled that virtual currency like Bitcoin constitutes a commodity.
Benham called on Congress to provide clarity on which of the hundreds – if not thousands – of coins in existence are securities versus commodities: “Ultimately, we’d like to see law drawing lines.” Piwowar said the lack of clarity creates unwelcome delays as many crypto-related applications before the SEC are “not getting answers” on whether their products represent securities. The result is that some crypto firms are “going outside the United States” to locate their business. Allen cautioned, though, that Congressional action could also constitute an indication that the government supports crypto. She warned against letting crypto into the regulated sphere for fear of giving it “implicit guarantees.”