Self-regulation could cut through crypto quagmire

THE cryptocurrency market is in the throes of an extended crash, as the implosion of FTX rattled an entire sector already shaken by dramatic price drops and bankruptcies of major players. But before the dust settles, the list of failed crypto firms is likely to have grown substantially, along with the list of investors who have suffered serious financial loss. Calls for a robust framework to protect investors and bring some standards and stability to the marketplace are increasing.

Opinions differ as to how we got here: US Securities and Exchange Commission (SEC) chairman Gary Gensler would say it is because so many in the industry have failed to comply with securities laws. In his view, most of the tokens being traded are securities and, therefore, trading venues should abide by the robust investor protection standards that exist for securities exchanges. Many in the sector disagree and claim the tokens they trade are commodities. But while the Commodity Futures Trading Commission (CFTC) oversees commodity derivatives markets, it has very little authority when it comes to the spot market for crypto, which is where most of the trading occurs.

This leaves a major gap: the spot market in cryptocurrencies that are not deemed securities. The Financial Stability Oversight Council issued a report recommending that “Congress pass legislation that provides explicit rulemaking authority over the spot market for crypto assets that are not securities” as well as legislation to regulate stablecoins. In addition, it recommended Congress “develop legislation that would create authority for regulators to have visibility into, and supervise, the activities of all of the affiliates and subsidiaries of cryptoasset entities, in cases in which regulators do not already possess such authority”.