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A Former CFTC Chairman’s Plan for Federal Crypto Regulation

Timothy Massad, the former chairman of the Commodity Futures Trading Commission (CFTC), has outlined a case for better (read: stricter) federal crypto asset regulation in a substantial report for the Brookings Institute, “It’s Time to Strengthen the Regulation of Crypto-Assets.”

Throughout the document, he outlined the case that improved regulations will better protect investors and guard against the fraudulent use of cryptocurrencies.

“There is a gap in the regulation of crypto-assets that Congress needs to fix,” Massad wrote. “The gap is contributing to fraud and weak investor protection in the distribution and trading of crypto-assets. Better regulation will benefit investors, further development of new technologies, curtail the use of crypto-assets for illicit payments, and reduce the risk of cyber attacks, which can result in collateral damage elsewhere in our financial system.”

Massad has some firsthand knowledge about the disparity between crypto assets and federal rules. As chairman of the CFTC under President Barack Obama, he oversaw the primary agency responsible for protecting consumers and the market from fraudulent futures contract trading. The commission has been outspoken about how cryptocurrencies like bitcoin are or will soon be impacting the markets it regulates.

Now a senior fellow at Harvard University’s John F. Kennedy School of Government, Massad has outlined his thoughts on the gap between bitcoin’s potential and its current reality, the risks that cryptocurrency investors face and specifics for improving regulations.

The Danger of Crypto Assets Today

Massad opened the report by pointing out that the massive potential of bitcoin and other blockchain-based assets may have kept regulators from implementing appropriate rules to date.

“The hype surrounding Bitcoin and other crypto-assets has contributed to regulatory distraction,” per the report. “Bitcoin’s creators promised it would solve the ‘trust problem’ and reduce our reliance on centralized financial intermediaries. However, it has not reduced our reliance on financial intermediaries or eroded the power of our largest institutions. Instead, crypto-assets have created new financial intermediaries that are less accountable than big banks.”

He pointed out that while cryptocurrencies do function without input from large banks, intermediaries like trading platforms still exist. And these middlemen do not necessarily abide by standard investor protection regulations.

The report also follows the worn thread between crypto assets and illegal economic activity.

“Crypto-assets are used increasingly to avoid government sponsored sanctions and for illicit payments — including ransomware for cyber attacks and transactions in narcotics, firearms or other dark market goods. The lack of transparency on the part of the crypto intermediaries contributes to this problem.”

Closing the Gap

When addressing areas where he would improve the oversight of crypto assets, Massad first pointed to areas where traditional financial regulators are unable to step in. He noted that the U.S. Securities and Exchange Commission (SEC) only has jurisdiction over crypto assets that are defined as securities. And that the CFTC only has sway over derivatives based on crypto assets, like bitcoin futures and swaps.

“Congress needs to fix this by creating regulatory oversight of the cash market for crypto-assets, and the trading platforms and other intermediaries that operate in that market,” Massad wrote. “Either the SEC or the CFTC is competent to regulate this area if given the power; it would be inefficient to create a new agency. I recommend making the SEC the lead agency.”

He also wrote against relying on state, as opposed to federal, regulation for what is naturally a borderless and international type of asset.

And Massad defied the notion that tightened regulations will hamper innovation, even if he acknowledged that more oversight might favor institutional blockchain companies over smaller innovators.

“Innovative technology does not inherently require a loosening of regulation,” the report reads. “It is not necessary to relax the rules on initial coin offerings or create ‘regulatory sandboxes’ where regulations are waived. Whether better regulation favors larger institutions and more centralized applications of DLT and thereby undermines the potential that DLT contributes to more decentralized financial processes is an open question that deserves more analysis.”

Finally, Massad provided seven specific steps forward for his vision of more comprehensive federal crypto asset regulation:

  1. Granting the SEC with authority to regulate crypto trading platforms, custodians and wallets, brokers and advisors.
  2. Increasing resources for the SEC and CFTC to implement new and existing regulations.
  3. Introducing legislation around core principles like protecting consumer assets, as opposed to specifics.
  4. Giving relevant federal agencies authority to decide whether offshore platforms need to comply with U.S. standards.
  5. Considering whether there are different ways to meet core principles for centralized and decentralized platforms and putting regulations in place that don’t favor one approach or the other.
  6. Issuing a report recommending Congressional action to strengthen regulation of the crypto asset sector.
  7. Continuing to develop self-regulatory standards within the crypto asset industry.

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