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Brookings Event Highlights

Brookings Event Highlights

The Brookings Center on Regulation and Markets and the Hutchins Center on Fiscal and Monetary Policy recently hosted “The Future of Crypto Regulationsaid Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam. Benham’s keynote was followed by a discussion with experts representing a range of viewpoints, including those from regulators, academia and industry. Here are five takeaways from the event, which you can watch in full here.

1. Higher levels of retailer participation in crypto than traditional commodity markets pose unique challenges for regulators.

One in five Americans say they have traded cryptocurrency, and surveys suggest that crypto trading is more common in young adults, men, and racial minorities. This is quite different from other financial instruments regulated by the CFTC, Benham noted. “You are going to have more vulnerable investors… It is our responsibility to educate, to inform, to disclose the risks involved.”

Michael Piwowar, former commissioner of securities and exchanges and now executive director of the Milken Institute Center for Financial Markets, linked increased congressional attention to the growth of retail crypto: “If you have one in five households that have interacted with cryptography… [members of Congress] are going to start hearing it from their constituents. Legislation to regulate digital assets introduced by senators Lummis and Gillibrand, Stabenow and Boozman, and Toomeyas good as Representative Gottheimer. The Treasury is actively negotiate bipartisan stablecoin legislation with House Financial Services Committee Chairman Waters and Ranking Member McHenry. Benham said stablecoins, a digital currency that is supposed to always equal a dollar, are more of a “payment mechanism” and should therefore be regulated by prudential banking regulators.

Digital asset regulation may require dealing with crypto exchanges and digital wallets. American University law professor Hilary Allen noted that the stablecoin legislation being discussed does not, saying: “It’s a gaping hole… Almost all major stable coins… are affiliated with an exchange that profits from the trading of this stable coin.” Mark Wetjen, former CFTC commissioner and current head of regulatory policy and strategy for FTX (one of the largest crypto exchanges), agreed: “Exchanges are the gateways to the entire crypto space. , so monitoring them is probably the most important. He pushed back that there are no current regulations, noting the requirement for state-level licenses, like New York’s Bit License“If you want to list bitcoin derivatives, for example, you need a license…so maybe it’s not such a serious situation.”

2. Crypto challenges the 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 a commodity remains unclear as various sub-components of the crypto ecosystem challenge existing regulatory divides. For example, the SEC recently argued that nine different crypto tokens were securities in an insider trading case as a federal judge ruled that virtual currency such as Bitcoin constitutes a commodity.

Benham called on Congress to clarify which of the hundreds — if not thousands — of existing coins are securities versus commodities: “At the end of the day, we would like to see the law draw lines. Piwowar said the lack of clarity creates unwanted delays, as many crypto-related applications before the SEC “don’t get answers” on whether their products represent securities. The result is that some crypto companies are “going out of the US” to set up their business. Allen, however, warned that the congressional action could also be an indication that the government supports crypto. She cautioned against letting crypto into the regulated sphere for fear of giving it “implied warranties.”

One solution to the regulatory turf battle could be the merger of the SEC and the CFTC, which Piwowar endorsed, as many have. others. Congress, however, has shown little appetite to do so given the different jurisdictions of congressional committees involved.

3. The CFTC will restructure to better protect consumers and regulate markets more effectively.

Benham announced several changes to the CFTC at the Brookings event. Initially, the LabCFTC will become the Technological Innovation Office, directly attached to the President’s office. Behnam justified this by stating, “We are past the incubator stage, and digital assets and decentralized fintech are past their sandboxes.” Second, the CFTC’s Office of Customer Education and Outreach will be realigned within the Office of Public Affairs, which Behnam says will “leverage resources and a broader understanding of issues facing the general public.” to meet the most critical needs of the most vulnerable communities. » Restructuring within a regulator may appear as a bureaucratic shuffle, but may reflect changes in internal power, agency focus, and prioritization. Reporting directly to the president increases an office’s authority and prestige.

4. Is crypto a passing fad (or worse, a bubble threatening financial markets)?

Allen argued that cryptography is “deliberately less efficient and more complicated than a more centralized system” and has no societal value. FTX’s Wetjen disagreed: “The difference here with blockchain as the underlying means by which you can transfer value is that there is absolutely no door.” Piwowar broadly agreed with Wetjen that “we’re going to get the next generation of Amazon and Google out of this stuff,” but cautioned that while he was at the SEC, “nine out of ten [crypto applications] were outright fraud, then out of one in ten, nine out of ten were probably fraud. Since January 2021, more than 46,000 people have collectively lost over a billion dollars to scams involving cryptography.

Everyone wants to avoid a repeat of the 2008 global financial crisis. To do this, regulators have focused on preventing and mitigating “systemic risk” to the financial system. When asked if he saw a “clear and present danger to the existing economic system,” Benham said no, pointing out that crypto is not interconnected enough to pose systemic risk. He noted that the decrease in crypto values ​​over the past few months has not caused ripples in the financial system or in the economy in general. Piwowar brought the issue of systemic risk back to the actions of financial regulators by asking, “What is systemic risk? It is the risk that a federal policymaker will bail out a bank, directly or indirectly. Allen agreed that bailing out crypto would be a mistake, joking, “If anything has to be allowed to fail, it should be crypto, which doesn’t fund productive economic capacity.”

Allen also noted the similarity of arguments centered on American global competitiveness that encouraged lax regulation for derivatives: “It’s almost identical to the rhetoric we saw around swaps in the 1990s.” Credit default swaps, like crypto now, were loosely regulated and ultimately helped fuel the subprime mortgage crisis. Behnam noted that one of the biggest lessons of 2008 was the need for the CFTC to promote market transparency in the “OTC [over-the-counter] derived space. Proponents of crypto indicate that the underlying technology is inherently more transparentwhile critics point to the lack of understanding of aspects of the market, such as assets that back stablecoins like Attached.

5. Does crypto increase financial inclusion?

Cryptocurrency supporters frequently cite financial inclusion as a major benefit linking the increased use of young people and communities of color who have higher rates to be unbanked or underbanked by traditional finance. Allen warned against “predatory inclusion” arguing that “because there is no production capacity behind them, their value is derived from finding someone else to buy them from you. “. Wetjen’s responded, mixing his experience as a commissioner of the CFTC with his time in the crypto industry: “In my own experience…at the CFTC, there’s a lot of authority that’s already in place. place for the agency… to be quite thoughtful and relatively prescriptive, even in terms of what should actually be disclosed, especially to retail investors or users of a platform such as FTX. that the right policy is to “give people the opportunity to get involved and invest in the space they love, but making sure it’s done with the right safeguards”.

The Brookings Institution is funded through support from a wide range of foundations, corporations, governments, individuals, as well as an endowment. The list of donors can be found in our annual reports published online here. The findings, interpretations and conclusions of this report are solely those of its author(s) and are not influenced by any donation.


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