SEC Commissioner Peirce + CFTC Commissioner Pham Plea for Interagency Collaboration on Crypto Regulation
On Thursday of last week, SEC Commissioner Hester Peirce and CFTC Commissioner Caroline Pham jointly published an opinion piece calling their respective agencies to come together and develop a clear regulatory regime for crypto.
The piece suggested that the agencies employ a collaborative and open-minded approach similar to the agencies’ approach to swaps regulation and portfolio margining regimes. To regulate swaps and margin regimes, the agencies worked collaboratively for several years to develop clear jurisdictional boundaries and a comprehensive framework for market participants.
The Commissioners advocated for the same kind of approach for dealing with cryptocurrencies. Their first suggestion is that the SEC and CFTC host a public roundtable where industry members and regulators would come together to assess the following issues: (1) whether new regulation or legislation is necessary, (2) whether existing regulations may be modernized to adapt to innovation, and (3) how technology is likely to reshape markets in the future.
Why does this matter?
We all know that the lack of regulatory clarity in the U.S. for the crypto ecosystem has made it difficult and risky for people in crypto; almost nothing chills legitimate innovation more than the fear of falling out of compliance with different and often conflicting regulatory approaches from competing agencies. After many years of little comprehensive consideration at the Federal level, ideas like the roundtable proposed by the Commissioners—and President Biden’s executive order process—evidence a robust and comprehensive approach we should all welcome.
ICYMI: Abu Dhabi FinReg Agency Issues Report on DeFi + Request for Comment
In mid-April, Abu Dhabi’s Financial Services Regulatory Authority, or FSRA, released a report outlining policy considerations for decentralized finance and requested for the public to comment. The deadline for comment submissions is June 30, 2022.
The FSRA report makes several recommendations that we think should be opposed and won’t accomplish their intended policy objectives. In a nutshell, the discussion paper proposes that accomplishing policy objectives in DeFi essentially requires not developing and using permissionless and decentralized protocols. For example, the discussion paper foresees permissioning protocols to make legacy AML/CFT tools implementable and envisions designating “DeFi controllers” for protocols who would be liable for a protocol’s functionality.
The discussion paper acknowledges that its vision of “regulated DeFi” isn’t really DeFi, stating that “such an approach could require that [developers] completely change their technological infrastructure and/or business model so that they can comply with new obligations.” These “new obligations” essentially would require developers to become centralized TradFi institutions.
Why does this matter?
The discussion paper joins the growing list of regulatory proposals premised on applying to emerging DeFi markets the exact same regulatory regime developed for intermediated financial markets. That means foregoing all hope of ever accomplishing policy objectives like countering illicit financial activity and protecting DeFi consumers without fundamentally distorting what makes DeFi markets unique.
We’ve used the analogy of regulating airplanes as cars before, and we’ll do it again here. Supplanting “DeFi” for “airplane,” “TradFi” for “car industry,” and “financial” for “transportation,” the discussion paper would read:
“We are of the view that [the airplane] does not fundamentally change the nature of [transportation] services. The underlying reasons why people consume [transportation] services remain the same… However, we are of the view that [the airplane] may significantly change the way in which [transportation] services are provided… Given that [the airplane] does not change the underlying nature of [transportation] services, we believe that similar requirements should be placed on [airplane industry] participants as on [car industry] participants.”
It doesn’t make sense for good reason. Expecting airplane and car manufacturers to meet the same regulatory requirements would be bad for everyone.
But these disagreements are what the comment process is intended to capture. We are going to submit a comment. We’ll keep you posted as we develop our response to this discussion paper.
FDIC Steps Away from Interagency Committees
According to sources familiar with the matter, the FDIC has decided to step away from several interagency committees established to provide regulatory clarity for institutions interested in offering services related to digital assets.
These committees were established in 2021 after several agencies, including the FDIC, OCC, and the Federal Reserve, issued a joint statement outlining areas in which supervised institutions can expect more clarity around digital assets.
An FDIC spokesperson issued this comment when asked about the decision to step away from these committees:
“We remain open to issuing supervisory guidance on activities that are relevant to FDIC-supervised institutions. We are currently reviewing the extent to which our supervised institutions are involved in digital assets to better understand the type of guidance, if any, to issue in the future.”
Why does this matter?
It is not clear why the FDIC decided to pull back from these interagency committees, but that shouldn’t stop us from speculating. First of all, this decision could indicate that there are interagency disagreements with respect to the treatment of digital assets. But harmonious interagency agreement isn’t common to begin with and isn’t a crypto specific issue.
Another possibility is that the FDIC may be simply unwilling to endorse any brightline rules or guidance for the custody of digital assets by financial institutions at this time. The FDIC adopting a cautious approach makes some sense, given the FDIC’s guidance last month urging lenders to inform the agency before offering any services related to digital assets.