BitOoda Global & Regulatory Analysis, 1/20/2020: Regulators Remain on Different Pages of Crypto Story
As we remain immersed in almost every aspect of the digital asset ecosystem, we continue to see indications that regulators are still seeing and approaching the space in very different ways, to the detriment of U.S. market development. A trio of announcements from this past week is a good example:
- CFTC Chair Heath Tarbert stated that regulated derivatives would “legitimize” and increase confidence in the U.S. crypto market. “Price discovery, hedging, and risk management” are three areas where Tarbert believes market maturation would benefit from the evolution of market dominance toward regulated exchanges, such as Bakkt and CME.
- The SEC issued an advisory on Initial Exchange Offerings (IEOs), alerting investors that IEOs may be subject to and in violation of federal securities laws, adding “there is no such thing as an SEC-approved IEO.” The Commission also published its 2020 priorities for compliance exams, identifying six areas of focus, including investment suitability, safety of client assets, pricing and valuation, and effectiveness of compliance programs.
- The Canadian Securities Administration (CSA) announced that most crypto exchanges and platforms are subject to the country’s securities laws, regardless of whether they trade securities or commodities.
Does Canada’s guidance represent sweeping overregulation and an oversimplification of the differences among digital assets, or proactive regulatory reform that will provide clarity to market participants? The government’s argument is that because many platforms provide only claims to an underlying asset — rather than immediate delivery of the asset itself — their activities put them under the umbrella of securities law regardless of the nature of the asset. In our view, this decision makes sense from the perspective of reducing the risk to consumers, and also could serve as a precedent for the U.S. in terms of providing clarity on at least one aspect of market activity (exchange trading).
Thinking about the U.S., how are the CFTC and SEC still so far apart in their perspectives on digital assets? SEC continues to issue investment alerts, pursue a seemingly never-ending list of enforcement actions, and regularly call out the risks and challenges for the protection of “retail investors who may not adequately understand the differences between [digital] assets and more traditional products;” its opposition to a crypto ETF continues to stifle all industry attempts to bring this potential new product to the market (Bitwise last week withdrew its latest proposal). CFTC, on the other hand, is pushing ahead with its “principles-based approach” to digital asset regulation to “foster the development of exciting new products while mitigating potential risks.”
How can the SEC get on the same page as other regulators in the space? Several Congressional proposals — as well as BitOoda’s own white paper — have proposed that the SEC look at global precedents for how to better balance investor protection and market advocacy, but the agency still has not deviated from its ‘regulation by enforcement’ approach. Whether the CFTC can move the overall U.S. approach in the right direction through its recognition that the fundamental structure of the future U.S. economy will have to integrate digital assets remains to be seen. Until then, we expect to see the same type of inconsistent messaging and lack of interagency coordination that has characterized the U.S. regulatory approach to date.