At a recent conference, prominent lawmakers, Senator Cynthia Lummis (R-WY) and Congressman Patrick McHenry (R-NC), have expressed their intentions to develop legislation aimed at clarifying the state of cryptocurrency market structure in the United States. Compliance complications and seemingly overlapping enforcement actions from the SEC and CFTC have resulted in a situation that has been pushing entrepreneurs and developers in the crypto industry offshore.
As the market structure of cryptocurrencies continues to evolve, it is crucial for the U.S. not to lose potential industry leaders by making the environment too restrictive. The current legislative framework faces challenges in defining appropriate legal treatment of crypto securities, crypto commodities, and the exchanges that facilitate their trade.
While SEC Chair Gary Gensler has expressed skepticism about cryptocurrencies’ core feature of decentralization, it seems that using this feature as part of the criterion for deciding if traditional financial regulations apply is sensible. As regulators often use the mantra, “same activity, same risk, same regulation,” it becomes necessary to ascertain if the risks in the crypto industry are the same as those prevalent in traditional finance.
A key aspect to consider is the risks that decentralized projects pose to investors. Typically, the answer seems to be “no,” as genuinely decentralized projects operate through an open-source protocol without a single creator promising performance. Thus, it makes sense for financial regulations to be adapted based on these projects’ actual risk profiles.
Regarding the regulatory approach for crypto exchanges, centralized and decentralized exchanges exhibit significantly different risks. Centralized exchanges commonly custody assets, settle transactions off-chain, and maintain opaque transaction records, so a differently focused regulatory approach may be required.
A proposed framework for centralized exchanges would involve a tailored registration path under the CFTC, ensuring transparent and clear guidelines for custody, cybersecurity, and anti-manipulation policies. Crypto securities exchanges would also have to adapt to the changing market conditions, revisiting registration requirements and adopting a more cost-benefit focused approach to SEC rulemaking.
On the other hand, decentralized exchanges operate in a distinct manner. They use self-executing smart contracts, remove middlemen from transactions, and settle transactions on public blockchains. Traditional financial regulations do not adequately address such exchanges, and applying existing rules may prove ineffective or even counterproductive.
The proposed framework for decentralized exchanges suggests a strictly voluntary registration process, keeping innovation in the space unrestricted and fostering experimentation in consumer protection measures. Ultimately, allowing deregulated innovation and embracing the potential of decentralized finance is crucial in enabling the U.S. to maintain its competitive edge in the global market for financial services.
Source: Coindesk
