What’s next for crypto regulations?

Regulatory Landscape and Debate

• Core Disagreement on Clarity: Experts are divided on whether the U.S. lacks regulatory oversight or merely lacks clarity regarding existing rules.

  • View A (Lack of Clarity): Marcel Kosimowicz argues that heavy regulation exists but is unclear, forcing risk-taking offshore; for example, FTX relocated to the Bahamas and Deribit controls 95% of crypto options open interest because U.S. persons cannot legally engage with these offshore markets.
  • View B (Clear but Strict): Former SEC Chair Jay Clayton rejects the "lack of clarity" argument as "garbage," asserting that existing laws are rigorous and that calls for more clarity are often attempts to avoid high compliance costs.
  • View C (Inadequate Protection): Former CFTC Chair Timothy Massad agrees clarity arguments are often overblown but contends the framework is "woefully inadequate" because most U.S. crypto exchanges are only regulated by antiquated state money service laws rather than federal investor protection standards.

• Jurisdictional Disputes: A central conflict exists over classifying digital assets as securities (SEC jurisdiction) or commodities (CFTC jurisdiction).

  • The SEC has won multiple cases demonstrating that many tokens qualify as securities.
  • The CFTC regulates commodity derivatives but lacks federal authority over commodity spot markets, a gap that crypto platforms exploit by claiming they trade "commodities" rather than "securities" to avoid registration.
  • This gap mirrors historical commodity markets where the CFTC regulates futures (e.g., cattle futures) but not the spot sale of physical assets (e.g., buying cows), a model Massad argues does not fit crypto as a financial instrument.

Recent Events and Market Failures

• FTX Collapse: The failure of FTX, once a reputable exchange, is cited as a primary catalyst for renewed scrutiny on the regulatory landscape.
• Broader Crypto Crises: The collapse follows the failure of Celsius (lending platform) and the crash of Terra's Luna stablecoin, highlighting systemic risks in the sector.
• BlockFi Bankruptcy: The SEC is the fourth-largest creditor in the BlockFi bankruptcy, remaining owed $30 million of a $100 million penalty ($70 million paid) for violating securities laws.
• Banking Exclusion: Staff Accounting Bulletin 121 (SAB 121) requires digital custodial assets to be held on bank balance sheets, effectively shutting many banks out of the digital custody business due to capital charges.

Proposed Solutions and Forward-Looking Statements

• Joint Regulatory Standards: Massad and Clayton propose that the SEC and CFTC jointly establish common standards for the crypto spot market immediately.
  • These standards would cover customer asset protection, fraud prevention, manipulation prohibitions, conflict of interest rules, and operational resilience.
  • Agencies could promise not to shut down compliant venues while they await final jurisdictional rulings on whether tokens are securities or commodities.
• Self-Regulatory Organizations (SROs): Massad suggests creating a joint SRO under SEC and CFTC supervision (similar to FINRA) to develop industry rules while maintaining a government "shotgun" for enforcement.
• Legislative Outlook:
  • Accelerated Action: Kosimowicz predicts regulatory clarity is coming, driven by Senate Agriculture Committee hearings regarding CFTC reports, with specific bills from Senators Lummis and Gillibrand.
  • Stablecoin Regulation: Clear regulatory frameworks for stablecoins are expected via Fed involvement and legislation in the coming year.
  • Enforcement over Legislation: Clayton warns that waiting for Congress is often ineffective ("waiting for Godot") and prioritizes strict enforcement of existing laws and targeted fixes (e.g., defining "stable" as 1:1 cash backing).
• Future Market Structure: Kosimowicz anticipates a permanent split between onshore and offshore markets.
  • He predicts Tether will remain a dominant offshore stablecoin unit but will likely never cross the regulatory threshold to become dominant in the U.S.
  • He argues that institutional adoption requires entering the regulatory mainstream, suggesting a delicate balance where innovation coexists with offshore alternatives.

Technology and Systemic Risk

• Resilience of Core Technology: Experts agree the underlying blockchain technology (Ethereum and Bitcoin) proved resilient during the FTX collapse, operating 24-7 with billions in daily settlements and proof-of-work incentives totaling $10 billion in miner rewards.
• Systemic Risk Concerns: Yale Professor Gary Gorton warns that while the technology is efficient, the link between crypto and the real world via stablecoins poses a severe systemic risk.
  • He views privately produced circulating money as "bad" and vulnerable to bank runs, comparing the situation to pre-Civil War private banknotes.
  • Gorton predicts a financial crisis will eventually force the creation of a Central Bank Digital Currency (CBDC) to replace private stablecoins.
• Efficiency vs. Regulation: While Clayton and Gorton acknowledge the vast efficiency gains blockchain offers for global payments and supply chains, they argue these gains cannot justify abandoning proven regulatory frameworks.