It’s Time for Crypto To Regulate Itself

Those in the crypto ecosystem hoping for regulatory clarity in the new year have been sorely disappointed thus far. 

The SEC is now targeting Paxos with their claims that stablecoin BUSD is an unregistered security (despite signing on to a working group recommending prudential regulation for stablecoins). The SEC has also implied that ether is a security, with the New York Attorney General saying so explicitly. The chair of the CFTC is confusingly on the opposite side of the ether debate. And meanwhile, a newly released Council of Economic Advisors report asserts that the “design (of crypto assets) frequently reflects an ignorance of economic principles.”

It’s fair for industry professionals to wonder whether this language represents an evolution in thinking from the administration’s March 2022 order on digital asset development, which discussed the positive role that crypto assets could play in the economy and the lives of everyday Americans. 

While market participants are right to continue pushing Congress and the Biden administration to enact a comprehensive regulatory framework for crypto assets, the lack of clear direction from Washington has created an opening in the crypto market. Participants should take matters into their own hands and establish a self-regulating organization (SRO).

There’s no question that crypto opponents in Congress would seek to smear the notion of an SRO with claims that recent malfeasance in crypto markets leaves the industry unable to be trusted to police itself. That’s not what an SRO is, and it’s not an approach I would advocate. 

To analyze the merits of an SRO — which has some traction in Congress — the country needs an honest debate about what this regulatory framework is and is not. 

SROs are an old concept that have been used effectively since the 1930s and remain in use today for the New York Stock Exchange and many other financial organizations. The success of America’s financial markets over many decades proves that SROs can work. The long record of disciplinary actions taken by regulatory organizations that violate SRO rules also speaks to their success.

SROs cannot simply write their own rules under this type of regulatory framework; the rules are overseen by Congress and regulators and have long had bipartisan support. SROs are imperfect, but the concept’s staying power over decades proves that this kind of regulatory framework can and does work. 

Crypto market participants should not wait for the government to sanction an SRO. Right now, good actors in the industry can come together, agree on a set of high standards and commit to abiding by them. 

A private SRO would not end the need for a federal regulatory framework — either through a comprehensive law or sanctioning of the SRO — but it does have the potential to bolster the industry. An SRO would separate the good actors from the bad ones; that is, the majority of the crypto community that is interested in driving innovation and improving lives versus those who see crypto’s current state of light regulation as an opportunity to commit fraud. An SRO would also bolster public confidence in crypto institutions at a time when it’s badly needed. And finally, a first-class SRO would deprive crypto’s opponents of their loudest talking point — the idea that crypto seeks to remain lightly regulated to commit fraudulent acts. 

Setting up a private SRO would be challenging for crypto market participants. For instance, hard decisions would have to be made about standards of conduct. For example, firms could insist on prohibitions on commingling customer assets, guidance for the 1:1 backing of stablecoin assets with fiat currency and liquidity standards. While reaching agreement among market participants would be a challenge, the upside is substantial. 

Washington may be back and forth about what it thinks about crypto, but that should not stop those who believe in crypto from showing the world that the community can come together around high standards for the greater good. 

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.