As the crypto industry continues to grow, regulators across the world are looking for operational and legal frameworks to guide their actions to more effectively monitor the industry.
The U.S. government in particular, which has been criticized for moving slowly on crypto rule-making in the past, has been looking at the sector with a renewed sense of urgency as the economy shifts into low gear.
In recent months, we’ve seen crypto-focused executive orders from President Joe Biden as well as a bipartisan bill proposed by Senators Cynthia Lummis, Republican of Wyoming, and Kirsten Gillibrand, Democrat of New York, which aims to install guide rails around the digital asset space.
While other governments around the globe look closely at the web3 industry, it’s still unclear the form any regulation could take and when the crypto industry should expect it.
“There’s a tremendous number of responsible players in the industry,” former U.S. SEC chairman Jay Clayton said during the Bloomberg Crypto Summit conference on Tuesday. “There were irresponsible players in the industry with the ICO [boom] … That was garbage. That was absolute garbage. And regulators have to respond to the garbage first. That’s the job.”
Regulation in the U.S. has been fairly sluggish and complex, so companies are trying to fill the void to an extent. “We’re at the ground level of policymaking,” Kara Calvert, head of U.S. policy at Coinbase, said during the discussion with Clayton. “Governments across the world are looking at how to address these issues.”
Even though the U.S. has considered regulating the crypto industry, Calvert said she believes the country is falling behind other global players.
“It’s not just about harmonizing globally. It’s also about creating consistency in the United States and determining how best to achieve that new regulation,” Calvert said. “[We] actually go to regulators and say, ‘Please give us a framework that will actually unlock innovation.'”
Clayton, who is now adviser to Fireblocks, took a slightly different tack, perhaps informed by his own experience with one of the U.S.’ top financial regulators. He argued that the U.S. already has more robust protections in place for equity investors than any other country, and similar regulations would continue to evolve for crypto as well.
“The U.S. has the most investor- and consumer-oriented financial regulation on the planet by a wide margin, and it doesn’t matter whether the product is securities, whether the product is loans, back to some other consumer [product]. That’s where we are,” he said.
Both Calvert and Clayton agreed, however, that stablecoins are at the forefront of what should, and probably will, be regulated by the U.S. government, especially following the crash of one of the largest so-called algorithmic stablecoins, TerraUSD (UST) earlier this year.
In May, TerraUSD (UST) depegged from its $1 target value, erasing billions of dollars in crypto wealth. Since then, government officials have pushed for regulation around the stablecoin industry, a subset of the larger crypto market, to protect both retail and institutional investors alike.
Stablecoins account for an immense portion of crypto trading volume, with Tether (USDT), USDC and Binance USD (BUSD) making up three of the top 10 cryptocurrencies by market capitalization, according to CoinMarketCap data.
Clayton argued that it is inevitable that regulators will face challenges in addressing this relatively nascent industry. Unlike most financial innovations, which are domestic and institutional, he said, digital assets are global, and the industry’s growth is largely driven by retail investors.
Those differences have presented an unprecedented regulatory challenge, “which is trying to have global coordination across a new type of asset class at the retail level,” Clayton said.
Calvert underscored Clayton’s view, adding that domestic coordination within the U.S. itself is equally important and challenging, given the “bifurcated” system for rule-making, which involves both individual states and the federal government.
While certain provisions of the bipartisan Senate bill look set to move forward, the entirety of the legislation is likely to be deferred to next year, Gillibrand said on a prerecorded panel with Lummis that was aired at the conference.
Still, we might see stablecoin regulations come out before some of the bill’s other provisions because of the bipartisan agreement around their importance. Lummis, who sits on the Senate banking committee, is hoping to fast-track the portion of the bill that would set rules for banks looking to issue stablecoins. Meanwhile, Senator Pat Toomey, Republican of Pennsylvania, has drafted a bill that would address rules for non-bank stablecoin issuers, Lummis noted on the panel.
Another part of the Senate bill that might reach bipartisan agreement relatively soon is a proposal that would make the CFTC the key regulatory authority overseeing crypto. The provision is being finalized in-committee, and there is a possibility Congress will be able to vote on it by the end of the year, Gillibrand said.
There has been great demand for regulatory clarity across the world, and if countries and governments can provide frameworks and minimize grey areas, crypto companies will have a smoother time doing business. It could also provide greater consumer protection in an extremely volatile period for both the crypto markets and the broader financial industry.