Many in the crypto space are becoming increasingly impatient as they try to navigate the muddy waters of crypto regulation without stepping on a law enforcement land mine.
Regulators, meanwhile, are trying to separate the bad actors in the crypto space — those actively committing fraud — from those who want to advance crypto and its market infrastructure, according to Dawn Stump, the former commissioner at the U.S. Commodity Futures Trading Commission.
“I think there’s a lot more work that needs to be done,” Stump told TechCrunch. “I think there’s a lot more work to be done on the regulatory-side front with regard to helping design regulations and coordinate regulation, internationally. In a way that makes sense.”
“This is going to sound very elementary, but I think more guidance is necessary [as well as] more thoughtfully set out expectations,” Stump said. “When I was at the CFTC, I always cringed a bit when it was suggested that the industry bears the burden to comply with the rules that are on the books today — and they certainly do — but in the same context it was sometimes suggested that it wasn’t the job of the regulator to hold their hand.”
There’s a big difference between hand-holding and providing clear expectations, Stump said. She compared it to her teenage children, who have to follow her household’s rules — which have consequences when broken.
“Guidance is something that can be put out in the public domain, that would be available for everyone and would certainly help at this point,” Stump said. “So that everyone is starting out on a level playing field.”
Stump served as the CFTC commissioner for the U.S. derivatives market from September 2018 to April 2022.
“By the time I arrived at the CFTC, in 2018, the agency had already taken at least one enforcement action against a crypto firm for fraud,” Stump said. “In that sort of enforcement action, the agency has to determine whether or not the asset in question is a commodity. This was sort of a monumental case. And it was determined that, in fact, the asset was a commodity.”
But there are limitations to the CFTC’s ability to regulate crypto assets, Stump said. The agency does not oversee the actual physical cryptocurrencies that people trade but can bring fraud cases in and enforce rules surrounding the derivatives market infrastructure, which includes futures, swaps and some options trading.
Prior to her departure from the CFTC this past spring, Stump said some of the new market entrants were asking the CFTC for things that were never really permitted in the past for traditional futures and derivatives market infrastructure providers.
“I was pretty clear that I thought the CFTC needed to consider updating their rules so that, even if it’s specific to only crypto, that [updated] rules … can be available to both the incumbents and new market entrants,” Stump said. “So I would hope and I think the CFTC today is focusing on updating their existing rules … for the uniqueness of crypto investors.”
But the biggest conflict is the fear of the unknown from both new entrants and legacy incumbent exchanges like CME Group, Intercontinental Exchange and The Chicago Board Options Exchange, which have always worked with the CFTC.
“There were times that fraud wasn’t present in these enforcement cases, but there was just a blatant disregard for the CFTC rules, such as someone offering a futures contract to clients without registering with the CFTC,” Stump said. “There were those occasions that we brought enforcement action for failure to register with the CFTC not having to do with fraud but having to do with not complying with proper oversight.”
The point here is that companies — crypto or otherwise — that refuse to comply with clear regulations are not going to succeed, Stump said. “But I also think companies that face unknown expectations can’t succeed. And the unknown abyss of regulatory expectations should not be the deciding factor in a company’s survival. There’s a dire need for regulatory clarity here.”
For legacy incumbents, there may be fears that the CFTC would allow new entrants to do things that they were never permitted to do, Stump said. It’s a question of whether the CFTC is going to rewrite the rules and level the playing field for everyone or not.
The CFTC is going to regulate any company that wants to offer a platform, exchange or clearinghouse with crypto derivatives like futures and swaps, Stump said. At the moment, traditional companies that offer bitcoin and ether futures, like the CME Group, as well as crypto exchanges, like FTX and ErisX, are regulated by the CFTC, she noted.
“My view on this is that regulations are not going to prevent all bad actors,” Stump said. “By the bad actors, I mean, those who are willfully going to commit fraud — regulations [are] not going to prevent them from doing so. But the threat of punishing subjectivity may act as a deterrent to some and may make them think twice before doing what is obviously lying and stealing.”
“When we’re talking about fraud, I think that regulators are making progress,” Stump said. “Yet, some of these folks will never be deterred. There will always be people who enter this or any space — it’s not limited to crypto — with somewhat nefarious intentions.”