Regulatory Approach Good for Crypto Industry

Cryptocurrencies face an uncertain and perhaps even tenuous evolution in commercial transactions.

Crypto payments, done in the service of B2B, will have a clearer path toward their full potential only when and if corporates and FinTechs give voice to what they want to see from regulators, rather than just waiting for regulators to tell them what to do, a panel of payment executives, attorneys, investors and academics said this week.

The panel consisted of i2c President Jim McCarthy; Wharton Managing Director, Center for Innovation in Finance, and Senior Director, Alternative Investments Program Sarah Hammer; and QED Investors Partner Amias Gerety.

They told Bryan Cave Leighton Paisner Partner and former Securities and Exchange Commission (SEC) Enforcement Senior Counsel Ashley Ebersole that the regulatory landscape under the President Joe Biden administration is markedly different from the previous administration.

As Ebersole noted, through the past few months, and under the continuing tenure of SEC Chairman Gary Gensler, there have been some advances, such as the launch of a bitcoin exchange-traded fund (ETF). And in recent months, a growing list of companies from PayPal to Visa and others have been busy expanding their efforts to support cryptos use in mainstream commerce.

But dig a bit deeper, said the panelists, and there has been some continuum between the eras of Gensler and former SEC Chairman Jay Clayton. Gerety noted that during Claytons time at the helm of the SEC, cryptos were viewed as securities; in the current period under Gensler, cryptos are regarded as securities too.

Most of these new protocols are people raising money for an activity that will be profit seeking, and the returns will be given to the people who provided the money in the first place, said Gerety. Thats pretty close to the definition of security. I think what you do see though is a pretty significant difference in enforcement approach.

Simply put, the SEC exists today as a disclosure and enforcement agency, he said. And when it feels the law is well established, it is loath to make new rules to implement that law. Claytons SEC was more intent on going after egregious cases of fraud; the Gensler focus has been on enforcing and defining (and even defending) the regulatory perimeter.

Thus, weve seen cases like the one centered on Coinbase, where its proposed lending product was called into question (and ultimately withdrawn).

Read more: Coinbase Kills Lend Product Amid SEC Ire

Establishing those perimeters, said Gerety, founded a set of practices that are tied to goals and set examples and paths for individuals and firms actively engaged in the space not just bad actors intent on disruption and theft.

As McCarthy noted: Just enforcing and going after bad actors does not really establish policy To the extent that the U.S. can take a leadership position and establish frameworks I think would be very positive. And thats what Im hopeful for with the new administration.

Whartons Hammer pointed to the fact that we are seeing more clarity around the registration and governance of unregistered exchanges (the presidents working group on financial markets serves as an example).

Stablecoins are increasingly coming into focus too, as the Commodity Futures Trading Commission (CFTC) finalized a settlement with Tether about the instruments backing its stablecoins. Specifically, the issues at hand revolved around disclosure.

Hammer told the panel that there are several issues around stablecoins that would warrant consideration from multiple approaches. There remains the issue over whether stablecoins are in fact stable, and how they can be used throughout the financial system. Liquidity is key, she said, and so is an understanding of the network effects that can be created by stressed markets.

McCarthy said the stablecoin opportunity will continue to push forward because I think theres a real opportunity here to solve some real-world problems for businesses and consumers alike. But it all comes back to disclosures and regulatory frameworks a solid way of knowing how to do it correctly.

The Higher Level Questions

But at a higher level, Hammer said, the broader question rests with whether we need new regulatory regimes around crypto or whether the existing case law and frameworks are sufficient. In the case of the exchanges, the exchanges that are trading securities or self-identified securities have clearly been tasked with registering with the SEC.

Panelists pointed to the need for coordination at the state, federal and international levels of policy and enforcement. And as Gerety noted, what is needed now may not be new laws, but different answers. Financial services exists as a regulated industry and depending on the use case, a certain framework governing payments or securities applies. The only question is which framework to apply.

Crypto firms actually get to choose the framework, he said. If you registered as a security, the CFTC is not going to come after you. If you register it, if you become a bank, the SEC is not going to come after you.

McCarthy noted that among i2cs client base, a growing number of crypto users are employing those digital offerings to transact.

You would be shocked at the amount of purchase volume that occurs across every type of spend category and cutting across every demographic category here in the United States, he said.

Those transactions are occurring wherever cards are accepted, he said, as fiat is converted into crypto on the send side of the transaction and then is converted back into fiat on the other side of the transaction while being facilitated across, say, Mastercard rails. Along the way, traditional know your customer (KYC) and anti-money laundering (AML) checks must be carried out. In the end, theres a familiar cast of characters, including banks, broker dealers and exchanges.

Said McCarthy: The new world is merging with the old world as all of this comes together.

And as Hammer said, the probability of creating a new regulatory regime devoted solely to crypto is small.

As FinTechs and other firms look to move into new markets, said Gerety, there are ways to ride other peoples rails. Many FinTechs start with a bank sponsor and then become a bank; in other cases, FinTechs start with a broker dealer sponsor on the way to becoming a broker dealer. That drive toward cross functionality allows firms to go to regulators and be proactive about how they might be overseen rather than, as Gerety said, simply going to the regulators seeking to sidestep that oversight.

If they go in and say, Id like to be a regulated exchange, I think then youre going to have a very strong footing to say, And by the way, I want to advocate for more administrative effectiveness, Gerety said. I think youll find many more friends [among regulators] in that advocacy.



About: Forty-seven percent of U.S. consumers are shying away from digital-only banks due to data security worries, despite significant interest in these services. In Digital Banking: The Brewing Battle For Where We Will Bank, PYMNTS surveyed over 2,200 consumers to reveal how digital-only banks can shore up privacy and security while offering convenient services to satisfy this unmet demand.