Coinbase founder and CEO Brian Armstrong, for one, believes that ideal crypto regulations should start with centralized actors since most of the damage to the consumers has been done by these entities.
In a recently released “realistic blueprint,” Armstrong highlighted the need to pursue legislation early instead of waiting for something comprehensive and perfect. Regulations should initially focus on centralized actors in crypto, such as – stablecoin issuers, exchanges, and custodians, which have seen the most risk of consumer harm, he argued.
All Eyes on Centralized Entities
A good place to start will be stablecoin regulations, a sector that has already garnered much attention from DC. According to Armstrong, the stablecoin market in the United States can be regulated under standard financial services laws.
A sound stablecoin regulation would require issuers to register as a state trust or OCC national trust charter and undergo rigorous annual audits to provide the transparency that customer funds are held in appropriate reserve assets and separate from corporate cash. The issuers should also ensure reasonable controls and board governance, meet basic cybersecurity standards such as SOC compliance, and set up a blacklist capability to meet sanctions requirements.
Watchdogs should then target exchange and custodians to help prevent malicious activity while ensuring that they do not stifle innovation. Traditional financial services can serve as inspiration, according to the Coinbase chief, which could entail implementing know-your-customer (KYC) and anti-money laundering (AML) procedures, establishing a federal licensing and registration regime, etc.
Meanwhile, commodities and securities are other areas that need urgent attention from regulatory agencies. As such, Armstrong believes the US Congress should require the Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) to classify each of the top 100 cryptocurrencies by market cap, declaring them as either securities or commodities.
“The industry is primarily focused on trading crypto commodities today, but a robust market to register and issue crypto securities should also exist in the U.S., and could be a real improvement over how traditional securities are issued.”
Decentralized Crypto
Decentralized finance (DeFi) has been the “trickiest” area to get right. Armstrong opined that the role of financial regulators should be limited to centralized actors in cryptocurrency while their decentralized counterparts should instead be allowed to innovate.
He explained that decentralized platforms do not have intermediaries and that the open-source code and smart contracts serve as “the ultimate form of disclosure.”
The latest draft comes exactly two months after FTX founder Sam Bankman-Fried (SBF) published a set of standards for crypto regulation that was met with significant backlash.
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