Coinbase
Global, one of the largest cryptocurrency brokerages, is calling on Congress to create a new crypto czar that would oversee the industry.
Coinbase (ticker: COIN) issued a policy proposal on Thursday, asking Congress to craft entirely new laws for the industry, including a definition of digital assets and a single regulator that would oversee “Marketplaces for Digital Assets,” or MDAs.
“Digital assets should be regulated under a separate policy framework,” said Faryar Shirzad, chief policy officer at Coinbase, in a press conference. Crypto “doesn’t fit neatly within the existing financial system,” he added, and there should be one regulator, supplanting the patchwork of state and federal authorities and rules now in place.
As Coinbase sees it, a new regulator would oversee the full “life cycle” of crypto services, including trading, custody, settlement, and transfers between crypto and “fiat” currencies like the dollar. Coinbase also wants a new Self-Regulatory Organization, or SRO, an industry-backed group that would be tasked with oversight, similar to FINRA or the New York Stock Exchange.
Coinbase would also like a more “robust disclosure regime” for digital assets and derivatives, and the company would like rules to promote “fair competition” and interoperability between crypto-trading platforms and digital wallets.
It’s a big wish list, and it isn’t unique to Coinbase: Much of the financial industry is anxious about the lack of uniform rules governing crypto assets and trading. As it stands, a patchwork of federal agencies have authority over the industry, including the Securities and Exchange Commission, and Commodities Futures Trading Commission, along with state banking and securities regulators.
Harmonized rules at the federal level would be a big win for the industry; many institutional asset managers, such as pension funds, would be more likely to invest in crypto under a uniform regulatory framework. More funds and tokens could launch on exchanges, and big advisory firms may be more inclined to add crypto for clients.
Yet getting Congress to create a new crypto czar won’t be easy. Such a role doesn’t exist today for the rest of the financial industry; banks, broker/dealers, advisory firms, and other financial intermediaries all have to abide by a hodgepodge of state and federal agencies and regulations.
Moreover, the politics of crypto are getting contentious. Democrats are staking out a stricter investor-protection stance, including stiffer regulations on trading activity and coin issuers—particularly “stablecoins” that are viewed as systemic financial threats. Some Republicans, however, want new “safe harbor” laws for token developers, arguing the industry should be allowed to develop without the constant threat of regulatory enforcement actions.
Tax-reporting rules are also at stake: Democrats aim to cover broad swaths of the industry, including digital-wallet developers and miners, while Republicans have called for narrower definitions of crypto “brokers” for tax-reporting purposes.
Shirzad said that Coinbase has had more than 30 meetings with members of Congress over its proposals. “We’ve been very encouraged by the bipartisan interest in looking thoroughly and open mindedly at this space,” he said. But he acknowledged, that “what we’re proposing isn’t the easiest path to legislation.”
Indeed, even under Coinbase’s grand proposals, vast swaths of the industry would remain unregulated.
BItcoin and Ethereum, for instance, would be exempt from registration requirements since they’re already well-established and widely circulated, according to Shirzad. In practice, it’s unclear how they would register since there isn’t a single entity governing them. The same holds true for thousands of other tokens now circulating.
One other area that would fall through the cracks is decentralized exchanges such as PancakeSwap, Uniswap, and SushiSwap. These DEXes, as they’re known, are collections of open-source code and software protocols that match buyers and sellers using “automated market maker” algorithms. Liquidity and order books aren’t centralized with a single entity. If a DEX consists of decentralized computers running code, it may be tough, if not impossible, to regulate.
Trading volume on the major DEXes is soaring, rising from an average of $787 million a day in October 2020 to $2.5 billion over the last 30 days, according to data from Coindesk. Much more trading occurs on centralized exchanges, though it’s largely in Bitcoin, Ethereum, and the other major tokens.
DEXes are also coming under more regulatory scrutiny. SEC Chair Gary Gensler has issued warnings that they may be violating federal exchange rules, and the SEC is probing Uniswap Labs, according to The Wall Street Journal.
“With a truly decentralized protocal, there’s nothing to regulate under our proposal,” said Shirzad. A level regulatory playing field would be in Coinbase’s interests, of course. But it may be a while before Congress grants the company’s wishes.
Write to Daren Fonda at daren.fonda@barrons.com