CFTC Faces High Hurdles in Virtual Currency Regulation

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The Technology Advisory Committee’s subcommittee on virtual currency gave the US Commodity Futures Trading Commission a problematic prescription during its first report to the regulator: Regulate the cryptocurrency and digital asset markets quickly and correctly because the clock is ticking.

The evolutionary pace in these markets is only increasing as more than 7 billion people are using the enabling open-source code to develop new applications, currencies, and assets, according to Alex Stein, a managing director at Two Sigma Investments.

“The challenge of what are these, how are they used and how to regulate coins continues to evolve,” he said. “Whatever we do going forward, it is more principle-based because it will be hard to stay ahead.”

Fellow subcommittee member Richard Gorelick, head of market structure are DRW Holdings also recommended that the Commission take a Hippocratic approach of first do no harm to the new market.

“There are some good things about the market structure that we should be careful to preserve and not lose,” he said. “There are is innovation and creativity in the market right now and difficult problems that are being solved.”

It would be a mistake to replicate the traditional financial markets in the new market, Gorelick added. “There are opportunities to be better and build a market with higher levels of integrity and more certainty. But we need to be able to start pulling from the learning of the traditional financial markets and the opportunities of the new technologies.”

The subcommittee’s first recommendation is to address the lack of the transparency regarding crypto trading venues where the operators could be brokers, custodians, clearers, and liquidity providers in addition to providing a matching service.

However, the decentralized nature of Federal and state financial regulations only increases the task’s difficulty.

“With 53 states and territories, money transmission laws, and various federal agencies, it makes it complicated actually to operate in this space,” said Andre McGregor, partner and global head of security at TLDR Capital. “There’s a lot of credit given to places like Bermuda, Jersey, and Malta where everyone government can walk across the street, be in the same building, and create regulations together. It has allowed for maturity in this space.”

Other issues gating institutional participation in these markets, such as hypothecation, remain works-in-progress, as the virtual currency markets explore traditional finance’s processes and tools, according to Gorelick.

“There may be some advantages, disadvantages, concerns, and cultural mismatches, but that is how the economy works,” he said. “If people want to lend their coins, they will figure out a way to do it, and we need to be aware of that whole process.”