Coinbase CEO: What kind of centralized supervision does the encryption industry need?
Original title: "Regulating Crypto: How we move forward as an industry from here》
Original title: "
Original post by Brian Armstrong, Coinbase CEO
Tl;dr：Original compilation: MarsBit
One of the most common questions people in the regulatory governance and policy community ask me is what regulatory clarity actually looks like. In this blog, I outline a realistic blueprint to ensure we have clear regulation of centralized players and a level playing field across exchanges, while preserving decentralized encryption that will bring enormous benefits to the world innovation.
After the FTX debacle, I thought giving a blueprint of where the industry could go would help restore trust and turn the page.
These are fairly simple steps, but it takes all of us moving forward together, as companies, policymakers, regulators and customers. Instead of waiting for something comprehensive and complete, we should aim for early, relatively easy, win-win passage of new legislation.
I will describe most of this from a US perspective, but similar steps need to be taken in every major financial market around the world, as well as other members of the G20.
1. Create regulatory clarity for centralized players
It's best to first establish regulatory clarity around the centralized players in crypto (stablecoin issuers, exchanges, and custodians) because that's where we see the greatest risk of consumer harm, and pretty much everyone agrees it should . Regulation in traditional finance is organized around ensuring that intermediaries operate fairly and appropriately, and the same principles make sense for cryptocurrencies in the presence of intermediaries. On the other hand, decentralized arrangements (DAOs, DeFi, etc.) do not involve intermediaries and have their own, and in some ways superior, set of safeguards, which I will come back to later in this article.
stable currency
stable currency
Regulating stablecoin issuers is a good place to start as there is widespread interest in DC and we can gain some momentum with quick wins. We don't need to do anything fancy or crypto here; stablecoins can be regulated under standard financial services laws, for example using state trust charters or OCC national trust charters.
You don't have to be a bank to issue a stablecoin, unless you want to do fractional reserve loans. Bank regulation is the strictest as it allows lending of client funds. But many stablecoin issuers will be required to hold assets on a 1-to-1 basis and will only be allowed to invest in high-quality assets such as treasury bonds.
So what does a reasonable stablecoin law require of an issuer:
Register as a State Trust or OCC National Trust Charter
You can also become a bank if you want to fractionate or invest in riskier assets. If not, you can only invest in high-quality liquid assets such as US Treasuries
Conduct rigorous annual audits to ensure client funds are held in appropriate reserve assets and segregated from company cash
Establish sound controls and board governance
Meet basic cybersecurity standards such as SOC compliance
Build blacklist capabilities to meet sanctions requirements
Hopefully we can get through something like this in the first half of next year.
Exchanges and Custodians
Once we have clarity on stablecoin regulation, a set of rules for centralized exchanges and custodians can help prevent bad activity while maintaining innovation. Again, many of these ideas can be borrowed from traditional financial services, so we don't need to reinvent the wheel.
Here are some potential regulations for centralized exchanges and custodians:
Implement robust know-your-customer (KYC) and anti-money laundering (AML) policies and procedures.
Create a federal licensing and registration system that allows you to get one license and service the entire country (or a passport licensed to an entire region like the EU). In places like the US, it's fine to retain the option for the states to issue their own licenses, but there should be a federal option to allow the US to become a single market.
Strong consumer protection rules are needed, such as risk disclosure and transparency of fees and conflicts of interest
Develop effective minimum standards for protecting client assets
Prohibition of market manipulation, wash trading and other forms of market misconduct
Commodities and Securities
Perhaps the most complex point to clarify revolves around which cryptoassets are commodities and which are securities. The CFTC and SEC have been debating this issue in the US for years, but unfortunately, they have not provided any clear information to the market.
At this point, Congress clearly needs to step in and pass legislation. This can be done with an updated version of the Howey test for cryptographic tokens that may fall under the definition of an investment contract.
A modern Howey test for cryptocurrencies might look like this:
Have money to invest?
If the issuer of the crypto-asset has not sold the asset in exchange for funding in order to build the project, then it is not a security.
Are you investing in an ordinary business?
For a crypto asset to be a security, it must be controlled and operated by a centralized organization like a corporation. If a project has become sufficiently decentralized, it is not a security.
Are there profit expectations?
If the primary purpose of a crypto asset is some other form of utility (voting, governance, incentivized behavior by the community, etc.), then it is unlikely to be considered a security.
Does the profit come primarily from the efforts of others?
If profits are expected to come primarily from participants unrelated to the asset issuance, then the project is sufficiently decentralized to not be considered a security.
It is important to note that all four of these branches need to be satisfied in order for an asset to be considered a security. If you only have a few of them, it's not enough. For example, people invest in gold or Picasso paintings with the expectation of profit, but these are not securities because the expectation of profit does not come from a common enterprise (or the efforts of others).
We also need to establish a legal precedent for why it is "sufficiently decentralized". A lawyer (not representing myself or Coinbase) told me that they see "5-15% of the token supply distributed" as a rough consensus before asset issuers can start secondary sales of their assets. But that hasn't been tested in court, and we'll need to see the case law evolve eventually.
In the absence of clarity from the SEC and CFTC, Coinbase has developed its own detailed legal analysis for each asset we consider whether to list, as we can only list commodities today. I would like to open source this analysis (currently working on this) to see if it can help self-regulatory standards emerge and save other crypto companies huge legal costs. We would prefer to have this kind of clarity from regulators, and we may need to update our analysis when clarity emerges, but until then, we would be happy to present our work to see if it helps.
The industry is currently largely focused on trading crypto-commodities, but there should also be a strong market in the U.S. for the registration and issuance of crypto-securities, which could be a real improvement over the traditional way securities are issued. Under current rules, that would require a broker-dealer and a separate national stock exchange, both of which are authorized by the SEC to trade crypto securities. But those rules don't quite fit right now. While the SEC can modify its own rules to ensure customers are truly protected, Congress may need to act to make that happen.
Congress should also require the CFTC and SEC to clearly publish their classification of the top 100 cryptoassets by market cap within 90 days of enactment of the aforementioned legislation, declaring whether each asset is a commodity, security, or “other” (eg, stablecoin). Courts can resolve fringe cases if the asset issuer disagrees with the analysis, but this will serve as an important labeled dataset for use by other industries as millions of crypto assets will ultimately be created.
2. Enhancing the level playing field
Regulation clarity would be a good first step, but if we do not enforce these rules evenly at home and abroad, we will have no way forward.
One of the challenges is the focus of regulators and law enforcement on the domestic market. In most cases, they do not have international mandates and the ability to monitor/investigate offshore companies. Where do they send legal notices if the entity is not registered? What door are they knocking on?
This creates adverse incentives for crypto companies to serve vast areas of the world from favorable overseas jurisdictions, while penalizing companies that try to play by the rules at home. A good example of this is FTX.com, which is based out of the Bahamas while serving clients from many countries (including some US citizens) due to weak KYC controls. In my opinion, the FTX.US entity is partly real, but also partly an attempt to distract US regulators from its main business.
In the crypto industry, it is still an open secret that there are a small number of questionable actors who do not abide by the above rules. We will continue to see problems in the crypto space until regulatory clarity emerges and fair competition is enforced.
What does it mean to enforce a level playing field? This means that if you are a country that is going to issue laws that all cryptocurrency companies need to abide by, you need to enforce those laws not only domestically, but also with foreign companies that serve your citizens. Don't take that company's word for it. Actually go check if they are targeting your citizens while claiming not. If you do not have the authority to prevent the activity, then you will need to cooperate with international law enforcement. Otherwise, you will inadvertently incentivize companies to serve your country from overseas. Countries that didn't realize this have lost tens of billions of dollars in wealth over the past few years, and now millions of customers have been hurt by the FTX debacle.
3. Let Innovation Happen in Decentralized Cryptocurrencies
The above lists a good set of steps to regulate centralized players in cryptocurrencies. But with the decentralized aspect of cryptocurrencies, we have the opportunity to create stronger consumer protections.
First, self-hosted wallets allow customers to store their own cryptocurrencies without trusting anyone else. Technological improvements such as multi-party computation and social recovery will allow anyone to easily and securely store their own cryptocurrency without trusting a third party.
Second, smart contracts supporting DeFi and Web3 applications are public and open source by default. This means anyone can audit the code to see if it really does what it claims. This is the final form of the disclosure. We can have "Don't be evil" instead of "Don't be evil" (Google's famous corporate values), where you can trust the laws of mathematics instead of humans.
Third, we will see the emergence of on-chain accounting as we build more organizations "on-chain" using DAOs and smart contracts. You should be able to view the solvency, financial statements, tax payments, etc. of any organization fully built on-chain with complete transparency.
The role of financial regulators should be limited to centralized players in cryptocurrencies, which requires additional transparency and disclosure. In an on-chain world, where this transparency is built in by default, we have the opportunity to create even stronger protections. With the internet, we're better regulated than taxi licenses through Uber's star rating system. Crypto has the potential to push this idea further by encoding on-chain trust in a cryptographically provable way.
in conclusion
in conclusion
Crypto can bring enormous benefits to the world through regulatory clarity for centralized players, a level playing field, and preservation of decentralized crypto innovation. Bad actors who cause harm are distracted too much right now, and we all need to take responsibility for improving that. I am optimistic that we can make significant progress on the above and pass encryption legislation in 2023.
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