According to a March 18, 2019, working paper published by former Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad, the large gap in crypto-regulations in the U.S. has led to continual frauds and weak investor protection in the budding cryptocurrency ecosystem.
Lack of Regulations a Menace for the Industry
Regulations and compliance in the cryptospace have been a matter of much debate all over the world. Given the fact that digital currencies are barely a decade old phenomena, international financial watchdogs have found it hard to classify this emerging asset class under a broad regulatory umbrella.
In a paper titled “It’s time to strengthen the regulation of crypto-assets,” Massad stresses the need for clear and transparent crypto regulations. He mentions how clarity with regard to regulations can mitigate the risk of crypto being used to sponsor illicit activities and also reduce the risk of cyber attacks.
Decentralized cryptocurrencies such as bitcoin (BTC) transcend international boundaries and jurisdictions. As a result, regulatory bodies in the U.S. such as the Securities and Exchange Commission (SEC) and the CFTC don’t have complete authority or sufficient jurisdiction over them.
This lack of authority has, in turn, made cryptocurrencies a favorite among wrongdoers. Their presence in the legal grey area has encouraged criminals as well as fraudulent financial intermediaries to orchestrate predetermined crimes behind the veil of cryptocurrencies.
A number of crypto cyber-attacks have taken place in recent times where the hackers were able to successfully run away with investors’ money without ever having to pay for it.
In his paper, Massad argues that due to lax regulatory and compliance infrastructure for cryptocurrency exchanges and trading platforms, the cases of fraud and conflict of interest run rampant in the infant industry.
Massad also mentions that a number of platforms don’t have a sound customer safety mechanism in place and may operate without enough assets to cover customer claims in case of theft of crypto-assets. The ongoing QuadrigaCX fiasco is a prime example of this.
Further, unlike banks and regulated stock exchanges, crypto institutions don’t have to deal with any specific cyber-security requirements. The paper reads in part:
“Crypto institutions are small compared to banking, securities and derivatives markets, but they do not operate in isolation; they have many connections with the broader financial system. A cyber attack on a crypto institution could lead to collateral damage elsewhere.”
How to Bring More Transparency?
Massad, in his paper, outlines a number of recommendations which can be taken as reference points by the SEC and the CFTC to streamline crypto regulations.
According to Massad, both authorities must have complete regulatory oversight over the offering, distribution, trading of crypto-assets. He added that Congress should pass legislation to increase these regulatory bodies’ resources to make way for new and existing crypto-centric authorities.
Another vital point that Massad highlights in his paper is that instead of delegating or deferring to state law in regulating crypto assets, the Federal Government should aim to establish a uniform national regulatory framework as the market for cryptocurrencies has an international appeal.
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