Establishing the Policy Goals for Crypto Markets: The FTX Perspective
As regulators across the U.S. and globally continue to focus efforts on understanding the totality of the digital asset and cryptocurrency ecosystem (the “Ecosystem”) and give thoughtful consideration to the best way to provide regulatory oversight to this emerging industry, we will use this blog (amongst several other initiatives) to offer our perspectives. In this initial post, we identify the key policy objectives that we believe regulators and the industry should pursue. We will shortly also publish some educational observations on the structure, size, and composition of cryptocurrency markets, and provide some information about FTX, its businesses, and its goals. Going forward, we would also expect to share more detailed thoughts on regulatory approaches for stablecoins, markets, token issuances, and other important part of the crypto Ecosystem.
While we believe that this framework would help the U.S. crypto Ecosystem grow in a sustainable, safe, compliant fashion, this merely represents our views. Regulators, lawmakers, and other key decision makers ultimately have a large breadth of experience, perspective, and authority on market regulation, and we welcome their feedback and proposals.
I. Policy Objectives for the Crypto Community – Setting the Goals
There is general consensus as to what the policy and regulatory goals must be in order for the crypto industry to achieve its promise. Regulators have been generally clear in outlining what they expect – certainly at the policy level – and we agree that there are four core priorities that must be addressed by crypto Ecosystem regulation: (1) customer and investor protection, (2) market integrity, (3) prevention of financial crimes, and (4) financial stability and systemic safety and soundness. We will devote a series of later posts to these topics, but here we preview our vision for such a regime:
1. Customer and Investor Protection: Customers should be given full transparency and disclosure into the Ecosystem – and the providers of this information should be subject to an accountability structure that disincentivizes failing to provide this information, providing misstatements, and making fraudulent claims or assertions.
- a. At a high level, we think this means a framework for transparency and disclosure standards.
- b. The provider of a given disclosure would likely depend on the status and lifecycle phase of a given digital asset, cryptocurrency, project, or service provider.
- c. For example, for a token, the required disclosure may come from one or a combination of the issuers and creators of the token; the venues providing trading, clearing and custody services for that token; and/or, the “official” foundation that is taking the lead for ongoing development initiatives for the token network.
- d. For centralized venues and services (such as exchanges and clearinghouses, or even custodians), the disclosures should also include clear information around protection and safekeeping of customer assets, system safeguard and resiliency measures, regulatory licensing details, availability of and access terms for market data, and clear terms on user rights and obligations (including an express path or program for the reporting and resolution of customer complaints and related customer support issues).
2. Promoting Market Integrity: The US is often described as offering the deepest, most liquid, and transparent capital markets in the world. For the crypto Ecosystem to grow into a new and beneficial component of this market structure, it is critical to ensure that crypto markets meet the same market integrity metrics that we expect of traditional commodities and securities markets.
- a. Focusing initially on centralized exchange trading environments, we think this means that exchanges must be required to (and to be clear, we think many largely already do) implement rulesets and surveillance programs designed to identify and prevent fraud, market manipulation and abusive practices.
- b. Similarly, these venues must implement rulesets and a system of oversight of trading participants designed to promote fair, transparent, orderly, and innovative markets.
- c. On a similar theme, we think it is reasonable to predict that, over time, it will make the most sense to achieve a harmonized (single regulatory program) approach to accomplishing these objectives across both spot market trading venues and venues offering the trading of related derivatives products (and potentially also borrow/lending venues, or other similar venues, as the Ecosystem matures to reflect the types of marketplace environments that exist in traditional financial markets).
- d. We look forward to expanding on these thoughts in a future post – including our thoughts on the existing statutory, rulemaking and jurisdictional tools that, along with inter-regulatory cooperation, may be best suited to furthering these objectives in a tangible way.
3. Identification and Prevention of Financial Crimes: Ecosystem on and off-ramps, such as exchanges and primary issuances/redemptions of stablecoins, should be (and largely already are) required to have and implement robust, risk-based know-your-customer and anti-money laundering programs, coupled with the implementation of strict sanctions compliance programs. This is largely required for existing US crypto Ecosystem service providers, and we think it is important to ensure that compliance systems and programs remains intentional, up to date, and continually subject to review and enhancement.
- a. In parallel with internal programs and policies, we are seeing regulators begin to expect that crypto Ecosystem actors also supplement their programs by integrating on-chain analytics tools, machine learning financial crimes surveillance techniques, and other similar innovative developments.
- b. We strongly support the continued promotion and development of both manual and automated financial crimes surveillance tools for crypto Ecosystem users, and we look forward to working with market participants and regulators to identify and implement best in class tools.
4. Ensuring Systemic Safety and Soundness: Exchanges with clearinghouse and settlement functions, whether for spot markets, derivatives markets, or otherwise should be subject to vigorous capital and financial adequacy standards. This is obviously not a new idea, and we believe the central clearinghouse regulatory programs that currently exist in the U.S. (e.g., CFTC derivatives clearing organization regulation, and SEC securities clearing regulation) largely provide the model for how this regulation can look. We support continuing to work with regulators to identify where these types of concentrated risks may exist in the crypto Ecosystem and to propose robust capitalization, examination, transparency, and risk management requirements for entities providing these functions.
From this basic policy framework, our strongest held parallel view is that the lack of coordinated, practical, and timely regulatory solutions for these critical issues will become a major counterweight against the continued growth of a safe, healthy and sustainable digital asset industry in the United States. There will certainly be iterative steps, and the first solution (likely some version of cooperative inter-agency guidance and rules) is unlikely to be the final, permanent regulatory outcome – but doing something now, to start the regulatory process moving, will outweigh the risks of doing nothing. Taking action will also position the U.S. approach as the global benchmark and standard for crypto Ecosystem regulation. The good news is that we have had many good and detailed discussions with regulators, policymakers, and market participants on these topics, and our sense is that most stakeholders hold a generally consistent viewpoint. With that generally common agreement as a starting place, we will continue to push out our thoughts and perspectives on these issues, and we look forward to continuing to collaborate with regulators and fellow market participants as this dialogue progresses.