In the last month the number of cryptocurrencies has almost been matched by the number of people coming forward with an opinion on how they should be regulated.

Adrienne Harris, superintendent of the New York State Department of Financial Services, has strongly advocated a role for public authorities in regulating crypto in an interview with the Wall Street Journal, arguing that this idea was nothing new, and that regulation stimulated growth.

Rules of the road

She said: “New York had banking law in the state before there was a national banking law, and that’s why Wall Street was here – because the rules of the road here were clear. And I think the same is true for crypto. There was more crypto investment in New York companies than even in Silicon Valley companies, and I think it’s because there are clear, rigorous rules of the road here. And we can make rules, we can issue guidance, we supervise and examine, and we can bring enforcement and so that attracts the good actors and it attracts the industry that wants to be here, in the financial capital.”

SEC chair Gary Gensler has made it clear his organization’s stance on crypto regulation is based on the view that crypto assets are securities, and should be registered and regulated as such. He’s said that “investors deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder,” and that investors would benefit from the creation of “exchange rulebooks that protect against fraud, manipulation, front-running, wash sales, and other misconduct”.

“Investors deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder.”

Gary Gensler, chair, SEC

He’s been encouraged by US Senator John Hickenlooper (D-CO) who said in a letter to Gensler that “clear rules promote an environment where investors are protected,” and he urges the setting of “regulations for digital asset securities through a transparent notice-and-comment regulatory process”.

In the UK, measures recently tabled by the government in the proposed Financial Services and Markets Bill to regulate crypto ads and ban unauthorized providers from offering crypto services would indicate that a similar view is being taken. An explanatory note stated that the move was intended to “clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate crypto assets and activities relating to crypto assets”.

Direction of travel

The Financial Stability Board’s set of recommendations for “international regulation of crypto asset activities” suggests a similar direction of travel. It described the proposals as “grounded in the principle of ‘same activity, same risk, same regulation’; where crypto-assets and intermediaries perform an equivalent economic function to one performed by instruments and intermediaries of the traditional financial sector, they should be subject to equivalent regulation”.

But Michael Hsu, the US’s acting Comptroller of the Currency, worried that efforts to regulate other types of fintech were suffering because too much effort was going into thinking about how to regulate crypto assets. “We’re spending too much time on crypto,” he told Reuters. “It’s interesting, it has thorny issues… but relative to other technology and banking issues, I think we’re now kind of overweight crypto.”

“When people think about regulation they think about it in a very static way, when in fact it’s a dynamic concept.”

Jai Ramaswamy, chief legal officer, Andreessen Horowitz

A more complex worry was expressed by Jai Ramaswamy, chief legal officer at venture capital firm Andreessen Horowitz, in a debate at the Money 20/20 fintech event in Las Vegas. He spoke of tension arising where a “multi-tiered technology stack” is merging with the financial stack and creating issues that go well beyond finance. The problem you have is that when people think about regulation they think about it in a very static way, when in fact it’s a dynamic concept,” he said.

He questioned whether regulators were best placed to make decisions in this area, and said “the industry needs to carefully consider how that base layer can be regulated through self-regulation from standard-setting bodies through best practices”.

But a proposal by Sam Bankman-Fried, CEO of cryptocurrency exchange FTX and one of the industry’s most prominent communicators, proved to be a catalyst for a feisty expression of disagreement around regulating something still prized by many precisely because of the absence of central regulation – it’s not called decentralized finance (DeFi) for nothing.

Backlash

Bankman-Fried published a lengthy blog and Twitter thread arguing that regulation was not only coming but needed if the industry was to “ensure an open, free economy, where peer-to-peer transfers, code, validators, etc. are presumptively free”. His thoughts prompted a backlash, with a number of respondents expressing concern that “coercive” controls would stifle innovation and discriminate against individuals.

Crypto investor Ryan Sean Adams said bluntly that Bankman-Fried’s document “absolutely sucks”, asserting it would “eliminate the US from the crypto race”. But Erik Vorhees, CEO of cryptocurrency exchange Shapeshifter, took the view that Bankman-Fried was “a good actor attempting to make a productive contribution to crypto policy” and so issued a more detailed response on his Money & State blog.

It does seem, though, that the debate about whether or not crypto should be regulated is over and the question now is how – this then revolves around how comfortable those who are most committed to the concept of DeFi will be with the regulatory framework that is then put in place.

Significant concentration

That group will not have been encouraged by Gensler’s latest comments, made in a speech to the annual meeting of the Securities Industries and Financial Markets Association (SIFMA), on October 24, 2022.

“We’ve even seen centralization in the crypto market, which was founded on the idea of decentralization,” Gensler said. “This field actually has significant concentration among intermediaries in the middle of the market.”

And he went on to observe that “though technological innovations repeatedly disrupt incumbent business models, centralization still tends to reemerge,” which leads to “a tendency for central intermediaries to benefit from scale, network effects, and access to valuable data”.

As is so often the case, the real debate over the merits of regulation may revolve around the question of ‘who benefits?’