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Bridging the Regulatory Gap Between the Securities and Crypto Markets
by Howard Haykin
To some, FINRA is holding off on these approvals at the SEC’s request, as the Commission tries to determine how best to treat cryptocurrencies under securities laws. Others are firmly convinced that the SEC has explicitly told FINRA to hold off. While others say the delays are not a sign of reluctance on the regulators’ part, but are likely unavoidable and stem from the newness of this asset class.
Regardless of which explanation is closest to the truth, regulators and industry leaders are still dealing with the 'elephant in the room', namely How far along are we in bridging the regulatory gap between the seemingly disparate markets for securities, cryptocurrencies and crypto coins?
THE GOOGLE SEARCH. Not being privy to the inner sanctums of the SEC or FINRA, I sought some solace (or guidance) from Google and came away by concluding that there’s little in the way of current news or analysis on this subject.
That said, I managed to identify an interesting study/analysis published by the Columbia Law Review through its Publishable Notes Program - Dealers for Virtual Currency: Regulating Cryptocurrency Wallets and Exchanges. The author, 3rd-year student Dennis Chu, believes that history from the late 1960's can serve as a guide for devising viable regulations applicable to today's cryptocurrency platforms and entities. As Mr. Chu explains ....
With the rise of cryptocurrency as a popular investment, cryptocurrency wallets and exchanges have proliferated, offering platforms that allow investors to hold and trade cryptocurrency. Because these platforms hold cryptocurrency on their customers’ behalf, they present problems associated with custody. Namely, how do investors ensure that these platforms do not misuse or mishandle their assets? And how will customer assets be treated if a platform enters bankruptcy?
To answer these questions, this Note looks to the experience of broker-dealers, exploring the similarities between the problems confronting cryptocurrency platforms today and the problems that broker-dealers faced in the late 1960s. Widespread broker-dealer failures during the late 1960s revealed problems with mishandled client assets, insufficient capital, and inadequate protection of customer assets in bankruptcy. Similar problems plague cryptocurrency platforms today.
This Note therefore points to the regulation of broker-dealers as a template for how to approach the regulation of cryptocurrency platforms. Looking to the regulatory responses to broker-dealer failures in the late 1960s - including the customer protection rule, net capital rule, and alternative bankruptcy regime created by the Securities Investor Protection Act - this Note proposes that a similar regulatory framework could be applied to cryptocurrency platforms.
Perhaps regulators and industry leaders can draw upon Mr. Chu's approach for their long, sought after answers. If not, then it might just mean ‘back to the drawing board’ for everyone involved. STAY TUNED!
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