The current regulatory state apply with the SEC and the CFTC is regulation by enforcement, according to Elizabeth Lan Davis, Partner, Co-chair, Financial Services Practice at Davis Wright Tremaine.
“The crypto industry has no regulatory clarity because the technology is very difficult to shoehorn into existing framework,” she said, speaking at the Crypto Roundtable – “Digital Assets 2023: Filtering the Noise and Looking Forward” at the STA Florida Conference in Saint Petersburg on Friday, February 24.
“We’re not seeing a lot in terms of regulatory proposals issued by the agencies,” she added, mentioning that the SEC recently issued a proposed rule in custody for registered investment advisors.
Registered Investment Advisors are required to hold the assets on these securities of their customers and the proposed rule would extend that to crypto and registered investment advisors would have to hold crypto in segregated accounts with a qualified custodian, said Davis.
“The issue is most crypto trading platforms lending platforms are not qualified custodians,” she noted.
Under the proposed rule, a qualified custodian would be a dealer registered with the SEC, a Futures Commission merchant registered with the CFTC or a state chartered bank company or a trust, she added.
“Most crypto platforms would not fall under the qualifier definition,” Davis said, adding that the issue is that if you want to trade crypto on a trading platform, you have to deposit the crypto first.
“If you’re not a qualified custodian that distorts custody,” she said.
“I think that’s one of the regulatory proposals we’ve been seeing, not much else from the SEC or the CFTC,” she added.
Gabriella Kusz, CEO, Global Digital Asset & Cryptocurrency Association, commented that part of the reason that you’re seeing some of the difficulty or infighting between the different regulators is because “we still sort of bump up against this question of taxonomy”.
She said that other countries are far ahead in terms of creating clarity, and it’s not necessarily about in terms of legal or regulatory approach.
We can’t wait forever for the US to catch up because eventually once it does, you will be so far behind in terms of being able to offer products and services that are successful on a global scale,” she said.
If you’re looking for a silver bullet from a legislative side,I don’t know
if you’re necessarily going to find that this year,” she added.
Meanwhile, according to Brian J. Mulcahy, COO of StoneX Digital, trying to build a business with a certain foundation is a challenge.
“The regulation is pushing us out of the US,” he said.
Kusz commented that they have an ongoing project to create core principles for the digital asset industry.
People are trying very hard to create out of this patchwork some level of clarity about how to run a business safely and securely but if you’re not able to get that guidance or direction from government themselves, then it’s important that an industry take responsibility and step forward to try to help to create those rules of the road, so that you do have the ability to continue to engage and innovate, she said.
Joseph Schifano, Global Head of Regulatory Affairs, Eventus, who was moderating the panel, added that there is a need to see more public private partnerships “to get this done in this country” versus how things are happening in other jurisdictions.
Kusz added that people are grappling with how to either shoehorn into existing legislation or how they need to modify existing rules and guidance.
“Finance and technology are two highly sophisticated and technologically expert areas that someone would have to be able to dominate both in order to take this forward,” she added.
“I think when we look at adoption and regulations, a priority would be the protection of customer assets,” said Schifano.
