Compliance and economic perspective: the keys to stabilizing crypto markets
By James Chase
Last month, a US federal judge upheld the Commodity Futures Trading Commission’s (CFTC) assessment that crypto currencies are equivalent to commodities, effectively granting it enforcement authority to regulate spot trading. If you’re new to the crypto space, you might assume this would position the CFTC as the new sheriff in town, heralding the start of a much-needed clean-up of the “wild west” and the creation of a safer environment for trading digital currencies. In reality, we will likely see the continuation of a less-swashbuckling approach. One day after the ruling, CFTC commissioner Brian Quintenz addressed delegates at the D.C. Blockchain Summit, reiterating calls he made in February for the crypto community to embrace a self-governing approach during the (possibly very long) wait for federal regulatory oversight.
In the same week, the Securities & Exchanges Commission (SEC) weighed in with additional regulatory muscle, issuing a public statement that reasserted its position on crypto currencies: namely, that it considers digital assets — including coins and tokens offered and sold in initial coin offerings (ICOs) — to constitute securities, and that it will continue to regulate such assets accordingly. The statement further clarified a mandate for online trading platforms and related service providers to register with the SEC or other regulatory bodies.
But while the crypto currency space is crying out for a robust regulatory framework to temper its volatility and remove the bad actors that blight its credibility, the current scenario doesn’t seem to be working too well. Here’s the problem. Both the CFTC and the SEC are suggesting that the cryptocurrency space is open to legitimate participants. At the same time, both are threatening to prosecute companies and individuals that run afoul of securities and commodities regulation. Unfortunately, it’s not always clear exactly how that regulation will be applied and so the present situation is merely compounding the confusion and uncertainty that surrounds crypto compliance in the US.
Crypto currencies have disrupted the established order of the financial sector and decentralized the market-shaping forces to the extent that anyone can play an influential role. Stories abound of individuals who had 10, 100, or even 1,000 bitcoin stored away in a hard wallet and who, all of a sudden, have become market makers and traders. But if the sector is to evolve, we need to figure out how to create scale. The average exchange volume is currently just 40–50 bitcoin, so how can we grow that volume to 5,000, 10,000 or 15,000 bitcoin? The answer is to develop and build robust platforms that are capable of handling large-scale trades, and which incorporate the highest possible standards of compliance.
Another major factor in stabilizing crypto markets is to develop our understanding of crypto economics. To help conceptualize these models, I have been “playing” with an idea that I call Brockonomics. Here’s the construct: when we study any token market, or any ICO ecosystem,
our instinct is to try to fit it to a model that is familiar to us from traditional economics — in this case, monetary supply, which is your standard, one-sided bell curve of the world. However, with crypto currencies, we are essentially creating a secondary value model, an inverted bell curve.
This secondary model represents the ability to generate equivalent monetary value inside of the ecosystem that is tradeable across the token economics of a specific token. In the token world, you have a token value and you also have the exchange of different things that could utilize it, so all of a sudden that token is something that is a fungible measure by which we can equivocate across these exchanges.
And that, essentially, is what the banks are afraid of because it might remove them from fungibility. The IMF is fearful that the larger-scale crypto currencies, and the multitude of crypto currencies out there, enable “regular” people outside of banks to lend money to entire nations. And that, of course, is where the IMF and a lot of the big banks make their money.
However, couple of interesting plays from around the globe suggest the banks might be over-reacting. For example, in Liechtenstein, banks can now treat crypto like fiat. Meaning you can go into a bank and deposit $100,000, or 10 bitcoin, or 90,000 euros, or any currency of your choosing. And the Bundesrepublik of Germany just passed a similar law to treat cryptocurrency like fiat.
Given these types of focus shifts we are now seeing within the banking world, and the constant evolution of the wider regulatory landscape, crypto compliance will continue to play a critical role in stabilizing crypto markets and enabling investment at a much larger scale — both of which are essential to advancing and expanding the crypto currency space. We need to eliminate uncertainty and mitigate risk by creating platforms with known processes, known compliance standards, known disclosures, known methodologies for bringing tokens to market, and known capabilities for trading.
