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FutureX Session #6 — Crypto and DeFi Regulation: Highlights and Recap

SynFuture FutureX #6

In March, we hosted our latest FutureX session on crypto and DeFi regulation, a topic that has been widely debated in the industry, especially over the last several months as government entities, including the Securities and Exchange Commission (SEC), have begun to examine the rise of decentralized finance and its effect on our greater financial systems.

Now, as the economics of the Terra ecosystem and its stablecoin UST continue to collapse, regulatory concerns have only heightened, making our FutureX session with Matthew Kulkin, co-chair of Steptoe’s Financial Services Group and a former Commodity Futures Trading Commission (CFTC) division director, more relevant than ever. Kulkin advises financial market participants on a wide array of legislative, regulatory, compliance, and enforcement matters.

Read on for the highlights or check out the full session below:

The Role of the CFTC in Crypto

After a short introduction, Matthew Kulkin offered an overview of the CFTC and its activities.

The U.S. has a number of regulators with their own jurisdictions. The CFTC oversees a range of markets, including futures, swaps, and options for commodity goods. In recent years, the CFTC’s jurisdiction has expanded to include Bitcoin and Ethereum and today, the office’s jurisdiction includes the crypto derivatives market (which doesn’t include the underlying spots market).

Today, there is much debate as to which government agencies should oversee certain aspects of the crypto market, including the SEC, which recently announced several new crypto-related initiatives.

What Biden’s Executive Order Means for Crypto

In March, President Joe Biden issued the “Executive Order on Ensuring Responsible Development of Digital Assets,” in which he called for a broad review of digital assets. While Matt pointed out that the order was mostly seen in a positive light and even boosted market prices, Kulkin said that the order is “more of a plan for a plan” in that it didn’t set forth a new policy.

“The executive order is a list of reports and studies that demonstrates for the first time what they call a ‘whole of government’ approach to policy-making…For the markets, it means nothing’s going to happen in the near, near future.”

Kulkin added that the deadlines listed in the report are not immediate, and that “we’ll have to wait and see” what happens as the parties work together to exercise the activities outlined in the report. He also added that there are some agencies, including the Financial Stability Oversight Council (FSAC), that the blockchain and crypto community should be aware of as these activities play out.

The U.S. Government’s Approach to Crypto

With this “whole of government” approach to crypto, the U.S. has also become one of the first jurisdictions to establish a country-wide view on the space.

When asked about whether this is because the U.S. is leading the establishment of these regulatory frameworks or if this is a response to other regions issuing central bank digital currencies (CBDC), Kulkin said it could be a combination of these reasons.

Currently, the U.S. has several regulatory bodies working together to provide a singular approach on digital currencies, which is a different approach compared to some smaller countries. The whole-of-governemnt approach brings consistency across the various offices.

Kulkin added that global competition and wanting to attract and retain talent within the U.S. are other factors.

Crypto Regulations Around the World

While the regulatory landscape is constantly evolving, some countries have emerged as more open-minded than others when it comes to digital assets, as Matt shared in the visual during the session. (Find a similar map here.)

The benefits of blockchain and digital currencies for developing countries have been widely discussed, though many developing countries aren’t considered “crypto friendly” right now in regards to regulation. Kulkin pointed out that any capital, whether fiat or digital, goes to where business can be done and where regulatory conversations are happening, which is why we’re seeing vast differences in crypto regulations around the world.

The State of DeFi Regulation

When asked about some of the current state of DeFi regulation, Kulkin explained that while we’re leaps and bounds ahead of where we were a few years ago, regulators have a lot to learn about the space. Many of the rules that were written for future contracts decades ago are now being used to regulate digital currencies, so there is a long way to go before rules specifically created for DeFi are put in place.

Kulkin added that DeFi knowledge varies among lawmakers. Gary Gensler, Chairman of the SEC, worked at MIT, where he led academic research in the market. While other policymakers are less familiar, many of them are willing to learn. Customer protection and money laundering are among the biggest issues regulators are concerned about in the DeFi space.

When asked about the effect of increasing regulatory scrutiny on DeFi projects, Kulkin pointed out that there are certain “penalties,” such as legal fees, that can inhibit innovation, though these occurrences are sometimes necessary in an evolving regulatory environment.

Driving Responsible Innovation in DeFi

Matt and Mark added that as entrepreneurs and active participants in the space, regulation is an important part of mainstream adoption. Kulkin added that there is a balance between innovation and regulation in the space and pointed out some crucial activities for projects to make headway in the space, including engaging with policymakers, meeting with Congress members on Capitol Hill, speaking at events, developing education materials, and working with the right counsel.

But it’s not just DeFi projects and retail investors who are interested in the market. We’re starting to see more institutional investors and companies, such as Goldman Sachs, enter as well. Kulkin said:

“It’s evident that, not just retail, but institutional market participants are looking to do more and do new things. In some cases, they’re seeking permission and, in other cases, they’re going to seek forgiveness. But in either case, they’re moving forward.”

The Future of DeFi Regulation

When asked to share thoughts on some of the most exciting areas of DeFi, Kulkin pointed out that the opportunity for innovation not only in the financial sector but across other areas is promising.

“There are a lot of legacy operational cracks in the system, and for the first time that I can remember, people are really aggressively trying to solve these problems through technology and across borders.

“The idea that you can be a part of something bigger than just yourself and your efforts and drawing on problem-solving skills around the world together…the endless opportunities [are] there.

“There’s tremendous application across traditional finance, as well as larger information systems and operational issues. I think the applications in the DeFi space could go well beyond buying and trading widgets, so I’m very optimistic.”

Watch the full Future X #6 session on YouTube and follow SynFutures on Twitter to stay updated on future meetings.

About SynFutures

SynFutures is a next-generation derivatives exchange focused on creating an open and trustless derivatives market by enabling trading on any device with proper price feeds. By cultivating a free market and maximizing the variety of tradable assets, SynFutures is lowering the barrier for entry in the derivatives market, creating a more equitable exchange market for digital assets.

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