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Regulating crypto: Why, how, and who

The last year has been a tumultuous one for cryptocurrency and digital asset markets. Volatility and scandals led to trillions in losses, including the spectacular collapse of crypto trading firm FTX. As these markets have grown and their risks have become more apparent, calls for improved regulatory protections have grown louder. In 2022, Brookings Economic Studies program hosted several events focused on regulation of digital assets and published working papers on some of the latest proposals.

See summaries of this work below and click the links to learn more.

Explore the events >>

Read the research >>

Watch the full event here, and read key takeaways below:

  • The use of crypto to deliver financial services at lower cost, higher speed, and without intermediaries has not yet materialized, Liang said, nor is there much evidence that crypto is delivering the hoped-for increase in financial inclusion.
  • Carmona suggested that if the U.S. already had a robust, real-time payment system, there wouldn’t be so much attention on crypto. Payment-system problems should be addressed in a variety of ways as opposed to seeking a role for digital currencies.
  • Paridon argued that digital currency players should be subject to bank-like regulation. Smith said the industry favors “appropriate regulation,” but argued against a one-size-fits-all approach.
  • As the Treasury and Federal Reserve ponder merits of a central bank digital currency (CBDC), Paridon and Smith highlighted risks of a retail CBDC (where everyone could have an account at the Federal Reserve), including threats to privacy and increased chances of a run on bank deposits and money market funds in a crisis.
Aaron Klein talking to Rostin Benham

Watch the full event here, read key takeaways below, and read a full summary of the event here:

  • Benham urged Congress to clarify the regulatory spheres between securities, commodities, and derivatives (and possibly draw some new ones around crypto)
  • Allen cautioned against bringing crypto into the regulatory system for fear of giving investors false guarantees around the quality of these assets and markets.
  • Benham noted that, unlike other commodities CFTC regulates where participants are often large insitutions or wealthy individuals, crypto has “more vulnerable investors,” prompting him to acknowledge that “It’s incumbent on us to educate, to inform, to disclose risks involved.”
Martin Gruenberg, Acting FDIC Chair

Watch the full event here, and read key takeaways below:

  • Gruenberg noted that the FDIC has “seen several instances where crypto asset companies have given customers the impression that they are protected by the government safety net when in fact they are not.” The FDIC continues to take an aggressive position when consumers are given false impression that their crypto is  structured such that it is like a government insured bank account.
  • Gruenberg explained that the FDIC would be far more comfortable with permissioned blockchain systems and highly skeptical of permissionless blockchains, which he said make it “nearly impossible to ensure compliance with anti-money laundering and counterterrorism financing requirements.”
  • Liao and Reineers clashed on whether crypto, in particular stablecoins, have real economic value and whether they should be subject to greater regulation. Ybarra disagreed that “cryptocurrency is going to serve that financial inclusion need” and posited that stablecoins are more like bank deposits than payment instruments at the moment.
Aaron Klein in conversation with Adrienne Harris.

Watch the full event here, and read key takeaways below:

  • Harris noted that New York had not approved FTX’s application to conduct crypto operations in New York under their specific Bit.License system which “has kept New Yorkers safer than people in other parts of the country.” She pointed out this extends not just to FTX but to other crypto offerings, including the stablecoin Tether.
  • Marton pointed out New York has a very specific set of capital adequacy requirements calibrated to specific crypto business models, including 1-to-1 asset backing for stablecoins. Kelleher heaped praise on New York’s system, stating that “we’d all be better off if Congress would just adopt the New York Department of Financial Services regime and be done with it.”
  • Carmona called for consumer protections to be strengthened given the opacity with which many crypto firms operate. Donkor highlighted the benefits Regulation E has provided in settling consumer disputes and that while it does not explicitly exist for crypto, Paypal is offering it.
a single US dollar bill, back side up, against a pink background

Watch the full event here, and read key takeaways below:

  • Stablecoins that have the most traction are those backed by U.S. dollars, not other reserve currencies, Prasad said.
  • The advent of a Chinese digital currency isn’t going to fundamentally alter anything in international finance, Prasad said. Most international payments are already digital.
  • There are, he said, some benefits of a digital U.S. dollar, but there are issues: Would it affect private sector innovation in terms of payments? And will it have any implications for privacy?
  • He also said we may be able to get the advantages—easier and cheaper payments domestically and internationally—without a U.S. central bank digital currency.
stock ticker of three types of bitcoin in the background, judge's gavel with a bitcoin coin in the foreground

Watch the full event here and read key takeaways below: 

  • Conti-Brown argued in favor of regulation, particularly new rules from banking and securities regulators that would close the gaps in existing regulations through which many crypto activities are sliding.  
  • Cecchetti argued against regulation, asserting that it would confer legitimacy on crypto that it doesn’t deserve and predicting that crypto is already dying.  
  • Both oppose any legislation, though. Conti-Brown said it would prematurely freeze in amber rules for a rapidly evolving technology.  Cecchetti said existing laws against fraud and the like should suffice.  
Illustration of digital currencies on top of a motherboard.

In “Cryptocurrencies and Decentralized Finance,” published in the Spring 2022 Brookings Papers on Economic Activity, Igor Makarov of London School of Economics and Antoine Schoar of the MIT Sloan School of Management say that proliferation of finance applications built on blockchain technology could reduce the role of financial intermediaries and their profits. However, it could also reduce competition and pose significant challenges to regulators.

Bitcoin BTC cryptocurrency coin with altcoin digital crypto currency tokens, ETC Ethereum, ADA Cardano, LTC Litecoin, IOTA Miota, ZEC Zcash for defi decentralized financial banking p2p global market

In their Hutchins Center working paper,  “How to improve regulation of crypto today – without congressional action – and make the industry pay for it,” Timothy Massad, former chair of the Commodity Futures Trading Commission and a nonresident fellow at Brookings, and Howell Jackson of Harvard Business School propose that the CFTC and the Securities and Exchange Commission create and oversee a new self-regulatory organization to govern the crypto industry. 

Married couple sitting on sofa at home read documents paper checking bills, bank account balance feeling satisfied and happy. Refund income last loan payment good news concept

Jackson and Massad, in “The Treasury Option: How the U.S. can achieve the financial inclusion benefits of a CBDC now” in the Series on Financial Markets & Regulation, say the Treasury would create digital accounts to provide payment services that would be especially valuable for unbanked and underbanked individuals.

USDC USD Coin stablecoin cryptocurrency golden coin over the chart. Price trend graph with growing and falling line.

Jackson, Massad, and Dan Awrey of Cornell Law School, in a Hutchins Center working paper, “How we can regulate stablecoins now – without congressional action,” argue that federal regulators, even without new legislation, could regulate stablecoins. They propose that the comptroller of the currency create a national trust bank charter, organized as a subsidiary of a depository institution, that would allow them to issue stablecoins.

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