On December 20, Coinbase CEO Brian Armstrong released a draft on regulating centralized actors in the crypto space while protecting decentralized innovation.
Armstrong believed that regulation by centralized entities such as exchanges, stablecoin issuers and custodians of cryptocurrencies would be the best thing for the industry. He said:
“This is where we saw the greatest risk of harm to consumers and almost everyone can agree that it should be done. That’s low-hanging fruit.”
Armstrong on stablecoin issuers
Armstrong added that there is already some momentum in the regulation of stablecoin issuers and hopes that this will happen during the first half of 2023. According to him, stablecoin issuers do not have to be banks, except that they offer lending with fractional reserves or invest in riskier assets.
He recommended that stablecoin issuers register as a state trust or OCC national trust charter. He added that these issuers must have rigorous annual audits, reasonable board and governance controls, the ability to be blacklisted to meet sanctions requirements and meet basic cybersecurity standards.
How centralized exchanges and custodians should be regulated
As for centralized exchanges and custodians, Armstrong noted that regulations for these entities should focus on implementing strong know-your-customer (KYC) and anti-money laundering (AML) policies and procedures.
In addition, their regulations should create a federal licensing regime where one license is sufficient to operate in one country. Other recommended rules include strict consumer protection laws, standards for the protection of client assets and prohibition of market manipulation.
Armstrong on the classification of crypto assets
The Coinbase CEO also gave his opinion on how regulators like the SEC and CFTC can determine whether an asset is a security or a commodity. He proposed a “modern Howey test for cryptocurrencies,” which would determine whether an asset should be considered a security.
Financial regulators in the US have faced criticism from crypto stakeholders for failing to provide regulatory clarity on the classification of tokens. The CFTC recently announced that Bitcoin (BTC), Ethereum (ETH) and Tether (USDT) can be classified as commodities.
“Congress should also require the CFTC and SEC to clearly publish their categorization of the top 100 crypto assets by market capitalization within 90 days of the enactment of the above legislation, stating whether each asset is a commodity, security or “other” (such as stablecoin).”
In the meantime, Armstrong believes the US Congress should pass legislation that would better guide industry players.
Domestic and foreign players should be regulated equally
Furthermore, he emphasized the need to establish equal conditions for domestic and foreign players in the industry. According to him, foreign companies that serve citizens of a country should comply with local regulations.
Citing the FTX collapse as an example, Armstrong said that without such a level playing field; crypto companies would continue the practice of going to favorable overseas jurisdictions. This gives such entities an advantage over domestic companies that must comply with the rules.
However, he argued that decentralized entities should not be regulated and allowed to innovate. “With the decentralized aspects of crypto, we have the opportunity to create even stronger consumer protections,” he added.