Regulating crypto assets is almost inevitable and lawmakers in Washington D.C. are showing an increased interest and the level of sophistication is rapidly increasing, what is encouraging, Kevin Werbach, professor of legal studies and business ethics at The Wharton School of the University of Pennsylvania told PYMNTS about his conversations with senators on Capitol Hill.
Werbach has testified twice in the last few months on congressional committees, and he noticed a notable shift in the conversations and in the approach to crypto regulation. Not only are policymakers taking a proactive and positive approach, but also industry representatives are showing an interest in having a good regulatory framework that allows them to operate with adequate oversight.
“It’s a good thing to have regulation because ultimately regulation is what will facilitate the growth of the digital asset market as a legitimate and trusted sector. And so it’s important to work through all of the challenges that, that poses, it takes some learning for policy makers to understand these markets and to be able to distinguish what’s legitimate, valuable activity and what are scams or what are improper activity, for example, that leads to financial crime,” said Werbach.
As these issues become more mainstream, there is more comfort on the regulator side and on the industry side to understand that this is no longer something small, this is something that potentially is the future of the financial system. “There are still many people in the government who don’t understand crypto and digital assets, and there are many people in the crypto and digital asset world who don’t understand how government works,” he said, but there is a common agreement that regulation over this industry needs to be debated.
There are dozens of regulatory questions that need to be answered, and there are gaps like which regulators should look at these assets, the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). Werbach believes that given that these markets are prone to abuses, regulation is needed, but “this doesn’t mean that every regulation that´s proposed is a good idea, it means there´s certain areas where it’s fairly obvious that we need to do something.”
Read more: At Senate Hearing, CFTC Chair Behnam Steps Up Battle With SEC for Crypto Oversight
Cryptocurrencies, Stablecoins and CBDCs
When asked which of these digital assets need to be regulated first, Werbach responded that the urgency is linked to the magnitude of the harm associated with these assets. “The magnitude of the harm might be we’re building up unsustainable risk. And when there is a collapse, it’s going to be devastating, and that might not happen tomorrow but the magnitude of the loss, if there actually is a collapse would be trillions and trillions of dollars.” When you find a big gap, there is a big risk, and in Werbach’s view, spot market regulation of digital assets that are not securities is an obvious, huge gap, and action is needed to close that regulatory gap.
Stablecoins represent another area with a very clear gap, according to Werbach. It isn’t clear yet how to regulate stablecoins issuers, either as banks or as money market funds, but there needs to be some new structure to get them regulated.
But regulation doesn’t mean banning large swaths of activity, although there may be areas where clear limitations and restrictions will need to be adopted. For instance, it is unlikely that the United States will ban a stablecoin for the fact that is a stablecoin, but if it is used for illicit purposes or doesn’t comply with any legal requirement, it will be banned.
Read also: US Draft Bill on Stablecoins Offers Safe Harbor for Issuers
This interview is partially based on an article that can be found in the TechREG Chronicle, our monthly journal that features articles from experts on technology regulation to drive discussion and debate. To receive this publication, subscribe here.
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