We are now at a tipping point. Innovation continues to grow in this industry – yet, regulation has stagnated. In the US, the latest and largest financial services overhaul was in 2010 with the Dodd-Frank Act. To put it in perspective, Bitcoin was proposed in 2009. Cryptocurrency exchanges were created in 2012. Today, there are over 200 million cryptocurrency users worldwide, and that number is projected to continue doubling for the foreseeable future. From a just a few billion dollars just 5 years ago, the global cryptocurrency market cap has passed the trillion-dollar mark. The most recent financial services regulatory update was only 11 years ago – but within two years of its enactment, it was already out of date due to the latest innovations in the marketplace. This highlights the importance of creating a regulatory environment that can evolve along with technological innovation. A coping approach we embrace is principles-based regulation.
Principles-based regulation is just that – establishing principles within the regulation that protect consumers or investors while providing clear regulatory guardrails. Principles-based regulations are drafted at a high level of generality to maximize flexibility; focus on objectives or outcomes rather than specific conduct; and often include qualitative rather than quantitative terms which can be supplemented with other forms of rules and guidance. When contrasted with traditional rules-based regulation, principles-based regulation can be simpler, more flexible, and better facilitate supervision and cooperation. While rules-based regulations are more appropriate in some contexts, as in the case of investor or consumer protection, principles-based regulations have proved particularly useful in financial regulation in rapidly innovating context rapidly, such as the regulation of derivatives by the CFTC.
Some principles that a cohesive digital assets regulatory regime should include are: classification of digital assets – focusing on their underlying functions in order to determine which agency can best regulate the asset to insure consumer and investor protections and transparency which ensures a consumer or investor of a digital asset knows what they are buying or investing in.
Todd White, Managing Partner, has been advocating for legitimizing cryptocurrencies since 2014 working with the U.S. Commodity Futures Trading Commission along with the White House, Congress, Treasury, and the SEC (Bios at: TODD WHITE)