Cryptocurrency proponents have long banged the drum for regulation of their market. As covered in Acuiti’s Q2 Crypto Derivatives Manager’s Insight report, well-constructed frameworks for these assets are seen as an essential ingredient to bringing institutional investment into the market.
So far, progress has been slow and piecemeal. Different jurisdictions’ approaches to, and progress on regulating Cryptoassets have varied — a situation somewhat at odds with the market’s worldwide scope.
Ex-SEC chairman Jay Clayton has described this challenge as “one of global products spanning and overlapping the jurisdictions of multiple domestic regulators”. This has bucked the trend of most financial products, which develop within a domestic financial system and as such fit much more easily into a domestic regulatory framework.
The pace of developing regulation has also often been hampered by limited budgets and staffing. In many cases, agencies have had to play catch up on a complex and rapidly evolving asset class.
But regulation is now coming down the track fast — given impetus by a crypto winter that caused a near $2tr loss of wealth, with significant pain inflicted on retail investors.
This is set to touch all aspects of crypto trading. In this quarter’s report, our network cited a more severe regulatory approach to crypto derivatives markets as the most likely medium to long term outcome from the market turmoil this year.
In many ways, this is set to be a positive. The deficiencies of crypto markets have been laid brutally bare by this latest market rout. Overleveraged business models, badly collateralised lending and severely flawed coin infrastructure have all been exposed in recent months.
Given the lack of transparency in many underlying coins and cases of fraud and scams, the market’s credibility obviously lags well behind more established asset classes.
Regulators are already flexing their muscles. In the US, the SEC has recently announced an insider trading probe into a former Coinbase manager and said that it considers at least nine coins listed on the exchange to be securities.
But regulation is progressing at very different paces. Both the US and EU are still pushing frameworks through their legislative branches, but the EU’s Markets in Crypto Assets (MiCA) bill is seen to be moving at a faster pace. The UK has also recently published a bill that will introduce a regime for some parts of the Cryptoasset market. It has previously signalled its intention to broadly follow MiCA but aim for a framework that better encourages innovation.
Cryptocurrency derivatives are on slightly steadier ground, covered by the fact that derivatives already fall under existing frameworks such as MiFID. This has been a selling point for institutions that want exposure to the market but grapple with diving into the spot market.
Nevertheless, the current state of play risks leading to overlap, contradictions and even fragmentation in the rules governing global crypto trading. Even within the US, settling on which of the CFTC and SEC will have overriding supervisory powers for Cryptoassets is far from decided.
A recent statement from CFTC Commissioner Caroline D. Pham on the SEC insider trading case expressed surprise at “regulation by enforcement”. This suggests that regulation could take an increasingly confused and even politically driven path, driven by the short-term need to be seen to take action on preventing retail losses.
On the other side, some market figureheads have already shown signs of bristling under this regulatory focus — with defensive statements from some market figureheads. This risks derailing what has in the main been a constructive and mature approach to dialogue between industry and regulators in creating a framework for the market.
Download the full report here: https://www.acuiti.io/crypto-derivatives-management-insight-report-q3-2022/