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Regulation Should Start with Stablecoins and Crypto Custody

Jay Clayton, former chairman of the US Securities and Exchange Commission, said regulatory clarity around stablecoins and custody should be priorities and would help boost the crypto industry.

Clayton is now an advisory board member at Fireblocks, the crypto custodian, and Of Counsel at law firm Sullivan & Cromwell and spoke at the Bloomberg Crypto Summit on 19 July. He added that the cracks in the crypto ecosystem that have emerged over the past few months have occurred many times before in financial markets.

“Lots of leverage, a price correction, and a wash out of people who are over-leveraged or don’t have sufficient capital or liquidity are age-old lessons,” said Clayton.

He wants regulators to take steps that unleash the power of private markets while still protecting investors, especially retail customers.

Jay Clayton
 Jay Clayton, Sullivan & Cromwell

“Our payment system is at the core of all financial transactions,” he added. ”If you start to get that right, then the opportunities for digitizing and tokenizing assets, whether traditional or new, are significant.”

As a result, he believes that stablecoins are a safe space for regulation to accommodate new technology which has been demonstrably effective as there are many stablecoin transactions taking place globally, 24/7, without friction. He would like to see regulatory clarity around stablecoins and which will be treated as securities.

“I would also like to seek clarity around custody because then you can get clarity around resolution and what rights people have in the event that things go wrong,” he added. “I think those are places where progress can be made for the industry and for regulators.”

Kara Calvert, head of US policy at publicly listed crypto exchange Coinbase, said at the Bloomberg Crypto Summit that recent events such as the collapse an algorithmic stablecoin and a crypto hedge fund have shown that a regulatory framework that provides consistency, such as requirements for disclosures, would give customers and investors more certainty.

At the same time, the financial system would benefit from the 24/7 settlement available in crypto markets, lower friction from disintermediation and the ability to create immutable records.

“Transparency is really important,” she added. “We are very hopeful and optimistic that we will see a regulatory framework come together.”

She believes there are many opportunities for responsible regulation over the next six months and agreed that stablecoins is an area where broad agreement is coming together.

“The benefit of having a payment system that is really efficient and immutable is good for consumers, “ she added.

Gillibrand-Lummis bill

Calvert commended Senators Cynthia Lummis and Kirsten Gillibrand for the work they have been doing at a legislative level.

On 7 June 2022 U.S. Senators Gillibrand (D-NY), member of the Senate Agriculture Committee, and Lummis (R-WY), member of the Senate Banking Committee, introduced the Responsible Financial Innovation Act to create a complete regulatory framework for digital assets. The senators said at the summit that their whole bill was unlikely to pass in 2022 but portions could be voted on  this year – such as the jurisdiction of the Commodity Futures Trading Commissionover digital assets which are considered commodities and how banks could issue stablecoins.

Clayton agreed that the Responsible Financial Innovation Act is an extremely responsible effort by both senators as they are focusing on some key issues such as custody snd resolution, which are fundamental to the regulation of any market, and because they are trying to take a coordinated approach.

“The bill does a very good job of saying we should try to move towards a technology-agnostic definition of appropriate custody across US securities laws,” he added.

The European Union has recently agreed on MICA, the market in crypto assets framework, and Calvert said there is a danger that US is falling behind other jurisdictions in terms of regulating the new asset class, which is global. She explained that Coinbase is a global company that complies with regulation in many jurisdictions and so has adopted some global best practices based on overseas regulation.

“So it’s really important that we get some harmonization,” she added. “There needs to be a consistent level playing field, not just for Coinbase, but for all companies so they adhere to the same high standards that the United States is known for.”

Calvert has been working at Coinbase since 2016 but said that the firm has been advocating for regulation since 2012.

“We started talking about how we wanted regulation and you don’t hear that from industry very often,” she added. “Actually going to regulators and asking for a framework that will unlock innovation is very unique.”