- Crypto regulation is the only option
- Create stablecoin reserves
- Separate trading and storage
- Make crypto transactions completely digital
- Regulate the use of omnibus wallets by digital-asset exchanges
- Define securities for the crypto market
- Conclusions
Mike Belshe, CEO of BitGo, believes that organizing crypto regulation could be fairly simple. It only requires five simple steps, including better oversight of stablecoin reserves, separate trading and custody accounts, and minimum use of omnibus wallets.
Crypto regulation is the only option
After the FTX meltdown, lawmakers across the world started active work on developing crypto regulation. This trend began in 2022, when six bills, both with a wide and narrow scope, were introduced to regulate certain aspects of the crypto market. The U.S. and Europe will definitely include many new bills into the 2023 legislative agenda.
Currently, two main organizations are competing to become leaders in crypto regulation in the U.S.: the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). Moreover, special committees are established, and there are also some opponents of regulation.
Mike Belshe strongly believes that comprehensive crypto regulation is a must. According to him, regulation plays an important role in making the American financial market one of the strongest markets in the world. He adds that traditional finance regulation was not built in a day either but developed over many decades. Many rules were implemented after crises similar to the FTX crash.
Mike Belshe offers lawmakers to take five simple steps to crypto regulation.
Create stablecoin reserves
Stablecoins are crucial to the digital ecosystem. Their main application is everyday transactions. They are supposed to be less volatile and risky than cryptocurrencies. It is expected that stablecoins can be redeemed 1:1 for the asset that backs them. However, the issuers are not legally required to maintain reserves in the amount backing the supply, which presents problems. If a stablecoin loses its peg, buyers may want to redeem their coins, which leads to a situation similar to a bankruptcy.
There has been such an example already. In May 2022, TerraUSD collapsed, which wasn’t backed by a reserve asset.
Issuers should be required to maintain 1:1 reserves at banks insured by the Federal Deposit Insurance Corporation. They also have to conduct quarterly audits of reserves and report on the status of minting and burning in real time.
Separate trading and storage
Keeping money with the exchange possesses great risks for crypto holders. Exchange owners and employees may be tempted to use the money. There are also counterparty risks, as exchanges often participate in various lending programs, do arbitrage and marketing, and trade on other exchanges. Therefore, holders risk losing their assets due to the bankruptcy or fraud of third parties. This very situation can be observed right now. Exchanges on the verge of meltdown freeze their customers’ assets to stay afloat.
Make crypto transactions completely digital
Direct digital asset trading with fiat or over-the-counter assets should be banned. As a result, all exchanges could be audited, providing a proof of reserves. Currently, proof-of-reserves statements do ensure some transparency, but they are not the perfect solution for assessing the solvency of issuers.
- Reserves cannot be audited on fiat, which is not represented in a digital way.
- The proof of non-liabilities cannot be provided. If fiat reserves were represented in stablecoins, the proof of reserves would reflect the entire picture.
Completely digital settlement and clearing would allow regulators to create a reliable and efficient system that complies with all the requirements. Nowadays, exchanges are attempting to develop their business in a hybrid world because there is no other choice.
Regulate the use of omnibus wallets by digital-asset exchanges
Many exchanges keep their customers’ assets by using omnibus wallets that combine customers’ assets and store them under a single address. This simplifies key management and efficient off-chain transactions.
The drawback of this model is that clients do not have any information about the transactions with their assets and cannot analyze counterparty risk. Moreover, the procedure in case of bankruptcy is not transparent, and it is not clear what happens to each client’s assets in this scenario.
Omnibus wallets can only be deemed appropriate if a qualified custodian can supervise each of the clients in the omnibus pool. In this case, assets should be segregated to protect each client from bankruptcy risks. The custodian must always comply with AML and KYC requirements.
Define securities for the crypto market
The most popular complaint about the SEC is that the commission still uses the definition of securities developed in the 1940s in relation to crypto. Developers cannot agree that this definition applies to their work.
In fact, it wouldn’t be really difficult for the commission to update the definition, provide transparent rules and a reasonable policy. All of this could contribute to protecting all participants of the crypto market.
Conclusions
According to Mike Belshe, what the market needs right now is crypto regulation. Basic oversight would help to protect investors from disastrous losses. Designers and engineers could develop a system that meets the requirements of lawmakers. If the new system can protect people from fraud, then more detailed issues could be discussed, and new truly comprehensive regulation can be developed.
