Regulate centralized players but leave DeFi alone

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Coinbase CEO Brian Armstrong has pushed for tougher regulations on centralized crypto players, but says decentralized protocols should be allowed to thrive given that open source code and smart contracts are the ultimate form of disclosure.

Armstrong shared his perspective on cryptocurrency regulation in a Dec. 20 Coinbase blog post where he offered how regulators can help restore confidence and move the industry forward as the market continues to recover. damage caused by FTX and its collapse.

But decentralized protocols are not part of this equation, the CEO of Coinbase pointed out.

Decentralized arrangements do not involve intermediaries [and] Open-source code and smart contracts are the ultimate form of disclosure, Armstrong explained, adding that on-chain transparency is built in by default in a cryptographically provable way and as such should be largely left out.

8/ To achieve this, the innovation potential of this technology must be preserved. Regulation should focus on intermediaries (the centralized cryptocurrency players), where additional transparency and disclosure is needed.

— Brian Armstrong (@brian_armstrong) December 20, 2022

The Coinbase CEO said additional transparency and disclosure controls are needed for centralized players because humans are involved, with Armstrong hoping the fall of FTX will be the catalyst we need to finally push through new legislation.

Exchanges, custodians, and stablecoin issuers are where we’ve seen the most risk of harm to consumers, and just about everyone can agree [that regulation] should be done, he added.

Armstrong advised the United States to begin by regulating stablecoins in accordance with standard financial services laws, suggesting that regulators mandate the implementation of a state trust charter or national trust charter of the OCC.

Currently, US Senator Bill Hagerty introduced the Stablecoin Transparency Act which is expected to pass the Senate soon in the coming months.

Armstrong added that issuers of stablecoins should not be banks unless they want fractional reserves or invest in risky assets, but issuers should still meet basic cybersecurity standards and establish a procedure for blacklist in order to comply with sanction requirements.

Once stablecoin regulations are settled, Armstrong suggests that regulators target cryptocurrency exchanges and custodians.

Coinbase CEO suggested regulators establish a federal licensing and registration regime to allow exchanges or custodians to legally serve people within that market, in addition to tightening protection rules consumers and to prohibit market manipulation tactics.

Regarding commodities and securities, Armstrong acknowledged that while the courts are still figuring things out, he suggested that the US Congress ask the Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) to classify each of the top 100 cryptocurrencies by market capitalization as securities or commodities.

If asset issuers disagree with the analysis, courts can settle extreme cases, but this would serve as an important set of labeled data for the rest of the industry to follow, because eventually millions of crypto assets will be created, he said.

Related: DeFi Regulation: Where US Regulators Should Draw the Line

Given the international reach of cryptocurrency-based businesses, Armstrong also urged regulators in all countries to look beyond what is happening in its domestic market to consider the implications a foreign business may have. on its citizens.

If you are a country that is going to issue laws that all cryptocurrency businesses must follow, you need to enforce them not only domestically, but also with businesses overseas that serve your citizens,” Armstrong said, adding:

Don’t take this company’s word for it. In fact, go check if they are targeting your citizens while pretending not to.

If you are not authorized to prevent this activity […] you will unwittingly entice corporations to serve your country from abroad, Armstrong explained, adding that tens of billions of dollars of wealth have been lost because countries have turned a blind eye to the practices their subjects have fallen victim to in the ‘foreigner.

Armstrong added that for the industry to be properly regulated, a collaborative effort of businesses, policymakers, regulators and customers will be required from financial markets around the world, especially those in G20 countries.

Despite the complexity and variety of issues to be resolved, Armstrong said he remains optimistic that meaningful progress can be made in 2023 on the legislative front.

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