After cryptocurrency has entered the mainstream, the U.S. Department of the Treasury, SEC, CFTC, and regulatory agencies in various countries want to bring cryptocurrency into regulation. This article will sort out recent regulatory trends and focus on FTX founder SBF’s views on regulation, so that readers can understand current regulatory trends.

FTX founder Sam Bankman-Fried (SBF) was a guest last week on the well-known blockchain Podcast "UNCHAINED". SBF talked about many regulatory issues in the Podcast, including the regulation of stablecoins, the risk management and control of algorithmic stablecoins and encrypted lending platforms, and the impact of a clear regulatory framework on the industry.

For many crypto supporters, the best regulation is no regulation, but after the thunderstorms of TerraUSD, LUNA, and Three Arrows Capital, from the standpoint of investor protection, the government has to consider the financial risks brought by cryptocurrencies .

SBF said that in the past six to nine months, regulation has begun in various aspects, including stablecoin regulation, whether tokens are securities, SEC and CFTC’s regulatory powers, CFTC’s futures regulations, etc.

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The real question is: where is the direction of regulation?

SBF said that for exchanges, the core business involves exchanges, clearing houses, matching engines, and trading front-ends. These businesses are separated in the traditional financial market, so operating exchanges requires It is necessary to sort out which licenses to apply for.

In addition, the regulatory agency has not yet clarified the definition of whether the token is classified as a security.

These are the reasons why crypto startups are struggling to move forward.

SBF believes that for now, members of Congress will prioritize consumer protection and industry regulation:

“I think the three pillars of regulation are stablecoin regulation, market regulation, and token registration.

Of these, stablecoin regulation was the most frequently mentioned by lawmakers. Market supervision focuses on which agency supervises and how to make legislation. The focus of token registration is mainly the determination of the regulator (whether it is a security). "

It's kind of ambiguous, like waiting for a new regime and a new system.

Are tokens securities?

A while ago, the two major U.S. regulators, the SEC and the CFTC, were arguing over the regulatory rights of cryptocurrency spot. The main point of disagreement is: Is the token a security?

The SEC's position is to regulate cryptocurrencies with existing securities exchange laws. In other words, if a cryptocurrency operates and makes profits in a similar way to traditional securities, it will be classified as a security.

In addition, in the Howey Test standard, tokens are likely to be regarded as securities, because these tokens may be classified in "investment contracts", as long as the purchase of tokens meets: 1.) Investors contribute, 2. ) are contributed to the same entity, 3.) profits are reasonably expected to be made, and 4.) profits result from the efforts of an entity.

The SBF concludes that the SEC chair supports the claim that “Congress gives the CFTC more regulatory authority over non-security cryptocurrencies.” He sees the SEC's position as:

1. CFTC to regulate spot + futures market for “non-securities” cryptocurrencies

2. The SEC is to supervise the encrypted spot + manage the issuance of security tokens.

But this creates several problems, including

1. Who should supervise futures and derivatives of security tokens?

2. Who supervises the stock pass?

3. Are stablecoins securities?

Still, he thought the discussions were worthwhile. Regulatory resolutions produced along these lines of thought will be beneficial to investor protection, risk prevention, and fraudulent incidents.

My Opinion on SBF’s Stablecoin

Stablecoins are another major regulatory focus.

Different from the other two directions, it is the two major monetary regulators in the United States that have recently called for the regulation of stablecoins: the Federal Reserve and the Treasury Department.

Lael Brainard, vice chairman of the Federal Reserve, said at a bank meeting in September that because of the structure of stablecoins, it is easy for risks to penetrate into the core financial system.

SBF believes that although there are all stable coins, they are essentially different, so he divides stable coins into four categories:

1. Stablecoins with 100% reserves: 100% stablecoins with US dollars and US short-term debt reserves, such as USDC and USDP;

2. Stablecoins similar to debt instruments: also 100% reserves, most of which are US dollars and treasury bonds, and a small part are corporate bonds, such as USDT;

3. Stablecoins like MakerDAO: Excess reserves of cryptocurrencies such as ETH or stablecoin reserves'

4. Algorithmic stablecoins like TerraUSD: High risk and flawed algorithmic stablecoins.

He said that it is necessary to distinguish stable coins before effective supervision.

The first is the most secure stablecoin. In theory, even in the face of a liquidation crisis, the price will not fluctuate.

Tether’s USDT is essentially a “debt instrument” and part of its investment portfolio (reserves) contains corporate bonds, so there may be a 2% price drop (1 USD → 0.98 USD) during periods of turmoil.

The third risk will be relatively high. Although there is an over-collateralization, in extreme cases, there may be a 20% price drop. He believes that although such a stablecoin is feasible, it is usually not what the public expects from a stablecoin, and a product disclaimer is required.

The last one should not be classified as a stablecoin at all.

“I mean, this (TerraUSD) is a cool concept, but it’s very risky…, I wouldn’t see it as a stablecoin, so if you’re launching TerraUSD, it shouldn’t be packaged into a stable currency.

At least something like TerraUSD should have very, very many disclaimers and maintain the highest standards in terms of customer understanding of the product. "

Although TerraUSD is called a stable currency and has a mechanism similar to MakerDAO, which makes the public think that TerraUSD is very stable, in fact, the linked destruction mechanism of TerraUSD and LUNA will cause a large amount of TerraUSD to be dumped, and the supply of LUNA will increase significantly. Once the supply of LUNA increases , the price drop will cause more sell-offs of TerraUSD, which is equivalent to the simultaneous decrease in market demand for TerraUSD + LUNA, forming a death spiral.

A clear regulatory framework is beneficial to the encryption industry

Now the overall economy is the biggest variable in the encryption market, but compared to the stock market, the encryption market is relatively stable at present. SBF believes that if we assume that the economy is stable, regulations will be the biggest impact on the encryption market:

“Compared to what’s happening in the stock market, I think the crypto market is relatively stable.

If the future regulatory framework is clearer, especially in the U.S., so that the industry can play by the rules while achieving consumer protection, which has been the biggest bullish in many years, I think we may be close to (regulatory clarity) . "

This is the same view as CFTC Chairman Rostin Behnam. Rostin Behnam said at New York University at the end of last month that as long as regulators can give clear specifications, cryptocurrencies can grow normally according to market imagination, and the price of Bitcoin may double.

Regulation increases investor protection

For CeFi startups such as Three Arrows Capital and Celsuis, SBF believes that more transparent lending mechanisms should be introduced to help users understand the risks they take.

Three Arrows Capital was originally the largest hedge fund in the currency circle. It filed for bankruptcy in July. It is rumored that it is because of liquidity problems caused by holding too many LUNAs; Lending and lending relations, caused a series of liquidation.

SBF believes that this is a bit similar to the financial turmoil in 2008. The over-expansion of credit and the opaqueness of the entire system caused the operations of a group of people to affect the entire encryption market, and finally affected the users of the lending platform.

“Improving the transparency of lending and borrowing may solve some of the problems, allowing the public to understand the risks they need to take when investing their funds in a lending platform like Voyager. I think information disclosure and transparency can allow regulation There is more investigation into this type of CeFi.”

Supervision should be simple and complex

SBF believes that the current discussion on regulation is mainly focused on the extent of regulation. He believes that the real focus is to narrow the scope of complex regulatory issues and give a general direction to the core issues.

He gave an example, if the supervisory authority pays attention to consumer protection, then it should focus on the places where there are risks, and various regulations should also be based on consumer protection, instead of adding more regulatory rules, which will make the industry at a loss. In addition to increasing regulatory difficulties, there is no way to obtain due consumer protection.

In the case of stablecoins, SBF hopes that regulators will really delve into the USD/Treasury bonds of stablecoin issuer accounts, and make the balance sheet as transparent as possible. If the issuer makes a mistake, it must be corrected in time and imposed a huge fine, instead of introducing a third party that is not helpful for supervision, making the operation of the stablecoin issuer difficult, and it is even more difficult to protect investors.

"Not all regulations for the industry can protect users, some will only increase troubles, and some are beneficial to investor protection. How to protect users while making regulations simpler and easier to comply with is my opinion. core idea of ​​regulation.”