A pushback against stocks-like products in Germany and tougher talk in Washington suggest that key financial regulators are bristling at cryptocurrency operators’ incursions into tightly-controlled public markets.
Crypto industry executives and securities law experts around the world are closely scrutinising the tussle between German regulator BaFin and crypto exchange Binance, which deepened this week.
Binance, one of the world’s biggest crypto firms, has asked BaFin to retract an allegation that it may be breaking securities laws with its new offering of ‘tokens’ meant to mimic a clutch of US stocks — a request the regulator has rebuffed.
In the same week, new chair of the US Securities and Exchange Commission Gary Gensler, known on Wall Street as a tough operator, told a hearing on Capitol Hill that the “close to $2tn [cryptoasset] market is one that could benefit from greater investor protection”.
“Right now, the exchanges, trading in these crypto assets, do not have a regulatory framework either at the SEC or our sister agency, the Commodity Futures Trading Commission,” he said. “There’s not a market regulator around these crypto exchanges, and thus there’s not protection against fraud or manipulation.”
At present, neither the SEC nor the CFTC has powers to supervise cryptocurrency market activity because, in legal terms, bitcoin and its peers are neither a commodity nor a currency. After the blistering rally in bitcoin and rivals like ethereum so far this year, the fast-growing and increasingly sophisticated industry now has the highly-regulated securities markets in its sights, a development that is concerning major watchdogs.
But regulatory bodies born out of the need to protect investors a century ago are often poorly equipped to deal with the vast array of new-generation offerings. Financial regulators are working with “19th century law concepts laid on 20th century technology. It’s out of date,” said Timothy Spangler, a partner at Dechert, a law firm in California.
Binance’s decision in April to begin offering tokens in stocks like Tesla without the usual documentation for securities offerings has pushed BaFin into action. Binance appears unfazed. It is still offering the tokens on its website more than a week after the BaFin intervention.
In the UK, the Financial Conduct Authority has said only that it is in contact with Binance over its new products, which are not available in the US, mainland China or Turkey.
Binance’s sprawling crypto product portfolio
Binance, the crypto exchange run by Changpeng Zhao, offers clients in many jurisdictions a vast array of generally sophisticated financial products that go well beyond spot trading in dozens of digital tokens.
Crypto savings accounts
Gensler’s plea for more powers from legislators reflects regulators’ frustrations that a rule book written for securities markets is not fit for purpose to cover investors wanting to trade crypto assets. However, policymakers face a tricky task to craft laws for an industry that operates across borders and with some players seeking to avoid regulation.
Many regulators have tried to interpret existing rules where they can, but it has not prevented innovation from mushrooming, in much the same way that derivatives trading and hedge funds emerged in the 1990s.
“It’s an interesting convergence of traditional financial regulation constricting the adoption of this new asset class,” said Matteo Dante Perruccio, president for international business at Wave Financial, a US regulated digital asset investment manager. “If we want to ensure longevity of the digital asset sector we need to welcome rigour in regulation,” he said.
The timeframe available for policymakers to act may be short. Institutional investors are growing interested in the gains on offer from cryptocurrencies, and banks are becoming…