Some crypto products, such as stablecoins and initial coin offerings, attempt to mimic or provide variants on financial sector products and activities, and may justify designation as a financial product or activity. Identifying what may warrant such a designation and what does not is a more appropriate starting point for regulation.
Perhaps more importantly, the notion that a special regulatory approach is relevant for any such crypto asset is misguided. The blockchain and cryptography arrangements that are the distinguishing characteristic should be thought of as simply a different form of “back office” for recording ownership and transactions.
The key considerations
Just as a regulator might apply different operational risk regulation to providers of a product, where one has a paper-based ledger and processes and the other is computer-based, so it should be with crypto.
It is the economic functions performed by a product or service which should be the key consideration for how to regulate, not the back office arrangements.
A further problem arises from an “institution focused” approach to regulation (as with proposed CASSPRs regulation) compared to a “functional approach”. The “institution” approach is relatively easy, but runs two main risks.
One is that the same functions provided by different institutions will be regulated differently, creating an uneven playing field.
The second is that other institutions can emerge outside the regulated sector to provide the same functions, such as the growth of “shadow banks” engaged in similar (but slightly different) credit creation activities to regulated banks. (In this case, providers of such shadow – or “ghost” – activities might be referred to as “CASSPRs”, even though they might not be friendly ghosts!)
Although touted by its promoters as a future form of private money to challenge fiat currency, crypto is not a financial asset.
There is no question that the crypto ecospace requires some form of regulation to protect poorly informed and gullible individuals (and institutions) from unwarranted engagement and unsuspecting risk taking.
The potential for profiting (or losing) from gambling in cryptocurrency positions does not reflect any skills or superior knowledge – unless one is skilled in predicting the “madness of crowds”.
Because entry into the ecospace as a creator/supplier of different cryptocurrencies and tokens is relatively easy and low cost, the sector has burgeoned.
Success requires attracting interest in the new product; hence the proliferation of marketing and advertising that extols the virtues of the product and potential gains.
Clamping down on misleading advertising, marketing and advice is definitely needed. Perhaps this is easier if the activities are subject to financial product and service regulation.
But designating pure gambling activities as financial products would give them a credence that they do not deserve, possibly encourage unwarranted growth, and make the regulatory task in dealing with poorly informed consumers that much harder.
