The book is a compendium of chapters addressing technology and innovation in regulatory and supervisory oversight in financial services. Different authors explore the emerging best practices in regulatory oversight and financial services that leverage technological solutions.
SEC Special Counsel Laura Harper Powell collaborated with the former President of ICE Trade Vault and current President and Founder of CoinReg Tech Bruce Tupper on a chapter in the book focusing on CFTC regtech implications for virtual currency trading.
Tupper addressed the question of “How do you comply with virtual currency regulation?” He talked about what is a deliverable commodity, and what is an actual delivery? Actual delivery has been a key factor in traditional commodity trading regulation over the years.
The CFTC put out detailed guidance on actual delivery of a cryptocurrency, Tupper said. The big test the CFTC looks at is whether a position is leveraged or not. Once leverage is applied, the CEA rules most likely apply, Tupper said.
Tupper also addressed the issue of people who loan out cryptocurrency in order to borrow money. This is likely to be considered applying leverage, Tupper said, and they may have crossed over into the realm of the swaps and futures regulatory regime.
He also talked about off-blockchain bookkeeping and how bitcoin trading on some platforms is like equities that were traded in street names. Not all bitcoin trades on the blockchain, Tupper said. The fact so many trades are being made on central limit order books at unregistered entities is something that he expects to get a hard look from the SEC this year.
Powell and Tupper are proposing the creation of a central repository for cryptocurrency trade reporting. The repository would be a registered entity that would collect data on all non-exchange trades.
Tupper said that while a distributed ledger could be used for this, in other instances he has seen, the ledgers were not designed with the regulatory reporting requirements necessary. The repository would provide the transparency to detect manipulative practices and the repository would aid that, Powell said.
Tupper says that through enforcement actions this year there will be greater clarity about where the lines of what is a security and what is a commodity lie and that many tokens are novelties on digital ledger technologies that are just “look alike products” of existing products.
Tupper also said he also thinks the crypto world does not need a new regulator. He said that when electronic exchanges were starting up, they never thought they needed a new regulator, despite the rules of the trading floors not applying to the electronic markets.
Distributed ledger technology does present some new challenges, Tupper conceded, but he said guidance to the rules is the best approach.
Tupper talked about the challenges of regulating a 24/7 environment.
Powell concluded, saying the chapter is very timely and sensible, a good public-private collaboration between her and Tupper.