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Crypto Mom Bemoans ‘Regulatory Escape Room’ Feel for Crypto

Last Updated March 4, 2021 2:37 PM
David Hundeyin
Last Updated March 4, 2021 2:37 PM

U.S. regulators FINRA and the SEC have put out a joint statement  explaining why they have yet to approve applications from crypto exchanges such as Coinbase and Gemini requesting to receive licenses to operate as broker-dealers alongside their custody services.

The statement comes in the wake of fraying patience and grumblings among key players in the crypto industry who have been stuck in an apparent pool of red tape holding up their license approvals.

Even SEC Commissioner Hester Peirce, who is affectionately known as Crypto Mom, found the humor in the SEC’s explanation for stalling, saying:

Crypto Has Disrupted Investor Protection Laws

Due to a long wait for approvals, two schools of thought developed in the crypto industry. The first was that there was an embargo on broker-dealer approvals for crypto-related companies. The second was that FINRA was just being careful. Among the pile of applications waiting for approval is that of Coinbase, which showed interest in 2018, and Gemini, which joined the queue last month. Both companies currently operate custody services but face a lengthy wait before being granted licenses to operate as broker-dealers.

Yesterday’s statement clarifies that the holdup in granting them this license lies in making sure that existing consumer protection laws provide sufficient regulatory cover in the cryptocurrency area. The statement identifies issues such as whether digital assets are to be considered as securities under the 1970 Securities Investor Protection Act, all of which have to be comprehensively addressed before any regulatory approval can go ahead.

Going further, the statement explains that while this kind of approval for other forms of assets is easier, using digital assets as securities is an altogether more complicated affair. Since there is no defined way for the institutional investor to access the keys and no way for brokers to confirm that only them have access to said keys, the broker could very well just move money around without the knowledge of the investor, which is against FINRA principles – and no one would be any the wiser.

Approvals Are Still Quite a Way Off

Then there is the issue of digital assets not meeting the SIPA standards which require that broker-dealers are able to hold the customer’s securities at a “good location.” Conventional custodians with broker-dealer licenses are required among other things to use a third-party service to actually hold the assets in question. Whether this can work with crypto is also something that regulators want to establish before approving any license applications.

With other assets, investors and regulators also have the ability to trace the destination of securities and carry out reversals when necessary. With crypto, however, this is nearly impossible as addresses can be anonymous and untraceable.

Yet another concern holding up approval has to do with books and recordkeeping, in addition to financial reporting rules. The rules require that a broker-dealer keeps current ledgers which show all assets and liabilities and a customer list reflecting transactions carried out on behalf of the customer which must correspond to the broker-dealer’s books.

While some companies have suggested the use of distributed ledger technology, the statement explains that regulatory bodies are still concerned about the possible challenges it will pose for external independent auditors when assessing the company’s books.

All Talk, No Action

Much of the response from the crypto community was more frustration about so much talk and so little action by regulators.