Leading exchange FTX has published a document covering 10 key principles to help regulate crypto trading platforms, prior to CEO Sam Bankman-Fried’s testimony before U.S. regulators.
Introduction
On December 3rd, FTX, one of the largest and most well-regulated global cryptocurrency exchanges, released a document titled, FTX’s Key Principles for Market Regulation of Crypto-Trading Platforms.
The document details 10 principles FTX believes will create an effective, regulated environment for crypto assets to maintain maximum growth and innovation. If put into law, policymakers will finally be able to claim they’ve found a solution to reign in crypto exchanges and service providers, while still allowing the virtual asset (VA) ecosystem to regulate itself, preventing regulatory pitfalls such as poorly defined terms or being inherently anti-crypto.
The document will be presented as a portion of Sam Bankman-Fried’s written commentary during his December 8th in-person testimony in front of the House Committee on Financial Services.
Bankman-Fried, also known as SBF, is the CEO and co-founder of FTX, and is perceived as a wunderkind due to the rapid ascent of his exchange and investment firm Alameda Research, which has led to his current net worth of over $22 billion dollars (October 2021). SBF will be appearing with many other CEOs of crypto exchanges this Wednesday to testify and answer questions for the committee.
The FTX founder previously commented on regulatory oversight back in September 2021, in particular on the potential regulation of stablecoins. Worryingly for virtual asset service providers (VASPs) and FTX no doubt, the world’s biggest exchanges have all been targeted by regulators over the last year, with the CFTC charging BitMEX that resulted in a $100m settlement, Coinbase receiving a Wells notice from the SEC, and Binance continuing to face intense global scrutiny over its operations that had it call for a global regulatory framework in November.
What do FTX’s guidelines cover ?
FTX.COM is a cryptocurrency exchange that offers innovative products, including industry-leading derivatives, options and volatility products, tokenized stocks, prediction markets, leveraged tokens, and an OTC desk. It’s grown quickly since its founding, becoming one of the most respected cryptocurrency exchanges in the world in under 2 years. Here we will go over just a few of the proposed regulations, and how they may benefit U.S cryptocurrency holders.
Everyone plays by the same rules
Bankman-Fried will have a lot to say on Wednesday (12/8) about future crypto regulation, but most importantly is his first guidance in the suggested policy, proposing a single market regulator with one rulebook to guide spot and derivatives listings.
Currently, in the U.S., the CTFC is the primary regulator of the derivatives marketplace, and the SEC primarily handles cash securities marketplaces, with both sharing oversight for certain portions of the security derivatives marketplaces. Spot markets are even less unilaterally governed, as it depends if the product is a security, with non-securities being regulated mostly by states.
Bankman-Fried will highlight that outside of the US, trading-market operators offer the ability to trade both spot and derivatives on crypto assets under a single rule book, and for the U.S. to allow crypto trading to thrive, U.S. regulation should follow the same rules that apply across all markets.
Standards on stablecoins
With the whole crypto industry fearful of possible stablecoin regulations, the suggested policy stresses those platform operators who permit stablecoins for settled transactions should be required to explain why specific stable-valued coins are used for such purposes. FTX has provided context for its suggested stablecoin regulation, claiming stablecoins are exposed to reserve volatility and redemption risk, and that holders of the asset are entitled to a transparent explanation of the risk of coins such as USDC and USDT.
KYC and anti-money-laundering (AML) surveillance
At the bottom of the suggested policy, FTX believes all platform operators must require all users must perform appropriate KYC (Know Your Customer) and routinely conduct anti-money laundering (AML) surveillance on withdrawals, deposits, and on-chain transfers conducted through the exchange.
While this may seem targeted more at customers than the exchanges themselves, the policy proposal would also ask primary regulators to periodically perform reviews to examine the data as well, as well as for exchanges and platforms to perform self-audits.
Would these regulatory changes help the crypto space?
Regulations will inevitably continue to come to the crypto space, and while those imposed by the likes of FATF, the SEC and FinCEN tend to create fear and uncertainty over the short term, more cohesive regulation should benefit especially U.S. citizens who are currently in limbo as federal regulators argue over the who, what and whys of potential regulation.
It could finally give the green light to those who wish to participate in new, innovative protocols such as crowd loans, staking pools, or IDOs that currently exclude Americans, Canadians, and very often a large number of other Western countries that aren’t allowed to participate due to fear of government intervention.
This is usually because a KYC is required to participate, and if it’s not, there is still a risk to lose your assets if the citizenship of its holder comes into question down the line. Greater regulatory clarity and closer cooperation between regulators and industry leaders, such as seen in Japan and Singapore, will greatly benefit a country’s domestic financial sector and help retain talent and innovation in the vital blockchain industry, rather than chase it away into the arms of more lenient jurisdictions.
Even FATF took an extra few months to take industry feedback into consideration before updating its FATF guidance on virtual assets and VASPs with more modest reforms than initially proposed.
More U.S users will further be able to deploy capital into more projects that they otherwise could not have, promoting more innovative ideas and helping the crypto space as a result in areas such as DeFi. With the crypto industry continuing to innovate and grow at a breakneck pace, regulators would be well-advised to turn the builders of this digital economy into allies rather than pariahs, in order to learn from them and facilitate the necessary changes.
