Coinbase CEO: Regulating Centralized Actors While Ignoring DeFi
Armstrong said that regulators should pay the most attention to centralized exchanges and custodians because they are the most likely to hurt consumers.
Coinbase CEO Brian Armstrong has pushed for stricter rules on centralized crypto actors. Still, he says that open-source code and smart contracts are “the ultimate form of disclosure” and that decentralized protocols should be allowed to grow.
Armstrong talked about how cryptocurrencies should be regulated in a Coinbase blog post on December 20. In the post, he suggested ways for regulators to help “restore trust” and move the industry forward as the market recovers from the damage caused by FTX and its sudden collapse.
But the CEO of Coinbase stressed that decentralized protocols are not a part of this equation.
Armstrong said there are no middlemen in decentralized arrangements, and open-source code and smart contracts are the ultimate disclosure forms. He also noted that on-chain, transparency is built in by default in a cryptographically provable way, so it’s best to leave it alone.
7/ Lastly, I call out that the decentralized aspects of crypto present an opportunity to create even stronger consumer protections by increasing transparency and removing the middleman via self-custodial wallets, public and open smart contracts, and on-chain accounting.
The CEO of Coinbase said that centralized actors need additional transparency and disclosure checks because they involve people. Armstrong hopes that FTX’s fall will push us to pass new laws.
Exchanges, custodians and stablecoin issuers are “where we’ve seen the most risk of consumer harm, and pretty much everyone can agree [that regulation] should be done,” he added.
Armstrong suggested that the U.S. start with stablecoin regulation based on standard financial services laws. He said that regulators enforce the implementation of a state trust charter or an OCC national trust charter.
At the moment, U.S. Senator Bill Hagerty has introduced the Stablecoin Transparency Act, which is expected to pass in the Senate in the coming months.
Armstrong also said that stablecoin issuers should only have to be banks if they want fractional reserves or to invest in riskier assets. However, issuers should still have to meet “basic cybersecurity standards” and set up a blocklisting procedure to meet sanction requirements.
Armstrong says that once stablecoins are regulated, regulators should focus on cryptocurrency exchanges and custodians.
The CEO of Coinbase said that regulators should set up a federal licensing and registration system to make it legal for exchanges or custodians to serve people in that market. They should also strengthen rules to protect consumers and make it illegal to manipulate the market.
Armstrong said that the courts are still trying to determine what commodities and securities are. He suggested that the U.S. Congress require the U.S. Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) to classify each of the top 100 cryptocurrencies by market cap as either securities or commodities.
“If asset issuers disagree with the analysis, the courts can settle the edge cases, but this would serve as an important labelled data set for the rest of the industry to follow, as, ultimately, millions of crypto assets will be created,” he said.
Given that cryptocurrency-based businesses can reach customers worldwide, Armstrong also urged regulators in all countries to look beyond what’s happening in their markets and think about how a foreign company might affect their citizens.
“If you are a country who is going to publish laws that all cryptocurrency companies need to follow, then you need to enforce them not just domestically but also with companies abroad who are serving your citizens,” said Armstrong, adding:
“Don’t take that company’s word for it. Go check if they are targeting your citizens while claiming not to.”
“If you don’t have the authority to prevent that activity […] you will unintentionally be incentivizing companies to serve your country from offshore,” Armstrong explained, adding that “tens of billions of dollars of wealth have been lost” because countries have turned a blind eye on what practices their subjects have fallen victim to abroad.
Armstrong also said that for the industry to be regulated appropriately, companies, policymakers, regulators, and customers from financial markets worldwide, especially those in the G20, will need to work together.
Armstrong said that he is still optimistic that a lot of legislative progress can be made in 2023, even though many complicated and different problems need to be solved.
