Regulating Crypto: How we move forward as an industry from here by Brian Armstrong, Coinbase CEO.
Tl;dr: One of the most common questions I get asked by folks in the regulatory governance and policy communities is what exactly regulatory clarity looks like. In this blog, I outline a realistic blueprint to ensure we have regulatory clarity for centralized actors, and a level playing field across exchanges, while preserving the decentralized crypto innovations that will bring enormous benefits to the world.
This reads like a summary of regulations that have been a long time coming.
It's best to create regulatory clarity first around centralized actors in crypto (stablecoin issuers, exchanges, and custodians) because this is where we've seen the most risk of consumer harm, and pretty much everyone can agree it should be done. Regulation in traditional finance is organized around ensuring intermediaries operate fairly and properly, and that same principle makes sense for crypto when there are intermediaries. Decentralized arrangements (DAOs, DeFi, etc), on the other hand, do not involve intermediaries, and have their own, in some ways superior, set of protections, which I'll come back to later in this post.
You can read the whole article yourself, so I just wish to touch on two things.
Just because DeFi is derived from "Decentralised Finance" does not mean that the protocols are truly decentralised. Every ponzi yield farm is created and managed by an entity that is very far from being decentralised. Having said that, there are tools to sniff out the scams, so buyer beware has to also be part of reality. One cannot regulate away greed and stupidity just to replace them with poverty.
But I'd also like to note one conceptual con. One of the proposed rules for issuers of stablecoins is that, "You can also be a bank if you want to do fractional reserve or invest in riskier assets. If not, you can only invest in high quality liquid assets, like US treasury bonds."
US Treasury Bonds are so often classed as "risk-free" that it is easy to forget what that means. There are different types of risk. Yes, the risk of default is extremely low, but for a collateralised stablecoin, the price risk remains very much there.
Let's take the 10-year T-bond (US10Y) and look at the price chart - not the yield chart. You will see that in 2022, the price has fluctuated between $108 and $88 - that's a spread of some $20, or about 20% around the mid-price. So, if you have collateralised your stablecoin with bonds bought at $100 and see the price drop to $90 then you suddenly find your coin under-collateralised. There are ways to manage this, but this is where some naive peg won't work unless it is wholly in USD cash. $1 will always be worth $1, but as soon as you want that Dollar to earn something, then risk is the evil twin of profit.
Hence stablecoin issuers - centralised, collateralised issuers - need to know what they are doing. Unlike Terraform Labs. Note that algorithmic stablecoins are being squeezed out of the picture.
They really, truly, deeply hate algorithmic stables.
Hence THAT is the way to innovate - ones that actually work.