Decoding Cryptocurrency Regulation | The Regulatory Review

Academics present a framework for regulating digital assets to prevent fraudulent and deceptive practices.

In the blink of an eye, $40 billion in life savings, home down payments, and investment portfolios. missing in the cryptocurrency crash of 2022. For policymakers, the failure of the cryptocurrency market underlined serious issues of fraud, deception and unfair business practices in the digital assets space.

In an article, sara hammerjurist and executive director of The Wharton School of the University of Pennsylvaniaand Brett Hemenway Falkdirector of the Crypto and Society Laboratory in it University of Pennsylvania, argue that regulators should adopt new cryptocurrency standards to protect investors from predatory digital currency practices. Hammer and Hemenway Falk recommend a three-pronged approach to enhance consumer protection while maintaining industry innovation.

Cryptocurrencies are digital assets designed decentralize traditional financial institutions. Digital asset transactions wear Peer-to-peer monitoring through blockchain technology, a virtual ledger that records transactions of physical and digital items. For example, the parties can record gold, real estate, copyright and cryptocurrency transactions via blockchain.

When making a transaction, users deliver requests to update the blockchain through a “smart contract,” a computer code that defines the scope of the digital asset and acts as an intermediary between users. When a user brands A request to update the blockchain, the smart contract records and carries out the instruction on the blockchain.

Investors who participate in these transactions often trade in “stablecoin,” a digital asset that maintains a stable value relative to government-regulated currency, physical products such as precious metals, other cryptocurrencies, and computerized algorithms.

Hammer and Hemenway Falk recommend that regulators create “crypto standards” that govern the development of cryptocurrencies and provide consumer protection rules to counter the abuse of digital assets. Currently, independent developers, who create their own rules, code Cryptocurrency trading features such as smart contracts and stablecoins. As a result, Hammer and Hemenway Falk warn that any developer can create a smart contract that refuses service to some users or alters the transactions of others at random.

To address this question, Hammer and Hemenway Falk suggest that the United States adopt existing financial and Internet industry policies. They argue That cryptocurrency combines aspects of finance and Internet technology, so the regulatory solutions used in those markets are well suited to digital asset trading.

To ensure compliance with securities regulation, the U.S. Congress authorized he Financial Industry Regulatory Authoritya non-governmental organization made up of various groups within The New York Stock Exchange and The Association of Securities Brokers, to provide exams to more than 624,000 brokers and dealers. TO sell securities, brokers must pass these exams. Hammer and Hemenway Falk argue that a non-governmental agency, similar to the Financial Industry Regulatory Authority, could also require a license for the development of digital assets.

Hammer and Hemenway Falk too point to the Hypertext Transfer Protocol, which allows server communication between machines running different software and hardware, as an example of industry self-regulation. Despite offering different operating systems, industry leaders collaborated to standardize many images displayed on computers.

Hammer and Hemenway Falk note that blockchain networks like Ethereum have begun to implement similar self-governance standards for smart contract functionality. Members of the crypto community propose rules governing digital assets. These rules are then selected and finalized by other community members. Developers who choose continue The adopted regulations are allowed some discretion as to how to implement certain functionalities.

Hammer and Hemenway Falk argue that cryptographic standards offer many public policy benefits. According to the co-authors, the adoption of a standardized computer code lower entry costs for new developers and reduce costs for current operators. Without that code, new developers would have to develop custom implementations, which costs additional time and money.

Hammer and Hemenway Falk contend that national agencies would better support cryptographic standards by implementing several key priorities.

them first argue that regulators should ensure that cryptocurrency issuers are honest, fair and professional in the way they manage potential conflicts of interest, and that developers use a standard system through which customer complaints are raised.

Hammer and Hemenway Falk too suggest that regulators should require public disclosure of various policies, processes and procedures of issuers. They too support publish procedures governing transaction manipulation and disclosure of the treatment of client assets in the event of bankruptcy or financial instability. They argue that treatment plans should reflect existing consumer protection standards.

To further increase transparency for the public, agencies should require cryptocurrency issuers to describe to users the technology powering their digital assets and update them on any changes to the source code, Hammer and Hemenway Falk. argue.

Hammer and Hemenway Falk recognizeHowever, American policymakers would face significant challenges in establishing cryptographic standards.

For example, cryptocurrencies lack a central regulatory body, characteristic of Hammer and Hemenway Falk. argue prevents policymakers from enacting sweeping regulations. Although the transactions are public, the people who carry them out remain anonymous, ban Effective policing of bad behavior on crypto platforms.

Also, Hammer and Hemenway Falk note that policymakers are unsure whether commodity or securities law applies to cryptocurrencies. Furthermore, Congress has yet to decide if either of the two Stock Exchange Commission or the Commodity Futures Trading Commission has jurisdiction over legal issues related to cryptocurrencies. Hammer and Hemenway Falk keep that US regulators must answer key jurisdictional questions before regulatory progress can be made.

Beyond American Policymaking, Hammer and Hemenway Falk conclude that international standards governing digital assets are essential to establishing international coherence and collaboration. Although Hammer and Hemenway Falk admit that international regulation is difficult to enforce, insist that the collective standards-setting process could inspire nations to adopt regulations that combat fraudulent and deceptive practices in the digital assets space.

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