Brian Armstrong (1), co-founder, and CEO of Coinbase stated that the cryptocurrency industry's regulatory bodies should leave DeFi alone.
Coinbase co-founder and CEO Brian Armstrong has urged regulators to ignore decentralized finance (DeFi) initiatives and instead focus on centralized finance (CeFi).
In a blog post (2) dated December 19th, Armstrong argued that
"it is best to develop regulatory clarity first around centralized entities in crypto (stablecoin issuers, exchanges, and custodians) because this is where we've seen the biggest danger of consumer harm,."
After the bankruptcy filing of FTX (3), a cryptocurrency exchange allegedly misappropriated billions of dollars in client cash in November. Crypto regulation has risen to the forefront of politicians' minds.
Sam Bankman-Fried, the company's co-founder and former CEO, was hit with theft and allegations of money laundering by U.S. prosecutors last week.
Coinbase, like FTX, is a centralized marketplace for exchanging digital currency. However, Armstrong's company is a public company listed on U.S. stock exchanges and subject to oversight by the U.S. SEC.
"Let innovation happen in decentralized crypto"
Armstrong claimed that stablecoins should be regulated first, then centralized exchanges and custodians, which would leave room for innovation from DeFi.
Since self-custodial wallets don't hold customer funds, he argued that they should be regulated more like software firms than financial services. In the same way, the development of decentralized protocols ought to be treated as similarly expressive as the release of open-source software under U.S. law.
Armstrong argued that licensing stablecoin producers is a good first step because of the widespread interest in Washington, DC, and the opportunity to build momentum with early success.
Stablecoins can be regulated under ordinary financial services rules by, for example, utilizing a state trust charter or an OCC national trust charter, so there's no need to do anything creative or crypto-specific.
According to Armstrong, a stablecoin law might be cleared in the first half of next year using the legislative framework from traditional financial institutions.
This would free up regulators to focus on the more difficult tasks of developing a regulatory framework for centrally controlled crypto players and determining which digital assets qualify as securities or commodities.
Armstrong claims that Coinbase only offers listings for assets it has determined are commodities based on its in-depth legal study of assets.
He explained that this was created because U.S. securities and commodities regulators had not been clear enough. However, he hopes that this problem is clarified and that "a vibrant market" for registering and issuing crypto securities develops in the United States.
Armstrong argued that financial authorities' involvement in the cryptocurrency market should be confined to its major actors because of the need for greater openness and disclosure in the sector.
As the author puts it, "In an on-chain world, this transparency is built in by default, and we have an opportunity to create even stronger protections.."
Some More Advice to Regulators
Armstrong argues, however, that regulations have their limits. He stressed the significance of enforcement both at home and abroad.
That "a number of questionable actors" don't adhere to standards like those outlined above is "an open secret in the crypto industry," Armstrong added.
"And unless regulatory clarity arises and a level playing is enforced, we will continue to see challenges in the crypto market."
FTX evaded international restrictions thanks to its major exchange's location in the Bahamas, which is considered an offshore jurisdiction.