Reimagining a Centralised Cryptocurrency Regulation in the US: Looking through the Lens of Crypto-Derivatives
| Pages | 97-136 |
| Date | 01 April 2021 |
| Published date | 01 April 2021 |
| Author | Sangita Gazi |
| Subject Matter | Derecho Civil |
Reimagining a Centralised Cryptocurrency Regulation in the US 97
Reimagining a Centralised
Cryptocurrency Regulation in the US:
Looking through the Lens of
Crypto-Derivatives
S G*1
A
Cryptocurrency as a reference asset in any derivative product (‘crypto-
derivatives’) is opaque, complex, and unreliable. The pricing and settlement of
crypto-derivatives have no standardized form and limit retail investors’ ability
to comprehend the terms of the product. Moreover, retail investors investing in
crypto-derivatives are vulnerable to monetary losses due to cryptocurrency’s highly
speculative nature, price volatility, and spot market manipulation. Nonetheless,
the regulatory approach to crypto-derivatives appears to vary from jurisdiction
to jurisdiction. For instance, while regulators in the UK and the EU have recently
banned crypto-derivatives to protect retail investors from the risk and volatility of
the crypto-derivatives market, the US has taken a more hands-o approach. This
paper presents a comparative analysis of the US regulatory responses to crypto-
derivatives with specific references to the UK’s and the EU’s approaches and
rationale towards crypto-derivatives regulations in their respective regions. Unlike
the EU and UK, where the regulators introduced restrictive measures regarding
cryptocurrency, the US regulatory eorts are primarily limited to interpreting
cryptocurrency in light of the existing legal and regulatory framework. Further,
* Ph.D. Candidate, Faculty of Law, University of Hong Kong. Postgraduate Research Fellow,
Asian Institute of Financial Law, University of Hong Kong. LL.M., Duke University School of
Law; LL.M., University of Warwick. Former Assistant Legal Advisor at the US Department of
Justice-OPDAT, US Embassy Dhaka, Bangladesh. I am grateful to Lee Reiners and Christopher
Smith for their comments on earlier drafts. sangita.gazi@gmail.com
Cambridge Law Review (2021) Vol VI, Issue i, 97–136
Reimagining a Centralised Cryptocurrency Regulation in the US98
the regulatory approach in streamlining cryptocurrency and associated innovative
products in the current framework inadequately encapsulates cryptocurrency’s
susceptibility to spot market manipulation and its potential to jeopardize investors’
interests. Hence, it is paramount that the US enact comprehensive cryptocurrency
regulation that recognizes the novelty of cryptocurrencies’ market risks and
introduces a robust regulatory infrastructure to limit market manipulation in the
cryptocurrency spot market vis-à-vis the crypto-derivatives market. The paper
envisions a cryptocurrency regulation that includes: (i) a centralised cryptocurrency
trading platform; (ii) a mandatory registration requirement for all cryptocurrency
exchanges and; (iii) a federal cryptocurrency agency. The paper suggests that with
a degree of centralisation, a federal cryptocurrency agency is likely to establish
the desired visibility into the cryptocurrency spot and an eective oversight
mechanism that would eventually help curb market manipulation and restore
investor confidence.
Keywords: crypto-derivatives, cryptocurrency, price volatility, investor protection, regulation.
I. I
“What I’m concerned about at the moment is if it can be
reasonably demonstrated that the underlying trading is generally
not manipulated, it’s happening on reliable venues with good
rules”.1
On 6 October 2020, the UK Financial Conduct Authority (‘FCA’) prohibited the
sale of cryptocurrency-related derivatives (‘crypto-derivatives’) to retail investors
on the ground that cryptocurrency as a reference asset is an unreliable basis
for valuation of these derivatives products.2 The FCA concluded that crypto-
derivatives, especially in the form of contract for dierence (‘CFD’) and exchange-
traded notes (‘ETNs’), are ill-suited for retail consumers because of the har m they
pose.3 In Europe, the European Securities and Markets Authority (‘ESMA’) has
also been looking to curb crypto-derivatives trading as these products are risky,
1 Jay Clayton (SEC Chairman) quoted in Helen Partz,‘SEC Chairman Highlights Investor Protec-
tion in Regard to Bitcoin ETF’ (Cointelegraph, 14 March 2019)
news/sec-chairman-highlights-investor-protection-in-regard-to-bitcoin-etf> accessed 23 February
2021.
2 Financial Conduct Authority, ‘Prohibiting the Sale to Retail Clients of Investment Products that
Reference Cryptoassets’ (2020) PS20/10 .fca.org.uk/publication/policy/ps20-10.pdf>
accessed 24 February 2021.
3 ibid.
Reimagining a Centralised Cryptocurrency Regulation in the US 99
speculative, and expose consumers to potentially huge losses.4 Both regulators
seem to have three main reasons for banning the sale of crypto-derivatives to retail
investors: first, cryptocurrencies’ extreme volatility as a reference asset; second, the
prevalence of rampant market abuse, price manipulation, and security breaches in
the cryptocurrency spot market and; investors’ significant lack of understanding of
these complex derivatives products.5
While regulators have initiated a broader crackdown in the UK and the
EU to protect retail investors from the crypto-derivatives market’s abuse and
manipulation, the US regulators chose to go the opposite direction. In 2014, the
Commodity Futures Trading Commission (‘CFTC’) approved TeraExchange,
a bitcoin-derivatives exchange, to self-certify bitcoin swaps allowing investors to
trade dollar-dominated bitcoin currency swaps.6 In the following year, the CFTC
classified bitcoin as a commodity in its order against Coinflip Incorporated, a bitcoin
trading platform, and thus ensured its entrance into the traditional derivatives
market just like other commodities.7 Since then, several crypto-derivatives have
proliferated in the market. The Chicago Mercantile Exchange (‘CME’) and the
Chicago Board Options Exchange (‘CBOE’) first launched cash-settled bitcoin
futures in December 2017.8 The Intercontinental Exchange (‘ICE’) introduced
physically-settled bitcoin futures and bitcoin options in September and October
2019, respectively.9 Following the CFTC’s announcement that the ‘Ethereum’
4 European Securities and Markets Authority, ‘ESMA Agrees to Prohibit Binary Options and
Restrict CFDs to Protect Retail Investors’ (27 March 2018) opa.eu/press-news/es-
ma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors> accessed
24 February 2021.
5 Previously, South Korea banned bitcoin futures trading following its initial ban on Initial Coin
Oerings (ICOs) in 2017; see David Dinkins, ‘In Unexpected Move, South Korean Regulator
Suddenly Bans Bitcoin Futures Trading’ (Cointelegraph, December 2017)
com/news/in-unexpected-move-south-korean-regulator-suddenly-bans-bitcoin-futures-trading>
accessed 11 May 2020.
6 Michale Casey, ‘TeraExchange Unveils First U.S. Regulated Bitcoin Swaps Exchange’ (The Wall
Street Journal, 12 September 2014) change-launches-bitcoin-deriv-
atives-exchange-1410543989> accessed 11 November 2020.
7 CFTC v Coinflip Inc [2015] CFTC Docket No. 15-29. In this case, the CFTC held that bitcoin
and other virtual currencies fall within Section1(A)(9) of the Commodity Exchange Act, as the
definition of “commodity” shall include “all services, rights, and interests in which contracts for
future delivery are presently or in the future dealt in”. Therefore, any company oering bitcoin
derivatives must comply with the CFTC laws, rules, and regulations.
8 Evelyn Cheng, ‘Bitcoin Debuts on the World’s Largest Futures Exchanges, and Prices Fall Slightly’
(CNBC, 18 December 2019) gest-futures-exchange-set-
to-launch-bitcoin-futures-sunday-night.html> accessed 11 November 2020.
9 Ryan Brown, ‘NYSE Owner ICE Launches Deliverable Bitcoin Futures Contracts’ (CNBC, 23
September 2019) -ice-launches-deliverable-bitcoin-fu-
tures-contracts.html> accessed 11 November 2020.
Reimagining a Centralised Cryptocurrency Regulation in the US100
cryptocurrency is a commodity,10 Eris Exchange (‘ErisX’) launched Ethereum-based
physically settled futures contracts on 11 May 2020.11
The US crypto-derivatives and perpetual swap market cap stands at $319.11
billion.12 As the market grows, the crypto-derivatives market’s concerns are also
emerging, as unregulated online exchanges, and brokerage firms oering cryptocurrency
trading products are susceptible to spot market,13 manipulation,14 and cyber-attacks.15
In support of the crypto-derivatives market, many argued that crypto-derivatives
give institutional investors an ecient and confident way to hedge risk. However, this
argument could be far from reality as two major global regulators — the FCA and the
ESMA — view crypto-derivatives as harmful to retail investors due to its opaque and
uncertain nature. From a regulatory standpoint, the CFTC’s approach in regulating
10 William Foxley, ‘CFTC Chairman Confirms Ether Cryptocurrency is a Commodity’ (Coindesk, 10
October 2019)
accessed 11 November 2020.
11 Nikhilesh De, ‘ErisX Announces Launch of First US Ether Futures Contracts’ (Coindesk, 11 May
2020), accessed 11
November 2020.
12 CoinMarket Cap, ‘Cryptocurrency Derivatives and Perpetual Swap Markets’
com/derivatives/> accessed 20 February 2021. It is important to mention that on 17 February 2021,
the market cap was $134.21 billion, which means the market grew more than twice in 72 hours.
13 Spot market refers to the trading and prices of cryptocurrency in any exchange. Unlike traditional
spot markets for commodities, cryptocurrencies have its own niche spot markets. There are over 300
cryptocurrency exchanges, and some Over the Counter markets, that constitute the cryptocurrency spot
markets.
14 A few notable examples of regulators’ enforcement action against market manipulation in the crypto-
currency spot market are: (1) On 20 October 2020, the CFTC announced that the US District Court
for the Southern District of New York ordered a person to pay $7.4 million for committing a multi-mil-
lion-dollar bitcoin fraud (CFTC Release No. 8272-20); (2) On 18 June 18 2019, the CFTC charged
Control-Finance Limited, a purported bitcoin trading and investment company, and its principal, Ben-
jamin Reynolds, for fraudulently obtaining and misappropriating $147 million worth of bitcoins from
more than 1,000 customers (CFTC Release No. 7938-19); (3) On 23 July 2018, the Federal Court order
a commodity pool operator and its principal to pay more than $1.9 million in connection with a bitcoin
and binary options fraud scheme (CFTC Release No. 7760-18); and (4) In another case, a New York
Federal Court ordered a trading firm and its CEO to pay more than $2.5 million for operating a bitcoin
ponzi scheme (CFTC Release No. 7831-18). See also, Neil Gandal, JT Hamrick, Tyler Moore, and Tali
Oberman, ‘Price Manipulation in the Bitcoin Ecosystem’ [2018] 95 Journal of Monetar y Economics
86.
15 In a study about market manipulation behaviour in the cryptocurrency exchanges, the evidence showed
that the biggest cryptocurrency exchange, Mt. Gox, was engaged in bitcoin price manipulation before
it was hacked in 2013, that led the exchange to file for bankruptcy in 2014. A subsequent data leak re-
vealed that a significant number of trades took place at rates that were far higher or far lower than the
reference price. The findings also demonstrated that these abnormal transactions took place between
two accounts (presumably belonging to Mt. Gox itself), which artificially inflated the daily bitcoin trade
volume to manipulate the price. See Weili Chen and others, ‘Market Manipulation of Bitcoin: Evidence
from Mining the Mt. Gox Transaction Network’ .org/abs/1902.01941> accessed 23
February 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US 101
crypto-derivatives through self-certification (like traditional derivatives products)
inadequately encapsulates the cryptocurrency spot market’s inherent risks of
opacity, price volatility, and exposure to market manipulation.16 Such inadequacy
is embedded in the CFTC’s two contrasting positions. In a traditional commodity
derivatives market, the CFTC has the power and capacity to both oversee the
commodity spot markets and, therefore, to take enforcement actions against any
abusive and manipulative behaviour that is detrimental to the investors’ interests.17
However, concerning crypto-derivatives, the CFTC’s oversight mechanism over the
cryptocurrency spot market is debatable as the CFTC has, on repeated occasions,
appeared to have conflicting opinions regarding such power. Furthermore, market
participants in the spot market operate with the assumption that the spot market is
beyond the CFTC’s regulatory perimeter. Hence, in the absence of any regulatory
clarity and with the CFTC’s questionable oversight mechanism, the spot market
could be a means to incentivise a bad actor to jeopardise crypto-derivatives
markets’ integrity and thereby undermine the retail investors’ confidence.
In addition, investor protection is a grey area in the US cryptocurrency
regulatory regime. As an example, although an Initial Coin Oering (‘ICO’) may be
a security,18 it is uncertain whether all investments are protected under the Security
Investment Protection Act (‘SIPA’) given that the SEC has also determined that
not all digital tokens are securities as depending on the degree of decentralization
of platform the oering takes place, a coin or token may fall outside the definition
of a security.19 Similarly, investor protection in the crypto-derivatives market
also remains vague as the eectiveness of the CFTC’s regulatory and oversight
mechanisms in preventing manipulation in the cryptocurrency spot market is
questionable. Most investors, especially retail investors, lack an understanding of
the complexity of cryptocurrency pricing and thus tend to treat cryptocurrency
16 For a detailed discussion regarding the impact of self-certification on bitcoin futures, see Lee Rein-
ers, ‘Bitcoin Futures: Self-certification to System Risk’ [2019] 23 North Carolina Bank Institute
61.
17 Enacted after the financial crisis of 2007, the Dodd-Frank Act authorises the CFTC to bring the
OTC under a broader regulatory purview, and thereby establish a direct visibility into the com-
modity spot market.
18 Securities and Exchange Commission, ‘Report of Investigation Pursuant to Section 21(a) of the
Securities Exchange Act of 1934: The DAO’ (2017) Release No. 81207 < www.sec.gov/litigation/
investreport/34-81207.pdf> accessed 11 March 2021.
19 ibid. The SEC is of the view that “[w]hether or not a particular transaction involves the oer and
sale of a security—regardless of the terminology used—will depend on the facts and circum-
stance, including the economic realities of the transaction” (n 18) 17–18. See also, William Hin-
man, ‘Digital Asset Transactions: when Howey Met Gary (Plastic)’ (US Securities and Exchange
Commission, 14 June 2018) .sec.gov/news/speech/speech-hinman-061418> accessed 23
November 2020.
Reimagining a Centralised Cryptocurrency Regulation in the US102
trading like gambling.20 Furthermore, the complex pricing combined with
extreme price volatility gives main-street investors an incentive to speculate the
cryptocurrency price.21 Finally, the cryptocurrency market size incentivises the
institutional money to flow into the new cryptocurrency-based economy, and
therefore, calls for regulators’ vigilance.22
Against this background, this paper puts forth a comparative analysis of the
US regulatory responses to crypto-derivatives with specific references to the UK’s
and the EU’s approaches and motives towards crypto-derivatives regulations in
their respective regions. It discusses that the UK and the EU regulators primarily
focus on protecting retail investors from monetary losses arising from investment
in crypto-derivatives products. In contrast, the US regulatory eorts are limited to
interpreting cryptocurrency in light of the existing legal and regulatory framework.
In the absence of CFTC’s oversight over the cryptocurrency spot market,
regulating cryptocurrency-related products under the traditional laws undermines
cryptocurrency’s novel risks of price volatility and susceptibility to spot market
manipulation. By comparing the US crypto-derivatives regulation with that of the
UK’s and the EU’s, this paper does not necessarily suggest that the US should
follow either of these jurisdictions and issue an outright ban — per manent or
temporary — on crypto-derivatives. What the paper emphasises on is that the
US incorporates a robust crypto-derivatives regulation that captures this novel
product’s complex risks and uncertainties, and tailors the regulation to protect the
‘Main Street’ investors’ interest. It nevertheless explores the possibility of imposing
an outright ban on crypto-derivatives like the UK and concludes that such a ban
on the crypto-derivatives market is likely to jeopardise financial innovation growth
20 In a market survey conducted in the UK, the majority’s perception regarding cryptocurrency
is, it is akin to betting. A study showed that cryptocurrency trading is linked with problematic
gambling. See Yessi Bello Perez, ‘Problem Gamblers More Likely to Obsessively Trade Cryp-
tocurrency, Research Finds’ (The Next Web.com, 11 March 2019)
cryptocurrency/2019/03/11/problem-gamblers-more-likely-to-obsessively-trade-cryptocurren-
cy-research-finds/> accessed 11 November 2020.
21 The cryptocurrency hedge-funds are betting on bitcoin’s price. See Vincent Mislos, ‘Bitcoin Price
will Hit $20,000 This Year because of “Liquidity Pump”, Says Novogratz’ (International Business
Times, 30 July 2020) .ibtimes.com/bitcoin-price-will-hit-20000-year-because-liquidity-
pump-says-novogratz-3019421> accessed 23 November 2020.
22 In the age of digital communications system and cryptocurrency-based financial system, the states
have to reimagine their roles in protecting financial stability and hence, redesign the financial
regulatory structure. For an academic discussion on regulation in the context of an emerging
lex cryptographica financiera, see Jason Grant Allen and Rosa María Lastra, ‘Border Problems:
Mapping the Third Border’ [2020] 83 Modern Law Review 505.
Reimagining a Centralised Cryptocurrency Regulation in the US 103
in the US.23 Furthermore, some cryptocurrency trading platforms are already
complying with the existing laws and regulations, and an outright ban will set them
back. Therefore, to protect market integrity and safeguard retail investors’ interest,
it is paramount that the cryptocurrency spot market be regulated.
The proposition this paper puts forward is that without an eective and
robust crypto-regulation with a certain degree of centralization, the market
manipulation in the spot markets will continue. This eventually hurts the crypto-
derivatives market, and hence, requires a parallel discussion. Furthermore, amidst
the COVID-19 pandemic, digital finance, including cryptocurrency, has been
witnessing accelerated growth.24 Big corporations, such as Tesla, BNY Mellon and
Mastercard are reported to have invested in cryptocurrency.25 Facebook is testing
the launch of Diem (formerly known as ‘Libra’) — a global stablecoin26 that is
designed to be pegged to US dollar.27 Such expansion of digital finance and the
use of cryptocurrencies among big corporations compelled regulators worldwide
23 In November 2019, the CFTC Chairman, Health P. Tarbert, expressed his intention to make
the US a leading nation in the field of blockchain and digital assets. So, it is highly unlikely that
the US regulators will take any decision of putting an outright ban on the crypto-derivatives. See
Miranda Wood, ‘CFTC Chairman Wants to Lead in Blockchain’ (Ledger Insight, 21 November
2019) < https://www.ledgerinsights.com/cftc-chairman-us-blockchain/> accessed 11 May 2021.
24 For reference, see The World Bank, ‘Fintech Market Reports Rapid Growth During COVID-19
Pandemic’ (The World Bank, 3 December 2020) .worldbank.org/en/news/press-re-
lease/2020/12/03/fintech-market-reports-rapid-growth-during-covid-19-pandemic> accessed
21 February 2021. See also Chris Versace, Lenore Elle Hawkins and Mark Abssy, ‘The Rising
Tide of Digital Currencies’ (NASDAQ, 19 February 2021)
ing-tide-of-digital-currencies-2021-02-19> accessed 21 February 2021.
25 BBC, ‘Elon Musk’s Tesla Buys $1.5bn of Bitcoin Causing Currency to Spike’ (BBC, 8 February
2021) accessed 21 February 2021. See also, Penny
Crossman ‘“Digital Assets are Here to Stay”: BNY Mellon Embraces Crypto’ (American Banker,
23 February 2021) .americanbanker.com/news/digital-assets-are-here-to-stay-bny-mellon-
embraces-crypto> accessed 24 February 2021; Jenna Delport, ‘Mastercard to Support Cryp-
tocurrency Transactions on its Network’ (The CNBC, 11 February 2021)
com/2021/02/mastercard-to-support-cryptocurrency-transactions-on-its-network/> accessed 24
February 2021.
26 Stable coins are digital currencies pegged to fiat currencies or non-volatile assets or to fixed
amounts of traditional monetary instruments. Stable coins came into cryptocurrency markets to
resolve the problem the problem of cryptocurrencies’ market volatility. For reference, see Alek-
sander Berensten and Fabian Schär, ‘Stablecoins: The Quest for a Low-Volatility Cryptocurrency’
in Antonio Fatas (ed.), The Economics of Fintech and Digital Currencies (CEPR Press 2019)
65–74.
27 For an academic discussion on Libra and its impact on payment and monetary system land-
scape, see Dirk A. Zetzsche, Ross P. Buckley and Douglas W. Arner, ‘Regulating LIBRA: The
Transformative Potential of Facebook’s Cryptocurrency and Possible Regulatory Responses’
(forthcoming) Oxford Journal of Legal Studies
stract_id=3414401> accessed 21 February 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US104
to reimagine the legislative actions required in addressing issues concerning
cryptocurrency and stable coins.
The UK and the EU have moved towards implementing a coherent, robust,
and uniform regulatory structure for the cryptocurrency industry and market
participants that provides stringent protection measures to retail investors and
consumers while supporting financial innovation and stability. The paper proposes
that the US Congress enact a centralised, comprehensive cryptocurrency regulation
(‘crypto-regulation’), recognising the novelty of the cryptocurrencies’ market risks,
and introducing eective regulatory treatments, to curb market manipulation
in the cryptocurrency spot market vis-à-vis crypto-derivatives market. It is
paramount that such crypto-regulation is not fragmented,28 but rather centralised,
conferring specific jurisdiction relating to cryptocurrency and cryptocurrency-
related financial products on a single US regulatory body. To this end, this paper
envisions a centralised US crypto-regulation that would include: (i) centralization
of cryptocurrency trading platforms; (ii) a mandatory registration requirement
for all cryptocurrency exchanges and; (iii) a single federal cryptocurrency agency
having exclusive jurisdiction over cryptocurrencies and oversight authority on the
cryptocurrency spot market.
II. R F C-D
EU UK
Unlike the US, regulators worldwide are sceptical about crypto-derivatives
— mainly because of their extremely volatile, speculative, and high-leverage
nature.29 The complexity of crypto-derivative’ products and investors’ lack of
understanding regarding the risks associated with come with a high likelihood of
losing money.30 Therefore, among other major regulators, the EU and the UK have
28 In the US, the major regulators concerning financial products are the SEC (for securities and
security-based derivatives) and the CFTC (for commodity and financial derivatives). Under the
existing legal framework, the SEC regulates the digital tokens and ICOs which they determine
as securities, whereas the CFTC regulates derivatives products where cryptocurrency is used as a
reference asset. The proposed crypto-regulation will obliterate this division between the SEC’s and
the CFTC’s mandate over cryptocurrency and establish a centralised cryptocurrency regulatory
body.
29 For instance, in May 2019, Japan asked bitFlyer to reduce leverage for its perpetual swap product.
See Emmanuel Goh, ‘Crypto Derivatives: A Corner of the Market or the Market Itself ?’ (Coin-
desk, 16 November 2019) .coindesk.com/crypto-derivatives-a-corner-of-the-market-or-the-
market-itself> accessed 11 November 2020.
30 ibid.
Reimagining a Centralised Cryptocurrency Regulation in the US 105
evaluated their regulations of crypto-derivatives on the ground that investment in
these products hurt retail investors.
A. T EU
In the EU, the derivatives markets are regulated by two central EU
regulations, namely, the European Market Infrastructure Regulation (‘EMIR’)31
and the Markets in Financial Instruments Directive (‘MiFID II’),32 alongside the
Markets in Financial Instruments Regulation (‘MiFIR’).33 Under these regulations,
the ESMA is the independent authority for market supervisory and law enforcement
of the EU derivatives markets.34 The ESMA is authorised to clear all eligible
derivatives contracts and is responsible for trade repositors’ surveillance across
the EU.35 Besides derivatives market, the ESMA is also responsible for promoting
31 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories
[2012] OJ L201/1. In the wake of the US financial crisis 2007, the EU OTC derivatives markets
also went through transformation. As a result, in 2012, the European Commission promulgated
the EMIR to include and regulate broad range of OTC derivatives across various asset classes,
central counterparties and trade repositories.
32 Directive 2014/65/EU on markets in financial instruments [2014] OJ L173/349 (“MiFID II”).
Previously, in 2004, the European Commission adopted the Markets in Financial Instruments
tion, MiFIR. Under the MiFID, the investors are categorised in three separate groups: professional
clients, retail clients, and eligible counterparties. The aim of such division among investors is to
reflect the necessity of dierent level of protection an investor may need. According to the classi-
fication, the retail investors needed the highest level of protection and comprehensive information
that are required for them to understand the risks associated with a specific investment product
and transaction. For reference on MiFID II’s impact on investor protection, see Christos Gortsos,
‘Stricto Sensu Investor Protection under MiFID II: A Systemic Overview of Articles 24–30’ (1st
ed., Cambridge Scholars Publishing 2018).
33 Regulation (EU) No 600/2014 on markets in financial instruments [2014] OJ L173/84.
34 Philipp Maume and Mathias Fromberger, ‘Regulation of Initial Coin Oerings: Reconciling US
and EU Securities Laws’ [2019] 19 Chicago Journal of International Law 548.
35 European Commission, ‘Derivatives / EMIR’(European Commission)
info/business-economy-euro/banking-and-finance/financial-markets/post-trade-services/deriva-
tives-emir_en> accessed 23 February 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US106
“supervisory convergence and the consistent application of market rules”36 within
the EU.
The ESMA first stepped into the cryptocurrency world by expressing its
view on cryptocurrency token oering, by way of ICOs, in November 2017.37
Although the ESMA’s statement regarding token sales was vague as it largely
leaves the burden on the firms and investors for their activities,38 the ESMA has
quite a strong position in regulating the EU’s crypto-derivatives market. In a
Call for Evidence Report39 issued in January 2018,40 the ESMA announced that
crypto-derivatives, which are in the form of CFDs41 and BOs,42 should be subject
36 ibid.
37 European Securities and Markets Authority, ‘The ESMA alerts firms involved in Initial Coin
Oerings (ICOs) to the need to meet relevant regulatory Requirements’ (13 November 2017)
ESMA50-157-828 (“first statement”) accessed 11 November
2020. This statement was published alongside with the ESMA’s statement made towards the in-
vestors warning the risks involved with the ICOs. See European Securities and Markets Authority,
‘ESMA alerts investors to the high risks of Initial Coin Oerings (ICOs)’ (13 November 2017)
ESMA50-157-829
ment_investors.pdf> (“second statement”) accessed 20 February 2021.
38 Ibid. In the first statement, the ESMA delivers a blanket statement stating, “Firms involved in
ICOs must give careful consideration as to whether their activities constitute regulated activities”,
without elaborating or giving precise guidelines as to what may be construed as “regulated activ-
ities”. The second statement further states that, “[d]epending on how they are structured, ICOs
may fall outside of the scope of the existing rules and hence outside of the regulated space. How-
ever, where the coins or tokens qualify as financial instruments it is likely that the firms involved in
ICOs conducted regulated investment activities” and hence, should be subject to the EU securities
laws and regulations. Without delineating specific conditions or requirements, the ESMA appears
to leave the burden of compliance on the firms oering digital tokens and ICOs.
39 European Securities and Markets Authority, ‘Call for Evidence: Potential Intervention Measures
on Contracts for Dierences and Binary Options to Retain Clients’ (18 January 2018) ESMA35-
43-904
potential_product_intervention_measures_on_cfds_and_bos_to_retail_clients.pdf> accessed 11
November 2020.
40 European Securities and Markets Authority, ‘ESMA Consults on Potential CFDs and Binary
Options Measures to Protect Retail Investors’ (European Securities and Markets Authority, 18
January 2018) .esma.europa.eu/press-news/esma-news/esma-consults-potential-cfd-and-bi-
nary-options-measures-protect-retail> accessed 11 November 2019.
41 A CFD is defined as “a derivative other than an option, future, swap, or forward rate agreement,
the purpose of which is to give the holder a long or short exposure to fluctuations in the price,
level or value of an underlying, irrespective of whether it is traded on a trading venue, and that
must be settled in cash at the option of one of the parties other than by reason of default or other
terminational event”. See (n 40) 4.
42 A BO is defined as “a derivative that meets the following conditions: (a) it must be settled in cash
or may be settled in cash at the option of one of the parties other than by reason of default or
other terminational event; (b) it only provides for payment at its close-out or expiry; and (c) its
payment is limited to: (i) a predetermined fixed amount if the underlying of the derivative meets
one or more predetermined conditions; and (ii) zero or another predetermined fixed amount if the
underlying of the derivative does not meet one of more predetermined conditions”. See European
Securities and Markets Authority (n 40) 4.
Reimagining a Centralised Cryptocurrency Regulation in the US 107
to strict legal scrutiny alleging that these derivatives products are speculative and
volatile, exposing investors to potentially significant monetary loss.43 The ESMA
further called for responses from market participants regarding possible measures
to regulate crypto-derivatives.44 After considering all responses and concerns, the
ESMA, according to Art. 40 of MiFIR,45 adopted restrictive product invention
measures in relation to CFDs and BOs.46 The intervention measures include: (1) a
prohibition on the marketing, distribution, or sale of BOs and (2) a restriction on
the marketing, distribution, or sale of CFDs to retail investors.47 In adopting these
restrictive measures, the ESMA noted that:
“[…] CFDs are complex products. The pricing, trading terms, and
settlement of such products is not standardized, impairing retail
investors’ ability to understand the terms of product. In addition,
CFD providers often require investors to acknowledge that the
reference prices used to determine the value of a CFD may
dier from the price available in the respective market where the
underlying is traded, making it dicult for retail investors to check
the accuracy of the prices received from the CFD provider”.48
It also noted that cryptocurrency is an immature asset class that poses
“separate and significant concerns”.49 Therefore, retail investors hardly understand
the risk of speculation on crypto-derivatives products. The ESMA from time to
43 European Securities and Markets Authority, ‘Additional Information on the Agreed Product
Intervention Measure Relating to Contract for Dierences and Binary Options’ (European Secu-
rities and Markets Authority, 27 March 2018) .esma.europa.eu/sites/default/files/library/
esma35-43-1000_additional_information_on_the_agreed_product_intervention_measures_relat-
ing_to_contracts_for_dierences_and_binary_options.pdf> accessed 11 November 2020.
44 ibid.
45 Article 40 of MiFIR (n 33). It per mits the ESMA to temporarily prohibit, restrict marketing,
distribution, or sale of certain financial instruments on grounds of investor protection and market
integrity.
46 European Securities and Markets Authority (n 4).
47 ibid. The restrictions on BOs came in eect from 1 July 2018, whereas the restrictions on CFDs
came in eect from 1 August 2018 (the restrictions on CFDs are renewable).
48 (n 44).
49 ibid 5. The ESMA also states: “[…] CFDs with cryptocurrencies as an underlying raise separate
and significant concerns as CFDs on other underlyings. Cryptocurrencies are a relatively imma-
ture asset class that pose major risks for investors. ESMA and NCAs have significant concerns
about the integrity of the price formation process in underlying cryptocurrency markets, which
makes it inherently dicult for retail clients to value these products…”.
Reimagining a Centralised Cryptocurrency Regulation in the US108
time extended its restriction on CFDs and BOs.50 In renewal notices, the ESMA
reiterated its concern over investor protection related to the sale of CFDs and BOs
to retail clients.51
B. T UK
The FCA, that regulates the UK financial services industry, has imposed
strict regulatory measures in the UK crypto-derivatives market.52 Before finalizing
the outright ban on crypto-derivatives,53 the FCA first proposed a temporary ban
on crypto-derivatives and ETNs in 2019, on the ground that crypto-derivatives
products were ill-suited to retail customers who are unable to assess the value and
risks of derivatives or ETNs reliably.54
To assess the trend of investors’ increasing interest and its correlation
with cryptocurrencies’ price instability, the FCA evaluated the price of bitcoin
and Ethereum, and Google trends data between 2018 and 2019. By doing so,
it was demonstrated that retail investors’ interests are strongly “correlated to the
increasing price and trading volumes of bitcoin”55 as well as ethereum. The FCA
50 See European Securities and Markets Authority, ‘ESMA to Renew Restriction on CFD for a
Further Three Months’ (European Securities and Markets Authority, 28 September 2018)
esma.europa.eu/sites/default/files/library/esma71-99-1041_-_esma_to_renew_restriction_on_
cfds_for_a_further_three_months.pdf> accessed 11 November 2020. European Securities and
Markets Authority, ‘ESMA to Renew Restrictions on CFDs for a Further Three Months from
1 May 2019’ (European Securities and Markets Authority, 27 March 2019) < https://www.
esma.europa.eu/press-news/esma-news/esma-renew-restrictions-cfds-further-three-months-1-
may-2019> accessed 11 May 2021. See also European Securities and Market Authority, ‘ESMA
Renews Binary Options Prohibition for a Further Three Months from 2 January 2019’ (European
Securities and Markets Authority, 09 November 2018) < https://www.esma.europa.eu/sites/de-
fault/files/library/esma71-99-1057_-_esma_renews_binary_options_prohibition_for_a_further_
three_months_from_2_january_2019.pdf> accessed 11 May 2021. See also European Securities
and Markets Authority, ‘ESMA Renews Binary Options Prohibition for a Further Three Months
from 2 April 2019’ (European Securities and Markets Authority, 18 February 2019) < https://
www.esma.europa.eu/press-news/esma-news/esma-renews-binary-options-prohibition-fur-
ther-three-months-2-april-2019> accessed 11 May 2021.
51 ibid.
52 In April 2018, the FCA released additional guidance regarding derivative contracts on crypto-
currencies, making it clear that derivatives on crypto tokens are transferable securities and that
providing financial services in this regard require formal authorization. See Financial Conduct Au-
thority, ‘FCA proposes ban on sale of crypto-derivatives to retail consumers’ (Financial Conduct
Authority, 3 July 2019) .fca.org.uk/news/press-releases/fca-proposes-ban-sale-crypto-deriv-
atives-retail-consumers> accessed 11 November 2020.
53 Financial Conduct Authority (n 2).
54 Financial Conduct Authority, ‘Prohibiting the Sale to Retail Client of Investment Products that
Reference Cryptoassets’ (July 2019) CP19/22 .fca.org.uk/publication/consultation/cp19-
22.pdf> accessed 24 February 2021.
55 Financial Conduct Authority (n 2) 9, 11.
Reimagining a Centralised Cryptocurrency Regulation in the US 109
is of the view that the data further demonstrated investors’ speculative behaviour
over a price-boom in cryptocurrency, rather than their ability to reliably and
consistently assess the intrinsic value of cryptocurrency, or the derivatives that use
cryptocurrency as a reference asset.56
Therefore, in framing the grounds for banning crypto-derivatives, the
FCA’s central focus was protecting retail investors from monetary losses.57 The
regulators were concerned that retail investors could be hurt because of: (i) the
opacity and complexity of cryptocurrency as reference assets;58 (ii) retail investors’
lack of understanding and consequent inability to make an informed investment
decision on crypto-derivatives59 and; (iii) the cryptocurrency as a reference asset is
highly speculative,60 volatile,61 and susceptible to sudden price drops and abrupt
price dislocation.62 Allowing crypto-derivatives to grow in the retail market might
create a perception among retail investors that these products are suitable and
appropriate investment products. In considering the proportionality of a ban
on crypto-derivatives, the FCA invoked Art. 42 of MiFIR63 and Art. 21(2) of
the Delegated Regulation of MiFIR,64 and determined that a per manent ban
on crypto-derivatives is an appropriate measure to secure the interest of retail
investors. During the interim phase, the FCA considered other less interventionist
56 ibid 8.
57 Financial Conduct Authority (n 54).
58 ibid 14.
59 ibid.
60 Shay-Kee Tan, Jennifer So-Kuen Chan and Kok-Haur Ng, ‘On the Speculative Nature of
Cryptocurrencies: A Study of Gar man and Klass Volatility Measure’ [2020] 32 Finance Research
Letters.
61 Bitcoin is 26 times as volatile than S&P 500. See C. Baek and M. Elbeck, ‘Bitcoin as an investment
or speculative: A first look’ 22 [2015] 1 Applied Economies Letter 34.
62 Financial Conduct Authority (n 2) 9, citing CP19/22 (n 57).
63 Article 42 of the MiFIR (n 33) provides a competent authority with the power to prohibit or re-
strict: “(a) the marketing, distribution or sale of certain financial instruments or structured deposits
or financial instruments or structured deposits with certain specified features; or (b) a type of
financial activity or practice.”
64 Commission Delegated Regulation (EU) 2017/567 supplementing Regulation (EU) No 600/2014
of the European Parliament and of the Council with regard to definitions, transparency, portfolio
compression and supervisory measures on product intervention and positions [2016] OJ L87/90.
Article 21(2) lays down the factors and criteria to be assessed by a competent authority to “deter-
mine the existence of a significant investor protection concern or a threat to the orderly function-
ing and integrity of financial markets or commodity markets […]”.
Reimagining a Centralised Cryptocurrency Regulation in the US110
approaches such as “do nothing”65 or “provide further consumer warnings”.66
Nevertheless, it concluded that “any remedy other than a ban on the sale to retail
clients would fall short of adequately reducing the harms to consumers and risks
identified”.67
The FCA’s eorts to regulate crypto-derivatives were not unopposed.68 The
FCA’s position was challenged on the ground that “an outright ban would aect
its members who are already in compliance with a slew of regulatory standards”.69
However, the FCA continues to maintain its position on the matter to protect retail
investors, stating, “a ban on crypto-derivatives could lead to a $96 million haircut
in harm done to retail traders per year”.70
III. R F C-D US
In the US, the Commodity Exchange Act (‘CEA’) and the Commodity
Futures Trading Commission Rules (‘CFTC Rules’) regulates the trading of
derivatives contracts (including futures, options, and swaps), and the CFTC
supervises the commodity and derivatives markets. The CEA, that is the primary
statute governing the laws and regulations of the US derivatives market, defines
“commodity” to include agricultural products, “all other goods and articles”,
and “all services, rights, and interests”, in which “contracts for future delivery are
presently or in the future dealt in”.71 In 2015, the CFTC assumed that certain virtual
currencies, such as bitcoin and litecoin, are commodities, and should be regulated
65 Financial Conduct Authority (n 54) 24. The FCA is of the opinion that a “do nothing” approach
does not address the fundamental product flaws or address the significant harm to consumers
posed by these products. Existing disclosure obligations and appropriateness tests are unlikely to be
eective in conveying the risks to retail clients. Continuing to allow the oer of these products by
firms with FCA authorization may also give retail investors a false sense of security by contrast to
the underregulated nature of the underlying.
66 Financial Conduct Authority, ‘Consumer Warning About the Risks of Investing in Cryptocur-
rency CFDs’ (Financial Conduct Authority, 3 July 2019) .fca.org.uk/news/news-stories/
consumer-warning-about-risks-investing-cryptocurrency-cfds> accessed 11 November 2020.
67 Financial Conduct Authority (n 54) 24.
68 Steve Kaaru, ‘CoinShares Wants Users to Take Action against UK Crypto Assets Ban’ (Coingeek,
29 September 2019)
crypto-assets-ban/> accessed 11 November 2020.
69 Osato Avan Nomayo, ‘Crypto Derivatives Ban: The UK Govt Won’t Interfere with FCA’ (Block-
onomi, 29 October 2019),
fere-with-fca/> accessed 11 November 2020.
70 ibid.
71 Section 1a (9), Commodity Exchange Act.
Reimagining a Centralised Cryptocurrency Regulation in the US 111
by the CFTC.72 Besides, multiple federal courts also held that virtual currencies
are commodities as per the CEA.73 Hence, crypto-derivatives — such as bitcoin-
futures, swaps, and options — fall within the CFTC’s regulatory perimeter.74
In December 2017, the CFTC permitted futures exchanges to apply the
self-certification process for bitcoin-futures and binary options under §7(a)(2) of the
CEA.75 However, despite the CFTC’s attempt to normalise crypto-derivatives in the
existing legal and regulatory framework, these derivatives products pose numerous
risks to retail consumers. Its lack of direct oversight on the cryptocurrency spot
market poses a significant challenge to regulate market manipulation, that has
adverse impacts on crypto-derivatives investors. In July 2018, Daniel Grofine, then
Director of the CFTC’s fintech initiative (‘LabCFTC’), shared similar concerns
on the issue of cryptocurrencies and digital assets during his testimony before the
US House Committee on Agriculture.76 He warned that while many things could
be commodities, the CFTC’s direct oversight on the commodity spot market is
essential to bring those commodity-built futures, swaps, and options within its
regulatory perimeter.77 The current regulatory approach should focus on bringing
clarity and certainty to the market, and any “hasty regulatory pronouncements are
likely to […] have unintended consequences, or fail to capture important nuance
regarding the structure of new products and models”.78
Currently, there are several crypto-derivatives products available to US retail
customers.79 The ICE launched its first bitcoin-settled futures, the Bakkt futures,
72 CFTC v Coinflip Inc (n 7). See also, Matt Clinch, ‘Bitcoin Ocially Becomes a Commodity’
(CNBC, 15 September 2018) essRoom/SpeechesTestimony/opagorfine1> accessed 24 February 2021.
ty-in-the-us.html> accessed 11 November 2020.
73 CFTC v McDonnell [2018] 287 F Supp 3d 213 (EDNY 2018). See also CFTC v. My Big Coin
Pay, Inc. [2018] 334 F Supp 3d 492 (D Mass 2018).
74 See Houman B. Shadab, ‘Regulating Bitcoin and Blockchain Derivative’ (2020) NYLS Legal
Studies Research Paper .cftc.gov/sites/default/files/idc/groups/public/@aboutcftc/
documents/file/gmac_100914_bitcoin.pdf> accessed 11 November 2020 (discussing whether
bitcoins fall within the definition of “commodity” under the Commodity Exchange Act (CEA),
and therefore, derivatives contracts like futures, swaps, options that reference bitcoins are subject
to regulation by the CFTC).
75 Commodity Futures Trading Commission, ‘A CFTC Primer on Virtual Currencies’ (Commodity
Futures Trading Commission, 17 October 2017) .cftc.gov/sites/default/files/idc/groups/
public/documents/file/labcftc_primercurrencies100417.pdf> accessed 12 November 2020.
76 Commodity Futures Trading Commission, ‘Written Testimony of Daniel S. Gorfine before the
US House Committee on Agriculture (Commodity Futures Trading Commission, 18 July 2018)
77 ibid.
78 ibid.
79 For reference, see CoinMarketCap
2021.
Reimagining a Centralised Cryptocurrency Regulation in the US112
in September 2019.80 Three months later, the ICE introduced its monthly settled
bitcoin options.81 In January 2020, the CME started trading options on bitcoin
futures.82 ErisX launched ether-based physically settled futures contracts in May
2020.83 In addition to bitcoin and ether derivatives products, the cryptocurrency
industry will soon attempt to issue other cryptocurrency-based derivatives products.
However, there are at least three regulatory issues with the CFTC’s approach to
approving these new crypto-derivatives.84 First, the CFTC’s traditional approach
to regulating crypto-derivatives, primarily through the ‘self-certification’ process, is
risky as the existing legal framework of ‘self-certification’ is not adequate to prevent
price manipulation in the cryptocurrency spot market. Second, the CFTC’s view
on market manipulation in the cryptocurrency spot market contradicts the SEC’s
view on the same issue. Third, the CFTC is surprisingly numb to the suggestion
that crypto-derivatives could jeopardise retail investors’ interest, and such an
approach deviates from the two major global regulators, that is the ESMA and
the FCA.
A. T CFTC’ -
- ’
The ‘self-certification’ process for derivatives contracts was introduced in
2000 by enacting the Commodity Futures Modernization Act.85 Under this law,
the CFTC permits the listing of a new futures contract if: (1) the exchange submits
a written self-certification to the CFTC certifying that the contract complies with
the CEA and CFTC regulations or (2) the exchange has voluntarily submitted
the contract for CFTC approval.86 Therefore, in the self-certification process, the
exchanges themselves can verify that a new contract complies with the CEA’s
or the CFTC’s requirements.87 The designated contract markets (‘DCMs’) may
80 Brown (n 9).
81 Adam White, ‘Expanding the Bakkt Bitcoin Product Complex: Bitcoin Options and Cash Settled
Futures Now Available’ (Bakkt Blog, 9 December 2019)
panding-the-bakkt-bitcoin-product-complex-68000faea6b3> accessed 11 November 2020.
82 CME Group
83 Brown (n 9).
84 This paper will not discuss systemic risk aspect of cr ypto-derivatives. This paper, however, admits
that the crypto-derivatives connect regulated sectors, i.e., firms and financial institutions, with the
unregulated underlying cryptocurrency markets. Therefore, any contagion created in the unregu-
lated asset class may have a spill over impact on the regulated sector, that can give rise to systemic
risk. For a discussion of crypto-derivatives’ systemic risks, see Reiners (n 16).
85 Section 7(a)(2), Commodity Exchange Act.
86 Commodity Futures Trading Commission Regulation 40.2 (17 Code of Federal Regulations 40.2).
87 Reiners (n 16) 71.
Reimagining a Centralised Cryptocurrency Regulation in the US 113
also voluntarily submit new contracts for approval to the Commission and list
the futures contract within twenty-four hours upon the CFTC’s approval of the
contract.88 The CFTC’s self-certification process has, however, been questionable
since its introduction.89 Between 2000 and 2017, data90 suggests that the self-
certification process facilitated the approval and listing of many complex exchange-
traded commodity derivatives.91 Such approval process often included an absence
of a proper understanding of the traded products giving rise to opacity and
unpredictability in the market. This potentially increased ineciency and system
failure 92 across the financial system.
Despite criticisms of the self-certification process and its controversial role in
the 2007 financial crisis, the CFTC allowed the processing of crypto-derivatives in
2014, as TeraExchange self-certified its bitcoin non-deliverable forwards.93 Several
US futures exchanges such as CME, CBOE, ICE, and ErisX self-certifies both
cash-settled and physically-settled cryptocurrency-based (bitcoin and ether) futures
contracts and binary options.94 Although the CFTC stated that the Commission
“held rigorous discussions” 95 with the exchanges for weeks before allowing them
to self-certify these crypto-derivatives products, such a process spurred agitation
88 ibid.
89 For an academic discussion on the CFTC’s role in approving complex financial products, see Saule
T Omarova, ‘Licence to Deal: Mandatory Approval of Complex Financial Products’ [2010] 90
Washington University Law Review 63.
90 Reiners (n 16) 72. The author compiled the data from a publicly available database on the CFTC’s
website, that clearly indicated a significant increase of the number of new exchange-traded prod-
ucts approved through self-certification process. It also suggested that this might have potentially
contributed to the financial crisis of 2007.
91 Although the economic purpose of the CFTC’s self-certification rule was to “reduce the potential
threat of market manipulation or congestion”, during the financial crisis of 2008, the market
could not necessarily extricate themselves from the underlying cash markets and the policy goal of
preventing potential harm to such markets from excessive financial speculation.
92 Steven L. Schwartz, ‘Regulating Complexity in Financial Markets’ [2010] 87 Washington Univer-
sity Law Review 211.
93 Casey (n 6).
94 David Felsenthal and others, ‘Cliord Chance Discusses the Role of the CFTC in the Regula-
tion of Bitcoin’ (The CLS Blue Sky Blog, 16 February 2018) .columbia.
edu/2018/02/16/cliord-chance-discusses-the-role-of-the-cftc-in-the-regulation-of-bitcoin/.>
accessed 13 November 2020.
95 Commodity Futures Trading Commission, ‘CFTC Statement on Self-Certification of Bitcoin
Products by CME, CFE, and Cantor Exchange’ (Commodity Futures Trading Commission, 1
December 2017) essRoom/PressReleases/pr7654-17> accessed 13 November
2020.
Reimagining a Centralised Cryptocurrency Regulation in the US114
within the futures industry.96 In 2017, Walk Lukken, the CEO of the Futures
Industry Association (FIA), expressed the FIA’s concerns:
“We remain apprehensive with the lack of transparency and
regulation of the underlying reference products on which these
products are based and whether exchanges have the proper
oversight to ensure the reference products are not susceptible to
manipulation, fraud, and operational risk”.97
Besides, the CFTC does not oversee the cryptocurrency spot market,
making it more susceptible to fraud and price manipulation.98 To respond to
the FIA’s concern and provide more clarity, the CFTC came up with a stricter
review for self-certified crypto-derivatives products, that is “heightened review” 99
for all bitcoin futures and crypto-derivatives products that will apply through self-
certification.100 However, such a review is also questionable because the “heightened
review” does not provide the CFTC with an eective oversight mechanism for the
cryptocurrency spot market, and therefore, cannot minimise the risks of crypto-
derivatives (analysis set out below).
B. ‘H ’ CFTC
Cryptocurrency spot markets operate in an unregulated space, or with little
regulatory clarity. For instance, ErisX, that oers Ethereum-based futures contract,
insists that the ErisX spot market is beyond the CFTC’s regulatory purview. It says
that,
“[t]he CFTC does not have regulatory oversight over virtual
currency products including spot market trading of virtual
currencies. ErisX spot market is not licensed, approved, or
96 Walt Lukken, ‘Open Letter to CFTC Chairman Giancarlo Regarding the Listing of Cryptocur-
rency Derivatives’ (The Futures Industry Association, 7 December 2017) lic/@newsroom/documents/file/
cles/open-letter-cftc-chairman-giancarlo-regarding-listing-cryptocurrency-derivatives> accessed
24 November 2021.
97 ibid.
98 ibid.
99 Reiners (n 16) 74. “Heightened review is a new process, without statutory process, without statuto-
ry basis, that the CFTC is using to review new virtual currency derivative products”.
100 Commodity Futures Trading Commission, ‘CFTC Backgrounder on Oversight of and Ap-
proach to Virtual Currency Futures’ (Commodity Futures Trading Commission, 4 January 2018)
backgrounder_virtualcurrency01.pdf> accessed 24 February 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US 115
registered with the CFTC and transaction on the ErisX Spot Market
are not subject to CFTC rules, regulations or regulatory oversight (emphasis
added)”. 101
Under the CEA, the CFTC is mandated to prevent market manipulation in
the derivatives market, which gives the CFTC an authority to act against the price
manipulation of any underlying commodity.102 To achieve this goal, the CFTC
intends to ensure that the self-certified crypto-derivatives contracts are not “readily
susceptible to manipulation”.103 The ‘heightened review’ also allows the CFTC to
implement risk-mitigation and oversight mechanisms through heightened margin
requirements and information-sharing agreements between cryptocurrency
exchanges.104 The CFTC views that the information-sharing agreements between
cryptocurrency exchanges will ensure the CFTC’s access to data, that could
“facilitate the detection and pursuit of bad actors in the underlying spot market”.105
However, unlike other traditional commodity spot markets, there is no existing US
law providing “direct, comprehensive federal oversight of underlying bitcoin or
virtual currency spot markets”.106 Many of the platforms are located oshore and
are not registered with the CFTC or the SEC. Therefore, the CFTC’s satisfaction
that the information-sharing agreements would ensure their visibility into the
cryptocurrency spot market, is debatable.107
Also, in cash-settled cryptocurrency futures, the ability to manipulate
depends on “how easily the reference rate that is used to price the contract can
101 ErisX
102 Sections 6(c)(1), 6(c) (3), and 9(1) Commodity Exchange Act; Commodity Futures Trading
Commission, ‘Prohibition on the Employment, or Attempted Employment, of Manipula-
tive and Deceptive Devices and Prohibition on Price Manipulation’ (Commodity Futures
Trading Commission,14 July 2011) (Final Rule 180.1) .federalregister.gov/docu-
ments/2011/07/14/2011-17549/prohibition-on-the-employment-or-attempted-employ-
ment-of-manipulative-and-deceptive-devices-and> accessed 13 November 2020.
103 Section 38.200, Title 17, Code of Federal Regulations.
104 Heightened review includes, among others, DCMs to enter into “direct or indirect information
sharing agreements with spot market platforms to allow access to trade and trader data”. See
Commodity Futures Trading Commission (n 100) 3.
105 Jay Clayton and Cristopher Giancarlo, ‘Regulators are Looking at Cryptocurrency’ (The Wall
Street Journal, 24 January 2018) < https://www.wsj.com/articles/regulators-are-looking-at-cryp-
tocurrency-1516836363> accessed 11 May 2021.
106 Felsenthal and others (n 94). See also, Jerry Brito, Houman B Shadab, and Andrea Castillo, ‘Bit-
coin Financial Regulations: Securities, Derivatives, Prediction Markets, and Gambling’ [2014] 51
Columbia Science and Technology Law Review 144, 196, arguing “physically-settled transactions
are generally not subject to the full scope of CFTC regulation precisely because they do not impli-
cate the markets that the CFTC is concerned about, namely, futures and swaps markets”.
107 Reiners (n 16) 75.
Reimagining a Centralised Cryptocurrency Regulation in the US116
also be manipulated”.108 Although there is no evidence of price manipulation of
the CME or ICE futures until April 2021, such manipulation on cryptocurrency
exchanges is rampant.109 In the absence of federal oversight, crypto-exchanges are
widely involved in price tampering by creating fake trade volumes (commonly known
as “pump-and-dump”).110 In many instances, traders use social media to perform
pump-and-dump schemes to inflate the virtual currencies’ prices artificially.111 A
recent study has revealed Telegram and Discord’s large-scale pump-and-dump
scheme.112 Such pumping-and-dumping activity can hurt investors in the crypto-
derivatives markets in the long run because crypto-derivatives enable institutional
investors (and also potential manipulators) to bet on the future bitcoin’s price. It is
not unlikely that a group of traders would place a massive trade on a bitcoin spot
market on the contract’s settlement date, thereby pushing up the price of bitcoin
and earning a profit on the futures position, and in the same way, if the speculation
is on a decreased price, instantly dump the trade.
Despite the apprehension, there is a regulatory vacuum in enforcing
cryptocurrency pump-and-dump.113 Usually, the SEC enforces against pump-and-
108 ibid.
109 ibid.
110 Paul Vigna, ‘Most Bitcoin Trading Faked by Unregulated Exchanges: Study Finds’ (The Wall
Street Journal, 22 March 2019) .wsj.com/articles/most-bitcoin-trading-faked-by-unregu-
lated-exchanges-study-finds-11553259600?mod=hp_lead_pos7> accessed 13 November 2020.
See also, Kate Rooney, ‘Majority of Bitcoin Trading is a Hoax’ (CNBC, 23 March 2019)
cnbc.com/2019/03/22/majority-of-bitcoin-trading-is-a-hoax-new-study-finds.html> accessed 13
November 2020.
111 JT Hamerick and others, ‘An Examination of the Cryptocur rency Pump and Dump Ecosystem’
[2021] 58(4) Information Processing and Management 102506
ipm.2021.102506> accessed 11 May 2021.
112 Michael Mckee, ‘Trader Using “Pump and Dump” Schemes to Manipulate Cryptocurrency
Prices’, (Finbrief, 22 August 2018) .com/globalfinance/2018/08/22/
traders-using-pump-and-dump-schemes-to-manipulate-cryptocurrency-prices/> accessed 13
November 2020 (“[s]uch pump and dump scheme are accomplished through private chatrooms
which are accessible only by invitation, and generally overseen by an anonymous moderator. The
strategy is to announce a date, time, and exchange for a pump of typically illiquid cryptocurrency.
As the buying frenzy pushes the prices up, the members of the pump group begin dumping, i.e.,
selling at the signal. Successful traders gloat about their profits”).
113 A report published by the New York Oce of the Attorney General admitted that the regulators
lack control to evade pump and dump activity. See New York State Oce of the Attor ney Gener-
al, ‘Virtual Markets Integrity Initiative Report’ (New York State Oce of the Attorney General,
September 2018) .gov./sites/default/files/vmii_report.pdf> accessed 23 November
2020.
Reimagining a Centralised Cryptocurrency Regulation in the US 117
dump schemes since it is a type of securities fraud.114 Nevertheless, in the existing
federal securities law, the SEC is not likely to intervene as it has determined that
bitcoin is not a security.115 Hence, the question remains, will the CFTC oversee
such illegal activities in the crypto-derivatives commodity spot market under its
mandate of preventing fraud and market manipulation? In 2018, the CFTC
first issued an advisory note to warn the consumers to beware and avoid pump-
and-dump schemes that occurred in cryptocurrency trading.116 Nonetheless, the
CFTC’s overall approach does not adequately address the fraud and manipulation
concerns in the cryptocurrency spot market.117 On the other hand, in the absence of
any oversight mechanisms, cryptocurrency spot markets operate in an unregulated
space, that is likely to incentivise manipulative behaviour in the crypto-derivatives
market.
C. C-
Many scholars argued that crypto-derivatives would serve only the interest
of the cryptocurrency exchanges because crypto-derivatives allow these exchanges
to hedge their risk exposures that arise from the volatility in the cryptocurrency
spot market.118 To illustrate, if someone purchases a piece of furniture on
Overstock and pays in bitcoin via Coinbase, the payment is denominated in
Dollars and transferred from Coinbase to Overstock’s bank account. This means
“it is Coinbase that is accepting the exchange volatility risk”.119 Even though
Coinbase charges Overstock a certain percentage as a payment processing fee,
such a fee is not sucient to “cover the exchange rate risk that Coinbase could
114 Section 10(b) read with Section 17(a) (2) and Rule 10b-5, Securities Exchange Act 1934. For a
brief analysis, see Wendy Gerwick Couture, ‘Prosecuting Securities Fraud under Section 17 (a) (2)’
(The CLS Blue Sky Blog, 20 March 2019) < https://clsbluesky.law.columbia.edu/2019/03/20/
prosecuting-securities-fraud-under-section-17a2/> accessed 11 May 2021.
115 Eugene Kim, ‘The SEC Warns Investors About Potential ICO Scams and ‘Pump and Dump’
Schemes’ (CNBC, 28 August 2017)
pump-and-dump-schemes.html> accessed 13 November 2020.
116 Commodity Futures Trading Commission, ‘CFTC Warns Customers to Avoid Pump-and-Dump
Schemes’ (Commodity Futures Trading Commission, 15 February 2018) < www.cftc.gov/Press-
Room/PressReleases/pr7697-18> accessed 22 November 2020.
117 In the past, the CFTC publicly announced that it is not the CFTC’s duty to oversee a spot market
on a daily basis. See Reiner (n 16) 85.
118 Brito, Shadab, and Castillo (n 107).
119 Cade Metz, ‘The Grand Experiment Goes Live: Overstock.com is Now Accepting Bitcoin’ (The
Wired, 4 January 2014) .wired.com/2014/01/overstock-bitcoin-live/> (discussing the
volatility risks associated with Bitcoin and Overstock’s collaboration with Coinbase).
Reimagining a Centralised Cryptocurrency Regulation in the US118
face in the future”.120 It will only make sense if Coinbase can hedge its exchange
rate risk by “simply engaging in swap or futures contract”.121 Arguably, this is one
of the reasons why cryptocurrency exchanges were insisting on crypto-derivatives
for so long.122 Also, fraud,123 scams,124 hacks,125 and insider trading,126 are rampant
in the cryptocurrency market. Moreover, it is quite uncertain what impacts on the
market price of cryptocurrencies. Any regulatory move appears to impact bitcoin
price; bitcoin price dropped by 30% when China banned cryptocurrency or South
Korea initiated a crackdown on cryptocurrency.127 In March 2020, when the US
market was turbulent due to the COVID-19 crisis combined with a plummet in oil
prices and sell-o in stocks,128 the cryptocurrency market lost almost $26.43 billion
in a day (see Figure III.1).129 Since November 2020, bitcoin’s price has been soaring
and hit as high as $63,729.50.130 In addition to spot markets, the abrupt price dips
120 Brito, Shadab, and Castillo (n 107) 157.
121 ibid 157–58.
122 ibid.
123 Collen Shalby, ‘Camarillo Man and Two Others Arrested in Alleged $722-million Cryptocurren-
cy Fraud Scheme’ (The Los Angeles Times, 10 December 2019) .latimes.com/california/
story/2019-12-10/camarillo-man-and-two-others-arrested-in-alleged-722-million-cryptocurrency-
fraud-scheme> accessed 13 November 2020.
124 Shaurya Malwa, ‘Twitter Bitcoin Scams Take New Leap After Verified Twitter Accounts Im-
personate Elon Musk’ (CryptoSlate, 18 November 2019)
coin-scams-take-new-leap-after-verified-twitter-accounts-impersonate-elon-musk/> accessed 13
November 2020.
125 Eric Lam, ‘Hackers Steal $40 Million Worth of Bitcoin from Binance Exchange’ (The Bloomberg,
08 May 2019) .com/news/articles/2019-05-08/crypto-exchange-giant-binance-
reports-a-hack-of-7-000-bitcoin> accessed 21 November 2020; Andrew Norry, ‘The History of
the Mt. Gox Hack: Bitcoin’s Biggest Hit’ (Blockonomi, 7 June 2019)
mt-gox-hack/> accessed 13 November 2020.
126 Daniel Oberhaus, ‘Coinbase is Being Sued for Insider Trading’ (Vice, 5 March 2018)
com/en_us/article/pam4xn/coinbase-insider-trading-lawsuit-gdax-bitcoin-cash> accessed 13
November 2020.
127 Stefan Stankovic, ‘US Cryptocurrency Regulation: Policies, Regimes & More’ (Unblock, 18
February 2019) accessed 21 November
2020.
128 Luke Kawa, ‘Stock Market Volatility Tops Financial Crisis with VIX at Record’ (Bloomberg, 16
March 2020) loomberg.com/news/articles/2020-03-16/stock-market-volatili-
ty-tops-financial-crisis-with-vix-at-record> accessed 11 May 2021.
129 Arjun Kharppal, ‘Over $26 Billion Wiped O Cryptocurrency Market in 24 Hours After Massive
Oil Price Plunge’ (CNBC, 8 March 2020) -
cryptocurrency-prices-plunge-after-oil-drop.html?__source=sharebar|linkedin&par=sharebar>
accessed 21 November 2020.
130 Ryan Browne, ‘Bitcoin Hits New All-Time High above $63,000 ahead of Coinbase Debut’
(CNBC, 13 April 2021)
above-62000-ahead-of-coinbase-debut.html> accessed 11 May 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US 119
regularly wipe out billions of dollars from other cryptocurrency-based markets,
such as the decentralised finance market.131
F III.1
Daily Closing Prices of Bitcoin, Ethereum, and
Ripple (22 November 2019–21 November 2020)
0
2000
4000
6000
8000
10000
12000
14000
Bitcoin Closing Price (USD)
131 Jose Antonio Lanz, ‘Ethereum Price Dip Wipes $1.5 Billion from DeFi Markets’ (Decrypt, 31
October 2020) accessed 21
November 2020.
Price-dip on 16
March 2020
Reimagining a Centralised Cryptocurrency Regulation in the US120
0
100
200
300
400
500
600
Ethereum Closing Price (USD)
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
Ripple Closing Price (USD)
Source: Coindesk
Price-dip on 16
March 2020
Price-dip on 16
March 2020
Reimagining a Centralised Cryptocurrency Regulation in the US 121
Figure III.1 shows that all three cryptocurrencies suered a major price dip on 16 March 2020
as a response to the COVID-19 crisis coupled with the turmoil in the US financial markets and
international oil prices.
F III.2
Bitcoin’s Soaring Price between (25 November 2020–24 February 2021)
0
10000
20000
30000
40000
50000
60000
Closing Price (USD)
Source: Coindesk
In light of cryptocurrency’s price volatility and regulatory opacity, the
addition of federally regulated crypto-derivatives to the market will give these
investors complacency that their investments are protected under federal laws.
However, it appears that until now the regulators’ approach is largely based on
warnings where customers are advised to do their research before nvesting in
cryptocurrency-related products. issued from time to time.132 Therefore, in the
132 Commodity Futures Trading Commission, ‘Investor Alert, Watch Out for Fraudulent Digital
Asset and “Crypto” Trading Websites’ (26 April 2019) .cftc.gov/sites/default/
files/2019-04/OIEA%20and%20CFTC%20Investor%20Alert%20Fraudulent%20Digital%20
Assets%20Websites.pdf> accessed 11 May 2021.
Bitcoin’s price
at $54,322
Reimagining a Centralised Cryptocurrency Regulation in the US122
context of an unregulated spot market and the CFTC’s lack of oversight on it,
investor protection in the crypto-derivatives market is very much questionable.
D. T ’
Unlike the CFTC, the SEC appears to be reluctant to approve any new
cryptocurrency products that would require oversight in the spot market.133 On
several occasions, SEC has raised concerns about the current cryptocurrency
markets featuring less investor protection and more susceptibility to fraud and
manipulation.134 The SEC’s view became evident when it first rejected a bitcoin
exchange-traded product (‘ETP’)135 in 2018.136 To date, the SEC has disapproved
of more than nine bitcoin ETP proposals, including bitcoin ETP proposals from
133 See Marion A. Brown, ‘Cryptocurrency and Financial Regulation: The SEC’s Rejection of
Bitcoin-Based ETPs’ [2012] 23 N.C. Banking Institute 139. See also, Tom Lydon, ‘SEC Rejects
9 Applications for Bitcoin ETFs’ (The NASDAQ, 23 August 2018)
sec-rejects-9-applications-bitcoin-etfs-2018-08-23> accessed 13 November 2020.
134 See Jay Clayton, ‘Statement on Cryptocurrencies and Initial Coin Oerings’ (US Securities
and Exchange Commission, 11 December 2017) v/news/public-statement/state-
ment-clayton-2017-12-11> accessed 14 November 2020 (warning that cryptocurrency markers
span national borders as the investment funds may travel across boundaries rapidly. As a result,
“risks can be amplified, including the risk that market regulators, such as the SEC, may not be
able to eectively pursue bad actors or recover funds”). See also, Jay Clayton and Christopher
Giancarlo, ‘Statement by SEC Chairman Jay Clayton and CFTC Chairman J. Christopher
Giancarlo: Regulators are Looking at Cryptocurrency’ (US Securities and Exchange Commission,
25 January 2018) .sec.gov/news/public-statement/statement-clayton-giancarlo-012518>
accessed 13 November 2020.
135 ETPs are securities that are traded on exchanges similar to stocks. Cryptocurrency ETPs could
be in two basic forms: (1) ETFs holding crypto-derivatives; and (2) ETPs physically holding
cryptocurrency. See also, James Chan, ‘Exchange Traded Products (ETPs)’ (Investopedia, 25
August 2019) vestopedia.com/terms/e/exchange-traded-products-etp.asp> accessed 13
November 2020.
136 Kate Rooney and Bob Pisani, ‘Winklevoss Twins Bitcoin ETF Rejected by SEC’ (CNBC, 26 July
2018) ejected-by-sec.html> accessed
13 November 2020.
Reimagining a Centralised Cryptocurrency Regulation in the US 123
Proshares,137 Direxion,138 and GraniteShares,139 and the latest being the ETP
application by Wilshire Phoenix.140 In rejecting the bitcoin ETPs applications, the
SEC held that none of the applicants had proved that the cryptocurrency market is
uniquely resistant to market manipulation to secure investor protection and public
interest, as required under §6(b)(f) of the Exchange Act 1934. These ETP products
are not designed to “prevent fraudulent and manipulative acts and practices”,141
as the current bitcoin futures market (such as CMR and CBOE) is not of a
significant size. This technically prevents the DCMs from detecting and deterring
misconduct and tracing price manipulation despite the use of an information-
sharing agreement.142 With regard to investor protection, although the SEC viewed
that “trading a bitcoin-based ETP on a national securities exchange might provide
some additional protection to investors”,143 this protection is not sucient to fulfil
the requirements of §6(b)(f) of the Exchange Act, that requires the “rules of a
national securities exchange be designed to prevent fraudulent and manipulative
acts and practices”.144
Regarding these new cryptocurrency products, the SEC also raises the
issue of custody risk.145 As bitcoin is largely traded on unregulated international
exchanges, these custodians carry a significant risk of being hacked or going out
137 Securities and Exchange Commission, ‘SEC Release No. 82350’ (19 December 2017); Securities
and Exchange Commission, ‘SEC Release No. 82 FR 61100’, 26 December 2017).
138 Securities and Exchange Commission, ‘SEC Release Nos. 82532’ (18 January 2018); and Securi-
ties and Exchange Commission, 83 FR 3380 (SR-NYSEArca-2018-02, 24 January 2018).
139 Securities and Exchange Commission, ‘SEC Release No. 34-83913’ (22 August 2018)
gov/rules/sro/cboebzx/2018/34-83913.pdf> accessed 13 November 2020. For commentary see
Nikhilesh De, ‘The Securities and Exchange Commission (SEC) has Issued Rejections to Bitcoin
Exchange-Traded Fund (ETFs) Proposals from ProShares, Direxion and GraniteShares’ (Coin-
desk, 27 November 2019) .coindesk.com/sec-rejects-7-bitcoin-etf-proposals> accessed 13
November 2020.
140 Nikhilesh De, ‘SEC Rejects Latest Bitcoin ETF Bid’ (Coindesk, 27 February 2020)
coindesk.com/sec-rejects-latest-bitcoin-etf-bid> accessed 14 November 2020.
141 See Katie Rooney and Bob Pisani, ‘Winklevoss Twins Bitcoin ETF Rejected by SEC’ (CNBC,
26 July 2018) .cnbc.com/2018/07/26/winklevoss-twins-bitcoin-etf-rejected-by-sec.html>
accessed 30 November 2019).
142 Securities and Exchange Commission (n 139) 24. The rationale here is that to successfully ma-
nipulate the ETP, one would also have to trade on the spot market. In traditional commodity a
surveillance-sharing agreement assists the ETP listing markets in spotting manipulative behaviour
in the spot market.
143 ibid 29.
144 ibid.
145 ibid.
Reimagining a Centralised Cryptocurrency Regulation in the US124
of business.146 Custody risk is also present in the crypto-derivatives markets, which
is rarely addressed by the CFTC. Particularly, for physically-settled bitcoin futures
contracts, the exchanges are required to hold physical bitcoins.147 Given that there
is no federal-level investor protection for these trusts, bitcoin held by the trust
is not subject to Federal Deposit Insurance Corporation or SIPA. Therefore, if
cryptocurrencies are lost or stolen, or a crypto holder dies, it is likely that those
coins will be lost forever.148 The existing law hardly “adjudicate the matter of
recovering the coins owned by the crypto holder who has passed away”.149
E. T ’
The CFTC’s approach in approving crypto-derivatives deviates from the
other two major global regulators, the ESMA and the FCA. Both the EU and the UK
regulators took measures restricting the trading of crypto-derivatives, determining
that retail investors are not protected from the price volatility, speculation, and
other forms of market and operational risks associated with cryptocurrencies.150
Also, the complexity of these products and a lack of transparency limit retail
investors’ ability to understand the risks underlying these products.151 Leveraged
crypto-derivatives are risky and extremely volatile, increasing the scale and speed
146 Daniel Shane, ‘Bitcoin Exchange Goes Bust After Hack’ (CNN, 20 December 2017)
money.cnn.com/2017/12/20/technology/south-korea-bitcoin-exchange-closes/index.html>
accessed 23 November 2020.
147 A company’s CEO has gone missing with Cold Wallet’s access. See Matthew Beedham, ‘Cryp-
tocurrency Exchange IDAX’s CEO Reportedly Missing with Company’s Wallet’ (The Next
Web, 29 November 2019)
cy-exchange-ceo-missing-idax-bitcoin-cold-wallet/> accessed 14 November 2020. On another
occasion, a CEO died and was the only person who knew the password of the company’s cold
wallet. See Antonia Noor Farzan, ‘Millions Vanished with a Cryptocurrency Entrepreneur’s
Sudden Death. Now Investors Want His Body Exhumed’ (The Washington Post, 16 December
2019)
cy-death-body-exhumed/> accessed 14 November 2020. In both cases, the investors lost all the
cryptocurrencies and the money.
148 Lefan Gong and Luping Yu, ‘China’ in Josias Dewey (ed), Blockchain & Cryptocurrency Regula-
tion (Global Legal Group 2019) 261, 266 ces/vl/mem-
bersonly/Article/1489775_1.pdf> accessed 24 February 2021.
149 ibid.
150 See analyses in Section II.A and II.B regarding the EU and UK’s ban on crypto-derivatives on the
ground of potential har m to retail investors.
151 Financial Conduct Authority, ‘Prohibiting the Sale to Retail Clients of Investment Products that
Reference Cryptoassets’ (n 2); Financial Conduct Authority, ‘Prohibiting the Sale to Retail Client
of Investment Products that Reference Cryptoassets’ (n 54).
Reimagining a Centralised Cryptocurrency Regulation in the US 125
of investors’ losses from a crypto-derivative.152 Furthermore, the regulators should
be cautious about the risk of the cryptocurrency speculative bubble. Although
many crypto-enthusiasts believe that crypto-derivatives could increase liquidity in
the cryptocurrency market, thereby stabilizing price volatility,153 in the absence
of a comprehensive regulation addressing the core regulatory concerns, crypto-
derivatives would still hurt retail investors.
IV. F C-D US:
P R F
To achieve a robust and eective crypto-derivatives regulatory framework
in the US, it is essential that: (1) the US crypto-derivatives market is free from
manipulative and abusive practices; (2) regulators have adequate visibility into the
cryptocurrency spot market; (3) regulators are well-equipped to detect abusive
and manipulative practices in the crypto-derivatives market and; (4) enforcement
mechanisms are in place to safeguard investors’ interest. This paper explores
two possible regulatory frameworks for crypto-derivatives. First, like the UK
(and possibly the EU in the future), there could be a complete ban on crypto-
derivatives enacted by a federal statute, as crypto-derivatives are just a means of
speculation, and the lack of oversight in the spot market will continue harming
retail investors. Second, if an outright ban is not feasible, Congress must develop
comprehensive legislation that recognises the novel market and operational risks
posed by cryptocurrency, and introduce eective regulatory intervention in the
crypto-derivatives markets.
A. T -
Following the UK and the EU, the US regulators may consider banning
the sale and purchase of crypto-derivatives in the derivatives exchanges, keeping
investor protection as their central focus. Crypto-derivatives pose a unique threat
to investors due to their high leverage and extreme price volatility.154 Moreover,
the failure of the CFTC to have any oversight mechanism on the cryptocurrency
152 ibid.
153 Many were of the view that having another competitor in the market or other altcoin derivatives
could give a major boost to its liquidity and trading volumes. This may also create awareness of
broader cryptocurrency market among investors that may result in infusing more money into the
market. This could help create less volatility in altcoin prices.
154 Ryan Clements, ‘Cryptocurrency Self-Regulatory Organization (CSRO)’ (The FinReg Blog, 21
June 2019)
ulatory-organization-work-assessing-its-promise-and-likely-challenges/> accessed 23 November
2020.
Reimagining a Centralised Cryptocurrency Regulation in the US126
spot market is contrary to the CFTC’s mandate to protect investors from fraud
and abusive market practices. Unless the CFTC has established a mechanism
to oversee the cryptocurrency spot market meaningfully and adequately, a ban
on crypto-derivatives will act as a warning to investors not to put their money
in such risky products. Further, the complexity of the crypto-derivatives and the
lack of transparency in the cryptocurrency spot market require a more rigorous
enforcement approach from the CFTC. However, many argue that an outright ban
is likely to hurt the existing cryptocurrency platforms that comply with the laws
and regulations.155 There is another set of arguments:
“where regulator erred on the side of banning or bashing
cryptocurrencies, they have faced classical problems of regulatory
competition and regulatory arbitrage, i.e., the migration of
the industry from their jurisdiction to more welcoming ones or
migration of activities to underground or black-markets”.156
Given the drawbacks of an outright ban on crypto-derivatives, this paper
proposes an alternative regulatory framework — enacting comprehensive federal-
level crypto-regulation in response to the emerging issues of manipulation and
lack of investor protection in the cryptocurrency spot market and vis-à-vis crypto-
derivatives markets.
B. T -
The need for a comprehensive crypto-regulation is premised on four
grounds. First, the sporadic regulatory eorts among dierent US regulatory
agencies concerning cryptocurrency are counterproductive. A systemic regulatory
approach can minimise the risks of cryptocur rency spot markets and avert market
failure.157
Second, the novelty involved in cryptocurrency requires a uniform
regulatory approach. Otherwise, it may bring about an unwanted disruption in the
capital and financial market. In the US, the regulatory approach to cryptocurrency
is fragmented. For instance, while the SEC has declared ICO as a security, it did
not establish its jurisdiction exclusively on all digital tokens. Meanwhile, the US
Internal Revenue Service (IRS) considers convertible cryptocurrency as property
155 Osato Avan-Nomayo ‘Cryptoderivatives Ban is Not a Good Idea, Says WFE’ (Blockonomi, 08
October 2019),
accessed 23 November 2020.
156 Hossein Nabilou, ‘How to Regulate Bitcoin? Decentralized Regulation for a Decentralized Cryp-
tocurrency’ [2019] 27 International Journal on Law and Information Technology 266, 270.
157 ibid.
Reimagining a Centralised Cryptocurrency Regulation in the US 127
for tax purposes.158 In addition, the federal courts in several cases (such as United
States v. Ulbricht)159 have treated cryptocurrency as money for specific purposes.
However, there are still divided opinions as to the status of cryptocurrency as
“money” because: (1) cryptocurrency is not widely accepted as a means of payment
and (2) its store value is unreliable due to market volatility.160 It is argued that a
comprehensive federal crypto-regulation can cure the problem of this fragmented,
sporadic, and ambiguous regulatory approach by adopting a unanimous definition
of cryptocurrency (or by defining it as a separate ‘digital asset class’) and thus
bringing the intermediaries and cryptocurrency-based assets under the same
regulatory framework.161
Third, if fraud and market manipulation continue, it will eventually drive
potential investors away from the market. Furthermore, opacity and lack of
regulatory clarity can result in the loss of investors’ confidence.162
Finally, if cryptocurrencies become an eective monetary instrument in
the future, its impact on the country’s monetary policy would be profound as
the Federal Reserve Board might lose its ability to control the money supply.163
Therefore, there is a demand from both policymakers and market participants that
158 Internal Revenue Service, ‘Virtual Currencies’ (The Internal Revenue Service)
businesses/small-businesses-self-employed/virtual-currencies> accessed 21 November 2020.
159 United States of America v. Ulbricht, No. 15-1815 (2d Cir 2017). Retrieved from
justia.com/federal/appellate-courts/ca2/15-1815/15-1815-2017-05-31.pdf?ts=1496241010>
accessed 11 May 2021.
160 Mohamed Damak, ‘The Future of Banking: Cryptocurrencies Will Need Some Rules to Change
the Game’ (S&P Global, 19 February 2018) .spglobal.com/en/research-insights/articles/
the-future-of-banking-cryptocurrencies-will-need-some-rules-to-change-the-game> accessed 4
December 2019. As it goes “[…] cryptocurrencies do not meet the basic two requisites of a cur-
rency: An eective mean of exchange and an eective store of value. First, cryptocurrencies are
still not widely accepted as payment instruments, although the list of companies accepting them
have increased over the past few years. Second, the volatility that we have observed over the past
12 months in the valuation of some cryptocurrencies and their market cap is the most meaningful
evidence that they fail the test of value storage. We also don’t view cryptocurrencies as an asset
class. For starters, the total outstanding aren’t big enough yet. At Feb. 10, 2018, there were 1,523
outstanding cryptocurrencies with a market cap of around $394 billion. By way of comparison, at
the same date, this is well below the market capitalization of Apple Inc., around $794 billion”.
161 Averie Brooks, ‘U.S. Regulation of Blockchain Currencies: A Policy Overview’ [2018] 9 Amherst
Intellectual Property Brief 75.
162 ibid.
163 Damak (n 160).
Reimagining a Centralised Cryptocurrency Regulation in the US128
Congress develop comprehensive federal legislation to regulate cryptocurrencies164
and bring it under a uniform legislative scope.165
In the UK and the EU, regulators are taking measures to establish a uniform
and robust regulatory framework to achieve transparency into the cryptocurrency
spot market. The UK government is in the consultative process with various
stakeholders and industry participants to ensure that “its regulatory framework is
equipped to harness the benefits of new technologies, supporting innovation and
competition, while mitigating risks to consumers and stability”.166 The UK’s eorts
on regulatory measures predominantly aim to enhance consumer protection and
address risks and challenges associated with cryptocurrency and stable coins.167
With a similar approach, the European Commission has adopted a comprehensive
digital finance package that included “Legislative Proposals on Cryptoassets”,168
to provide the cryptocurrency markets with coherent legal rules as well as to
support financial innovation, reinforce investor protection while ensuring financial
stability.169 The proposal further aims to reduce the market fragmentation by
164 Financial Stability Oversight Council, ‘Annual Report’ (2019)
tem/files/261/FSOC2019AnnualReport.pdf> accessed 20 November 2020 (calling for stricter
state and federal regulations of stablecoins and digital assets).
165 Peter Van Valkenburgh, ‘A National Alternative to Onerous State-by-State Regulation of Crypto-
currency Intermediaries’ (Coin Center, 30 August 2019) .org/entry/a-nation-
al-alternative-to-onerous-state-by-state-regulation-of-cryptocurrency-intermediaries> accessed 20
November 2020.
166 See HM Treasury, ‘UK Regulatory Approach to Cryptoassets and Stablecoins: Consultation and
Call for Evidence’ (January 2021) 3 .gov.uk/government/consultations/uk-regulatory-ap-
proach-to-cryptoassets-and-stablecoins-consultation-and-call-for-evidence> accessed 21 February
2021.
167 ibid. The UK’s Call for Evidence report is the reflection of the final report submitted by the Cryp-
toassets Taskforce in 2018 which advised the government to take actions in five main grounds to:
(1) “maintain the UK’s international reputation as a safe and transparent place to do business in
financial services; (2) ensure high regulatory standards in financial markets; (3) protect consumers;
(4) guard against threats to financial stability that could emerge in the future; and (5) allow those
investors in the financial sector that play by the rules to thrive”. See also, HM Treasury, Financial
Conduct Authority, and Bank of England, ‘Cryptoassets Taskforce: Final Report’ (October 2018)
6 < https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf> accessed 21 February 2021.
168 The proposed legislative proposal on cryptoassets will be accompanied by the MiFID and MiFIR.
169 European Commission, ‘Proposal for a Regulation of the European Parliament and of the
Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937’ [2020]
COM/2020/593 final
:52020PC0593> accessed 21 February 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US 129
developing “uniform conditions of operations for firms with the EU”,170 that can
be utilised to overcome regulatory dierences across the member states.
In contrast, the US regulatory approach towards cryptocurrency is still
sporadic, fragmented, and ambiguous, along with powers being divided across
multiple regulatory agencies between SEC, CFTC, the Oce of the Comptroller
of the Currency (‘OCC’), the Financial Crimes Enforcement Network (‘FinCEN’)
and Internal Service Revenue (‘IRS’).171 In addition to the SEC and the CFTC’s
authority over cryptocurrency, the OCC from time to time, provides interpretative
letters and guidance for the banks and financial institutions to delineate the
permissible activities concerning cryptocurrency.172 Since 2013, the FinCEN has
also been issuing instructions for banks, Money Services Businesses (MSBs), and
170 ibid 5.
171 For an analysis on the gap in the regulation of cryptoassets, see Timothy G. Massad, ‘It’s Time
to Strengthen the Regulation of Crypto-Assets’ (Brookings, 18 March 2019)
brookings.edu/wp-content/uploads/2019/03/Timothy-Massad-Its-Time-to-Strengthen-the-Reg-
ulation-of-Crypto-Assets-2.pdf> accessed 11 May 2021.
172 In an interpretive letter dated 04 January 2021, the OCC has now permitted the banks to use
cryptocurrency and stable coins to facilitate payment transactions for customers. The banks can
also validate, store and record payment transactions made in cryptocurrency and stablecoins, and
serve as a node of a blockchain (INVN). See Oce of the Comptroller of the Currency, ‘OCC
Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to
Use Independent Node Verification Networks and Stablecoins for Payment Activities’ (04 January
2021) v/news-issuances/news-releases/2021/nr-occ-2021-2a.pdf> accessed
24 February 2021. In a previous interpretive letter dated 22 July 2020, the OCC permitted the
US national banks to provide cryptocurrency custody services for customers. See, Oce of the
Comptroller of the Currency, ‘Authority of a National Bank to Provide Cryptocurrency Custody
Services for Customers’ (22 July 2020) .occ.treas.gov/topics/charters-and-licensing/inter-
pretations-and-actions/2020/int1170.pdf> accessed 24 February 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US130
cryptocurrency exchanges to require them to comply with the Bank Secrecy Act173
and AML/CTF rules.174
F IV.1
The Major US Regulators with Jurisdictions over Cryptocurrency
However, legislative eorts are going on to bring about some regulatory
clarities for cryptocurrency service providers and market participants. In particular,
the shift towards contactless digital payment because of the COVID-19 pandemic,
and Facebook’s eorts to initiate their own digital currency, compelled the US
legislatures to consider the need for a cryptocurrency regulation. In March 2020,
the US House of Representatives proposed a new Cryptocurrency Act 2020,175
categorizing cryptocurrency or digital tokens into three main groups based on its
decentralised nature and the use of cr yptographic ledger, that is: (1) cryptocurrencies
173 31 United States Code 5311 et seq.
174 See Financial Crime Enforcement Network, ‘FinCEN Issues Guidance on Virtual Currencies and
Regulatory Responsibilities’ (Financial Crime Enforcement Network, 18 March 2013)
fincen.gov/news/news-releases/fincen-issues-guidance-virtual-currencies-and-regulatory-respon-
sibilities> accessed 24 February 2021; Financial Crime Enforcement Network, ‘Application of
FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies’ (Fi-
nancial Crime Enforcement Network, 9 May 2019 .fincen.gov/sites/default/files/2019-05/
FinCEN%20Guidance%20CVC%20FINAL%20508.pdf> accessed 24 February 2021; US De-
partment of the Treasury, ‘The Financial Crimes Enforcement Network Proposes Rule Aimed at
Closing Anti-Money Laundering Regulatory Gaps for Certain Convertible Virtual Currency and
Digital Asset Transactions’ (18 December 2020) .gov/news/press-releases/
sm1216> accessed 24 February 2021.
175 United States House of Representatives, ‘H.R.6154’: Crypto-Currency Act of 2020.
Reimagining a Centralised Cryptocurrency Regulation in the US 131
including the US currency representation; (2) crypto-commodities residing on a
blockchain or decentralised cryptographic ledger and; (3) crypto-securities that
meet the Howey test.176 The Act further proposed that depending on the categories,
the CFTC, the SEC, and the FinCEN would have regulatory authorities over this
asset class. In another draft bill, the Digital Commodity Exchange Act 2020,177
The US House of Representatives proposed an amendment to the CEA by
incorporating definitions of ‘digital commodity,’ ‘digital commodity custodian’178
and ‘digital commodity exchange’.179 Although it recommended the CFTC as
a single regulatory body with exclusive jurisdiction over cryptocurrency-related
transactions,180 the proposition is based on the assumption that cryptocurrencies are
only ‘virtual commodities’, and thus excluded other cryptocurrency-based financial
products, such as ICOs and various forms of digital tokens and utility tokens. It
also does not provide any specific regulatory guidance where cryptocurrency is
used as a payment method.
Nonetheless, both propositions do not adequately answer the regulatory
quandaries regarding cryptocurrency, in as much as they do not complement the
existing fragmented regulatory approach towards cryptocurrency. To provide a
degree of regulatory clarity, this paper proposes a federal level crypto-regulation
with a separate regulatory agency having exclusive jurisdiction over cryptocurrencies
in the US, including the spot market and any financial instruments where the
underlying asset is a cryptocurrency (such as crypto-derivatives). The legislation
should also incorporate mandatory registration requirement for cryptocurrency
exchanges.181 The agency will also coordinate with other regulatory agencies, as
the new agency will work parallelly with the others (such as the SEC, CFTC, IRS,
and FinCEN), but will only be limited to regulating cryptocurrency and other
digital assets. A uniform federal-level cryptocurrency agency is likely to establish
176 Securities and Exchange Commission (n 18).
177 United States House of Representatives, ‘H.R. 8373’: Digital Commodity Exchange Act of 2020.
178 ibid 2. “The term ‘digital commodity custodian’ means an entity that holds, maintains, or safe-
guards digital commodities and other assets on behalf of digital commodity market participants”.
179 ibid 2. “The term ‘digital commodity exchange’ means a trading facility that lists for one digital
commodity”.
180 ibid.
181 The proposed new legislation should also exempt the SEC and the CFTC from exercising its
jurisdiction over cryptocurrency-based financial instruments.
Reimagining a Centralised Cryptocurrency Regulation in the US132
eective oversight and supervisory authority over the cryptocurrency spot markets,
that would help curb market manipulation and restore investor confidence.182
C. T -
The proposed crypto-regulation should be based on information, equal
access, and investors’ confidence. In particular, it should have the mandate of
protecting investors against fraud and oer a degree of centralization. Therefore,
the regulation should have: (1) a new federal cryptocurrency agency established
by an Act of Congress; (2) the mandatory registration requirement for all
cryptocurrency exchanges, including the cryptocurrency spot markets and; (3) a
national cryptocurrency exchange.
(i) A New Federal Cryptocurrency Agency: A de novo Crypto-Regulatory Re gime
Established by an Act of Congress
A federal cryptocurrency agency having exclusive jurisdiction over
cryptocurrencies can prevent price manipulation, fraud, and abusive market
practices, by exercising direct oversight over the cryptocurrency intermediaries,
including exchanges and spot markets. Although the new cryptocurrency agency
structure is subject to rigorous academic, technical, and regulatory discussions,
it is not uncommon in the US to constitute a new federal agency to protect
consumers and fill in the regulatory vacuum. After the financial crisis of 2008,
the Dodd-Frank Wall Street Reform and Consumer Protection Act established the
Consumer Financial Protection Bureau — a single, independent consumer-focused
regulatory regime — consolidating the scattered financial authorities throughout
the federal government and bringing them under one roof.183 Similarly, the de
novo crypto-regulator should combine existing regulators’ mandates, jurisdictions,
responsibilities, and enforcement authorities over cryptocurrencies, and overcome
the current regulatory overlap and ambiguity. The de novo regime’s mandate
should be based on investor protection through promoting market transparency.
With respect to jurisdictions, this paper proposes that the crypto-regulator
should deal with cryptocurrency-based securities (for example, ICOs, digital
tokens, and utilities), derivatives (for example, swaps, futures, and options), ETFs,
182 This paper does not propose a direct regulation of the cr yptocurrency technology (i.e., blockchain
technology) itself. Rather, the regulation should be indirect, meaning it should address the regula-
tion of the cryptocur rency intermediaries, including cryptocurrency exchanges and custodians.
183 12 United States Code Sections 5491–5497 (2010).
Reimagining a Centralised Cryptocurrency Regulation in the US 133
crypto-securities based swaps, cryptocurrency custodians, and cryptocurrency
spot markets (Figure IV.2).
F IV.2
The Proposed US Crypto-Regulation
With respect to jurisdictions, this paper proposes that the crypto-regulator
should deal with cryptocurrency-based securities (for example, ICOs, digital
tokens, and utilities), derivatives (for example, swaps, futures, and options), ETFs,
crypto-securities based swaps, cryptocurrency custodians, and cryptocurrency
spot markets (Figure IV.2).
(ii) Federal Licensing Requirement: Overseeing the Cryptocurrency Spot Market
The new regulator should be responsible for authorising licenses to eligible
and trusted cryptocurrency intermediaries, i.e., cryptocurrency exchanges,
cryptocurrency custodians, payment processors, and cryptocurrency spot markets,
that will operate businesses in cryptocurrencies. The licensing regime is significant
for cryptocurrency companies because it will help the regulator bring the licensed
entities under a single supervisory authority. For instance, after the infamous Mt.
Gox hacking incident,184 Japan enacted an amendment to the Payment Services Act
184 In 2014, Bitcoin hacking bankrupted a leading exchange in Japan called Mt. Gox, with approx-
imately half-a-billion dollars in bitcoin ($850,000 bitcoin) stolen. While $200,000 bitcoin were
recovered within six months, its dollar value sunk by the revelation of weak security, and the in-
cident showed that hacks impact bitcoin’s trading price. Exchange customers had no remedy. See
Robert McMillan, ‘The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster’ (Wired, 3 March
2014) hange/#:~:text=Tokyo%2Dbased%20bitcoin%20
exchange%20Mt,the%20much%2Dhyped%20digital%20currency> accessed 11 May 2021.
Reimagining a Centralised Cryptocurrency Regulation in the US134
(‘PSA’) in 2017, and created a licensing regime for its cryptocurrency exchanges.185
According to the new amendment, all cryptocurrency exchanges engaged in
purchasing, selling, and exchanging cryptocurrencies and intermediaries thereof,
must register with the Japan Financial Services Authority (‘FSA’).186 The exchanges
must also comply with capital and positive net assets requirements and have an
internal auditing system to ensure compliance with the relevant PSA rules.187 To
date, the FSA has granted licenses to 16 cryptocurrency exchanges subjecting them
to regulatory oversight.188
Like Japan, the licensing regime will help the US regulator supervise the
cryptocurrency intermediaries. The regime will establish a market oversight
mechanism by ensuring that these intermediaries comply with the relevant US
laws, including AML/CFT, anti-manipulation, anti-fraud, consumer disclosure,
and prudential (licensing and minimum-capitalisation) requirements.
(iii) A Central Cryptocurrency Trading Platform with Registration Requirement
Under the new cryptocurrency regulation, there should be a central
cryptocurrency trading platform with mandatory registration requirements for all
cryptocurrency exchanges and spot markets willing to trade cryptocurrencies and
issue cryptocurrency-based oerings. A centrally regulated cryptocurrency trading
platform with a mandatory registration requirement will infuse the liquidity in the
spot market and stabilise the cryptocurrency’s price volatility.189 This will further
facilitate the regulators to exercise direct oversight over the cryptocurrency
spot markets. A central platform predicated on disclosure requirements and
information-sharing will provide investors with transparency and equal access to
information, and will safeguard the market from the cryptocurrency world, which
is highly asymmetrical, unverified, and sometimes blatantly false.190
As to the platform’s structure, the new agency could create and maintain
a central database where all cryptocurrency-based oerings will be listed and
185 Masahiko Ishida, Edward Mears, and Ryutaro Takeda, ‘Japan Regulatory Update on Virtual Cur-
rency Business’ (DLA Piper, 29 December 2017) .dlapiper.com/en/japan/insights/publica-
tions/2017/12/japan-regulatory-update-on-virtual-currency-business/> accessed 23 November
2020.
186 ibid.
187 ibid.
188 These cryptocurrency exchanges are represented by the Japan Virtual Exchange Association—a
self-regulatory organization for the Japanese cryptocurrency industry.
189 Brial Novell, ‘Regulation Crypto—A Proposed Framework for United States Cryptocurrency Reg-
ulation’ (PR Newswire, 20 August 2018) .prnewswire.com/news-releases/regulation-cryp-
to--a-proposed-framework-for-united-states-cryptocurrency-regulation-300699235.html> accessed
23 November 2020.
190 ibid.
Reimagining a Centralised Cryptocurrency Regulation in the US 135
conducted, providing the regulator “with direct oversight, capabilities, and
transparency for all transactions and parties involved”.191 Further, to prevent false
claims on ICOs, crypto-derivatives, and other cryptocurrency-based oerings, here
should be a requirement that all advertisements and solicitations be source-verified.192
The registration and oering process should be based on disclosure requirements,
representations, and warranties, as well as the regulator’s involvement at the outset.
In addition to supporting, facilitating, and listing ICOs and crypto-derivatives, a
central cryptocurrency exchange could employ world-class security measures,
which would consequently enhance the trading platform’s safety and investors’
confidence.193
V. C
There are many questions yet to be answered in this rapidly changing
cryptocurrency industry. However, hype, volatility, and speculation — these three
words best describe the current cryptocurrency space, which is likely to adversely
impact the crypto-derivatives investors in the absence of a robust regulatory
framework, investor protection, and oversight mechanisms of the spot market.
The UK’s and the EU’s regulators have recently moved to protect retail
investors from the risk and volatility of the crypto-derivatives market, and have
extended their eorts to establish a uniform legislative framework for all kinds of
cryptocurrency-related assets. Nevertheless, the US oers a somewhat hands-o
approach. The present study takes a comparative approach to analyse the regulators’
contrasting stance with respect to crypto-derivatives in the UK, EU, and US. The
research revolves around an essential question — whether the existing regulatory
approach towards crypto-derivatives is adequate to protect the retail investors? It
concludes that unlike the UK and the EU, the US measures fail considerably to
consider the ‘Main Street’ investors’ vulnerability to this allegedly over-leveraged
crypto-derivatives market. It further concludes that the propensity of market
manipulation in the cryptocurrency spot market combined with regulatory opacity
and fragmentation creates significant hurdles to regulate crypto-derivatives under
the existing US legal framework.
These opaque and fragmented regulatory responses to crypto-derivatives
demonstrate the dire need for centralised and comprehensive cryptocurrency
regulation in the US. The lack of regulation perpetuates the fraudulent and
manipulative behaviour in the spot market, that will eventually drive potential
investors away from the market. Many crypto-enthusiasts resist the idea of
191 ibid.
192 ibid.
193 ibid.
Reimagining a Centralised Cryptocurrency Regulation in the US136
regulating the industry on the ground that it may impede innovation. However,
regulatory clarities and a proper oversight mechanism over the cryptocurrency
exchanges and spot markets are necessary frictions, as this will help protect the
market integrity, punish abusive and manipulative practices, and restore investor
confidence.
To reimagine the crypto-derivatives regulation in the US, the paper envisions
a centralised disclosure-based cryptocurrency regulatory regime in establishing an
eective oversight mechanism for the US cryptocurrency spot market. This would
not increase regulatory certainties and competencies and is also likely to attract a
wide range of market participants.
At the 5th Annual Conference on FinTech and Regulation held in
February 2021, Robert Ophèle, as Chairman of Autorité des Marchés Financiers,
proposed a centralised crypto-regulation on the ground that a single regulator is
cheaper and more competent to exercise the centralised expertise in this emerging
cryptocurrency market.194 In the US, Hester Peirce, as an SEC Commissioner,
called for regulatory clarities as major corporations like Tesla, BNY Mellon, and
Mastercard, started participating in the cryptocurrency market.195
Therefore, like the UK and the EU, the US Congress should develop
comprehensive federal cryptocurrency legislation to capture the cryptocurrency’s
novelty and underpinning technology. A comprehensive regulation will serve
the public interest, providing a systemic regulatory approach that minimises the
risks of cryptocurrency spot markets and averts market failure. Furthermore, the
legislation will encapsulate the technology-specific regulation to cryptocurrency,
strengthening the US capital and financial market. A uniform federal-level
cryptocurrency agency is likely to establish eective oversight and supervisory
authority over the cryptocurrency spot markets, that would help curb market
manipulation and protect retail investors, and thereby uphold market integrity.
194 In Robert Ophèle’s opinion, a single body could provide a level playing field among all cryptocur-
rency service providers and is likely to have all the expertise that would provide simplicities and
certainties in regulating cryptocurrency. In his view, the ESMA, in the EU, could be a competent
authority to oversee cryptocurrency spot markets and any financial instruments where the refer-
ence asset is a cryptocurrency. See Helen Partz, ‘French Ocial Wants to Change How Europe
Regulates Crypto and Blockchain’ (The CoinTeleg raph, 09 February 2021)
graph.com/news/french-ocial-wants-to-change-how-europe-regulates-crypto-and-blockchain>
accessed 20 February 2021.
195 Chris Prentice and Katanga Johnson, ‘Clear Crypto Rules Urgently Needed as Major Compa-
nies Embrace Asset: SEC Ocial’ (The Reuters, 13 February 2021) .reuters.com/article/
idUSKBN2AD0ML> accessed 24 February 2021.
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