Directly engage with policymakers! FTX proposes ten regulatory principles, CEO SBF to attend congressional hearing on Wednesday

The CEO of the cryptocurrency exchange FTX, Sam Bankman-Fried, will attend a cryptocurrency assets meeting at the US Congress this Wednesday. Representatives from cryptocurrency companies such as Coinbase and Circle will also be present. Today, FTX has proposed 10 major regulatory principles in hopes of assisting policymakers in establishing regulatory frameworks.

https://t.co/ml057xybRm

— SBF (@SBF_FTX) December 3, 2021

FTX's 10 Regulatory Principles for Cryptocurrency Trading Platforms

1. Proposal for Single-Level Market Regulatory Oversight for Spot and Derivatives Markets

In the United States, the separate regulatory policies governing the spot market and derivatives market have resulted in inefficiencies and suboptimal market structures. We believe that key regulatory principles for cryptocurrency trading markets, such as customer and investor protection, market integrity, prevention of financial crimes, and system security and resiliency, typically applicable to both spot and derivatives markets, as well as commodity and securities markets. In other words, regulatory labels for specific products and markets should not alter the core objectives of regulation, and the same rules should generally apply across all markets.

Therefore, we strongly support providing a single and consistent regulatory framework for cryptocurrency market operators.

2. Maintain Neutrality in Market Structure

If the regulatory principles mentioned in the first point can be addressed, the market structure should be independent of regulation. We believe that as long as various functionalities required for the trading lifecycle are addressed, policymakers can maintain neutrality in market structure.

In other words, most trading markets today have intermediary institutions to facilitate regulation and engage directly with clients through brokers or intermediaries. In contrast, most investors in the cryptocurrency market do not go through intermediaries but trade directly on platforms.

Furthermore, non-intermediary market participants have equal access to market data. If the primary barrier to entry for the general public into trading markets is internet connectivity issues rather than $100,000 data subscription fees or expensive commission fees with brokers, then the public can receive better service through today's cryptocurrency exchanges.

Non-intermediary markets create a more level playing field, which many traditional financial systems lack. Therefore, as long as cryptocurrency trading platforms continue to provide relevant customer protection, a direct, non-intermediary market structure should be allowed.

3. Cryptocurrency Asset Custody - Key Functions and Disclosure Requirements

If cryptocurrency assets are held in custody by platform operators or intermediaries on behalf of clients, appropriate safeguard measures should be disclosed in the custodian's policies and procedures. Key disclosures should include wallet architecture, whether insurance is provided by the custodian, how private key security is ensured, managed, and transmitted, how internal collusion and fraud-related risks are managed, and physical security of data centers.

4. Addressing Risks in Token Issuance, Asset Services, Trade Settlement, and Full-Collateral Margin Services Provided by Platforms

a. Token Issuance and Asset Services: Entities authorized to issue tokens through cryptocurrency platforms should adhere to policies and procedures governing token listing standards. Additionally, platform operators should establish and disclose how token issuers interact with the platform to facilitate asset services policies and procedures.

b. Market Supervision: Sound public policies should require cryptocurrency platform operators to establish policies and procedures for market supervision in the platform's trading environment to curb market manipulation and promote market trading order.

c. Settlement: In terms of settlement, platform operators should establish clear and transparent policies and procedures to explain when trade settlements will be executed, and under what conditions and circumstances settlements may be reversed due to errors.

d. Full-Collateral Margin and Risk Management: The regulatory framework for cryptocurrencies should clearly indicate the spot and derivatives positions in user wallets and accounts available for full-collateral margin and be subject to appropriate risk-weighted discount constraints.

5. Trading Platform Providers - Regulatory and Market Reporting

Regulatory bodies should require platforms to report on trading activities to provide visibility into the platform's trading information and better regulate market manipulation and other unfair trading practices.

Regarding market reporting, the cryptocurrency industry generally provides market data to users for free. Policymakers should carefully consider allowing trading platforms to charge users for providing or using market trading data on the platform. The correct policy can incentivize platform operators to focus on risk management, user experience, and product innovation to gain a competitive edge, rather than solely earning fees based on user trading behavior on the platform.

6. Ensure Customer Protection

As mentioned earlier, cryptocurrency platforms bring a transformation in market structure that favors a non-intermediary model where there is no need for additional third-party platforms or institutions to enter the platform and trading markets.

However, in this market structure, essential customer protection measures should still exist. Platform providers or intermediaries should establish and disclose policies and procedures to ensure the best interests of all users are always protected, leaving it to investors to assess. This will allow investors to choose platform providers based on the robustness of these policies and procedures.

7. Ensure Financial Responsibility

Similar to traditional markets, maximizing the protection of user assets should be a key principle in regulating the cryptocurrency asset market.

Wallets serve as crucial tools for storing cryptocurrency assets, and besides ensuring the security of wallets themselves, policymakers should ensure that users have real-time access to information regarding their account levels.

Additionally, policymakers should also ensure that platform operators do not rely on external resources for settlement and risk management.

8. Ensure Stablecoins Used on Platforms Meet Appropriate Standards

Platform operators should explain the standards for selecting stablecoins that can be used on the platform. As stablecoins face reserve asset fluctuations and redemption risks, users have the right to understand how these risks will impact trading behavior on the platform and affect trade settlements.

9. Ensure Network Security Measures

In recent years, market regulatory bodies have established comprehensive network security requirements for market infrastructure providers. If policymakers do not apply existing relevant safeguard measures, they should require platform providers to establish and disclose policies and procedures regarding network security protection measures.

For platform operators not yet licensed, policymakers should adopt policies that help standardize domestic and global safeguard measures.

10. Ensure Anti-Money Laundering and KYC (Know-Your-Customer) Regulations

When new users join a platform, appropriate KYC procedures should be implemented, and user transaction behaviors should be regularly monitored for anti-money laundering compliance. Market operators should also undergo periodic self-assessment and regular reviews by their primary regulatory bodies of these requirements.