Regulators should bring the best of equity market regulation to crypto investment

Former MIT cryptocurrency professor Gary Gensler, more widely known today as the new chairman of the U.S. Securities and Exchange Commission, wasted little time upon entering office in testifying before a U.S. House committee this month that the “crypto asset market is one that could benefit from greater investor protection.” Clearly, the wild swings in price volatility, some days as much as 30 percent, would challenge even the steeliest crypto investor.

But not to be overlooked is the importance of enhanced crypto regulation for the benefit of the everyday Americans who invest in cryptocurrencies via the stock market. Multiple public companies, two dozen by some analyses, now own cryptocurrencies on their balance sheets. Moreover, an analyst for BCA Research, a leading independent research firm, said last week that “there is tight positive correlation between bitcoin and the S&P 500 Index.”    

And more crypto investment vehicles are coming from some of Wall Street’s biggest players: BlackRock has filed to add Bitcoin futures to two of its investment funds and in April, Morgan Stanley added Bitcoin to 12 mutual fund investment strategies.

With more than half of Americans invested in the stock market – be it through ETFs, mutual funds, 401(k)s, 529 Plans and pension plans – regulators and Congress would be prudent to bring the very best of equities market structure and regulatory practices to the crypto investing markets.  

Michael Hsu, acting U.S. comptroller of the currency (OCC), has testified before Congress that the OCC, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are in talks about an “interagency sprint team” on crypto regulation. It is vital that U.S. regulators and lawmakers are ahead of the curve on innovation policy and investor protection in a globally competitive landscape, with regulators in Canada and Brazil approving crypto ETFs earlier this year, and further growth expected in the cryptocurrency ecosystem.

Here’s a roadmap from the equities markets that regulators should factor into any decisions: 

• Add cryptocurrency questions to the FINRA Series 7 General Securities Representative Exam. Crypto investing is no longer on the fringes. As Ben Emons of Medley Advisors noted last week, cryptocurrency investing is “here to stay” with increasing interconnectedness between Bitcoin and the equities markets. Investment advisers and brokers now have to be as knowledgeable about that asset class as they are about stocks and bonds. 

• Encourage financial literacy and suitability evaluations for relevant cryptocurrency investments, using, as an example, the work of the Options Industry Council, which educates and tests on options.

• Promote the adoption of automated trading for trade execution. Electronic market makers have significantly reduced the cost of trading and reduced volatility in the stock market and have proven ability to deliver superior price discovery, particularly across asset classes. When the markets are volatile, dependable liquidity is provided by automated traders to smooth out the markets, in particular electronic market makers who have obligations to buy when no one else wants to buy, or vice versa, to catch the proverbial falling knife.

• A strong cop on the beat. Examinations and enforcement are a powerful deterrent to bad actors. A self-regulatory organization (SRO) for crypto, similar to how FINRA safeguards market integrity, should now be under strong consideration.

The global markets, be they for stocks, bonds, futures or currencies, have long been interconnected. With greater retail investor exposure to cryptocurrency investments, even indirectly in the equities markets, it is more important than ever that retail investors can have confidence in regulation and market mechanics. Regulators must work with Congress, automated trading experts and market participants to ensure the same level of leadership and responsibility known and appreciated in the more established markets.

Kirsten Wegner is CEO of the Modern Markets Initiative, a Washington, D.C.-based education and advocacy organization for innovation in today’s markets.