A recent statement from an NYU professor brought yet another troublesome aspect of US crypto regulation to the attention of the public. This time, it is a rivalry between different regulators, with all of them wishing to establish dominance.
US Regulators Competing for Turf
The US is under a lot of pressure when it comes to bringing functional regulation. However, this also allows for a turf struggle, since the dominant regulator has yet to be determined. The NYU Professor David Yermack stated recently that the US currently has numerous regulatory agencies at the federal level. All of them are trying to bring their own regulations, but the issue comes from overlapping jurisdictions. The issue expands even more due to the state regulations, once again with overlapping jurisdictions.
A good example is a recent situation where the New York Attorney General’ office and DFS (Department of Financial Services) both brought their own regulatory decisions regarding the crypto world. Then, there is the US SEC, which is currently leading in regulatory decision making at the federal level.
With a situation like that, Professor Yermack claims that the US system has a lot of weaknesses in it. Those weaknesses include regulatory arbitrage, high costs, and even competition among different agencies.
Is NY AG Stepping out of Turf?
The jurisdiction debate came to light only days ago, after accusations from Jesse Powell, the co-founder, and CEO of crypto exchange called Kraken. Powell accused Barbara Underwood, the NY Attorney General, as well as her entire office, for operating outside their turf. This came due to the fact that the Attorney General’s office conducted an in-depth look into the exchanges, with some of them (Kraken included) refusing to cooperate.
The AG office then referred Kraken and two other exchanges of potentially violating the state of New York’s regulations regarding cryptos. The referral is mostly based on the belief that the exchanges may have accepted trades from individuals within the state itself.
Kraken continued to deny this, claiming that they are not operating in NY. It is currently unknown where the AG office received this information from. They were even asked whether they collaborated with SEC during their fact collecting, to which they have yet to respond.
We must, however, object to the highly unprofessional/malicious implication that because we did not respond to the voluntary information request, we *might* be operating illegally. We told you we don't operate in NY. AG trying cases in court of public opinion now?
— Kraken Exchange (@krakenfx) September 19, 2018
Shipkevich PLLC’s principal, Felix Shipkevich, also commented on the situation, stating that the regulation gaps exist. He also believes that skipping around jurisdictions will become even easier if regulation remains at the state level.
Government’s Intervention May Be Necessary
The problems, however, did not start with the AG’s report and have instead been around for a while now. For example, only a little over a week before the AG’s report, another uncertainty arose when the NY DFS approved two stablecoins’ applications. One was issued by Gemini Trust Co., while the other one came from Paxos Trust Co. Additionally, it would seem that Paxos did not even see the need for going into dialogue with the SEC.