By Kathy Chu, TruthDAO
Kathy Kraninger, former director of the Consumer Financial Protection Bureau (CFPB) under President Trump, spends her days grappling with one of the crypto industry’s thorniest issues: Market manipulation.
By many estimates, it's a sizable problem. A 2019 study by Bitwise Asset Management found that 95% of all reported bitcoin trades were fake (so-called "wash trades.") Meanwhile, fake trading in NFTs, or non-fungible tokens, account for 20% to 30% of overall activity, and up to 90% or more of trades on some NFT platforms, according to academics and data firms.
As vice president of regulatory affairs for Solidus Labs, Ms. Kraninger helped lead the formation of the Crypto Market Integrity Coalition in February. She said the coalition — which now has 30 members including Coinbase, Huobi Tech and Bitstamp — aims to combat all types of market manipulation to give investors confidence in the volatile crypto industry.
TruthDAO talked to Ms. Kraninger about whether the crypto industry is the "Wild West" of finance, and whether so-called stablecoins need strict regulation. Her interview was conducted in March 2022, two months before the UST stablecoin — which is supposed to be pegged one-to-one with the dollar — lost its peg, along with most of its value.
Answers have been edited for clarity and space. You can also watch our video interview with selected comments from Kraninger.
Digital assets, including cryptocurrencies, had a market cap last year of $3 trillion. How big of a problem is market manipulation?
When there are bad actors looking to take advantage of things, they're going to find a way, and that's the case with crypto. We absolutely see more concern about this, more action about this... and therefore, more sophisticated types of manipulation than we had before. When you know you're being watched, when you know that monitoring is happening and the surveillance capabilities are in place, people are going to behave differently.
The Crypto Market Integrity Coalition (CMIC) was formed in February. What was the impetus for this formation, and what is the coalition doing to address market manipulation?
It was really designed to counter the misconception of the Wild West of crypto. We know that there are regulatory regimes in place and that market participants, particularly the exchanges, are subject to regulation. It’s a different question whether you would like to see different regulations in place.
In terms of concrete initiatives, one is certainly creating awareness around the terms and use policies, the regulatory requirements, and the type of surveillance that's being conducted and addressed in the crypto ecosystem. And then most pointedly on the initiatives, training is something that I’ve talked about, and something we want to enable through the CMIC.
Critics have talked about how cryptocurrency exchanges overall are not doing enough to curb market manipulation. Have the exchanges indeed fallen short at times at preventing market manipulation, and if so, in what way?
I don't want to say that any particular exchange is necessarily falling down. It really is important to have that comprehensive risk-based approach in place so that you understand the risk appetite, you understand where your thresholds are, you understand what you can watch for and what you're responding to. That’s a challenge for any organization, including those in traditional finance.
What types of laws or regulations do you think need to be put in place to curb market manipulation, if any?
That gets to a more complicated question of the players, and which laws apply to them, and how they see themselves. But if they are engaged at all in securities trading, then there is a requirement already upon them to actually look for market manipulation and seek to prevent it.
The fact that this industry coalition exists shows that market manipulation is a major problem, right?
It’s a major problem in finance. It's certainly a problem in fiat, in banking, in traditional equities. There's this incentive to try to make money for those who are looking to do that quick and dirty.
There are particularly unique things with crypto that means we're going to have to continue to work on it. It's really about making sure we shore up any avenue to engage in manipulation or fraud.
President Biden recently released an executive order on cryptocurrency, asking federal agencies to study aspects including regulation. What type of regulation do you think is needed for the crypto industry?
I think that the executive order was a positive step, clearly demonstrating that the government as a whole should take a holistic approach. With regards to regulation that would be useful in the general space, I point to the safe harbor. The concept of a safe harbor is to enable innovation to happen, and to recognize that there are small projects that, when they start off, should have a sandbox opportunity. Right now, I think there is a little bit of uncertainty, particularly for the early (crypto) projects. They haven't even figured out what their use case is, but they have to figure out where they should register.
As director of the Consumer Financial Protection Bureau, you were known for your financial education efforts. As the crypto industry boomed, did you ever seriously consider regulation or putting in place consumer protections, as your successor Rohit Chopra is now thinking about doing?
I can tell you that the CFPB under my leadership was part of the inter-agency conversations around the Libra project (a digital currency proposed by Facebook), how to define cryptocurrencies, and what some of the requirements were. The focal point at the time though was really around the Anti-Money Laundering and Bank Secrecy Act compliance dimensions, which the CFPB doesn't have a role in, but pays close attention to because all of our partners are working on it in the government, and our regulated entities are subject to it.
The other dynamic at the time was very much the definitional one, because if a cryptocurrency is defined as a security or a commodity, then it's outside the purview of the CFPB. It’s subject to SEC or CFTC regulation from that standpoint
The current director of the CFPB has indicated that he's thinking about seeking consumer protections for the $180 billion stablecoin market. Do you think that's a good idea?
Look, I think there are a bunch of things that are being proposed on the stablecoin front. I think that it's critically important to have disclosure around the backing of those stablecoins. Obviously, there's an expectation that the coin is actually stable, that it's backed by something. As I said, the states have a role in that type of regulatory structure today, and there are pretty active conversations around that. I think that disclosures are important, but as for which agency should have that role or responsibility, I leave that to Congress.
Watch our video interview with selected comments from Kraninger HERE