Financial regulation is often written in response to crises or booms. Both are too reactive to produce durable market structure.
Rules drafted during periods of stress tend to be narrow and enforcement-driven, focused on containing recent failures. Rules written during rallies tend to be permissive and defer hard solutions on risk allocation, disclosure, and supervision to the future. Neither approach yields stable rules that market participants can follow across cycles.
The most effective regulatory frameworks are built during periods of lower activity, when market participation has lessened, leverage is reduced, and policymakers can focus on structure rather than headlines or appealing to voters.
After a sharp pullback—Bitcoin is down roughly 36% and the Hashdex Nasdaq Crypto Index ETF has declined about 20% since October—crypto markets have deleveraged and cooled, creating conditions under which durable market rules can be written.
Despite years of debate, several foundational regulatory questions remain unresolved in the cryptocurrency industry. Policymakers have yet to settle 1) who may lawfully custody customer assets and under what safeguards, 2) which trading platforms and intermediaries should be subject to ongoing supervision, 3) what baseline disclosures investors are entitled to receive; and 4) how regulatory authority should be allocated between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
These questions are not new. They have surfaced repeatedly during bull markets and in the aftermath of downturns, often accompanied by hearings, staff reports, enforcement actions, and draft legislation. What has been missing is not diagnosis, but follow-through.
Custody has remained unresolved despite repeated regulatory attention and well-documented failures. During the 2022–2023 crypto downturn, bankruptcies including FTX, Celsius, and Voyager exposed the absence of clear federal standards governing whether customer crypto is legally separated from a platform’s own assets in insolvency. As a result, investors often cannot tell whether they legally own their crypto, are lending it to the platform, or merely hold a contractual claim against the firm. In several cases, courts determined that customer crypto formed part of the bankruptcy estate, indicating that those assets had not been legally segregated and leaving customers to stand in line with other creditors. Unlike traditional financial markets, where custody law preserves customer ownership through firm failures, crypto custody often relies on platform contracts that leave ownership unresolved until insolvency.
While the SEC can clarify custody obligations within existing securities law, only Congress can establish a comprehensive, technology-neutral framework that defines custody rights across digital assets. Absent a single federal custody standard, ownership depends on platform contracts and post-failure litigation, making custody risk opaque and allowing firms to compete on legal ambiguity rather than transparent safeguards. Markets function best when property rights are defined ex-ante, not retroactively after losses occur.
Beyond custody, other core elements of market structure remain unsettled. Crypto trading platforms routinely perform the combined functions of exchanges, brokers, dealers, and custodians, yet there is no clear federal consensus on which intermediaries should be subject to ongoing supervision or under what supervisory model. Disclosure standards are similarly uneven: investors receive inconsistent information about token supply, insider allocations, governance rights, operational risks, and the role of intermediaries, making it difficult to assess risk across platforms or assets. Compounding these problems is unresolved jurisdictional authority between the SEC and the CFTC, which has pushed crypto oversight toward case-by-case enforcement, even after repeated congressional efforts, including post-FTX hearings and market-structure proposals such as FIT21, to clarify supervisory responsibility.
It is clear that these issues require comprehensive agreement among policymakers and that agreement is best reached when markets are neither at speculative peaks nor in crisis.
Periods of lower activity allow policymakers to act deliberately rather than reactively. Yet U.S. crypto regulatory policy tends to advance only when rising prices force the issue. Instead of resolving foundational questions in advance, policymakers defer them until renewed market participation creates urgency, at which point policymaking becomes driven by headlines and time pressure rather than institutional design.
This sequencing is backwards. These rules should be debated and established before leverage rebuilds and crypto again dominates headlines.
