The following is an excerpt from Data Money: Inside Cryptocurrencies, Their Communities, Markets, and Blockchains by Koray Caliskan, now out at Columbia University Press.

The SEC and the CFTC cannot regulate crypto economies— not because they are failing to do their job but precisely because they are doing their job well. They are not designed to operate in this novel geography. The SEC works with securities, while the CTFC focuses on commodity derivatives. In order to be able to do anything about cryptocurrencies, they had to treat them either as a security or as a commodity derivative. And so they did.

The time has come to name the baby. A cryptocurrency is a money form with a new materiality: data. This chapter has shown that data monies should be treated as non-sovereign fiat currencies and approached as such. Yet this is not sufficient for regulation. Because of the data materialities’ innate material characteristics, these new monies create a broad economic opportunity infrastructure on which diverse financial and economic architectures can be built. Thus, it is only when we incorporate an analytical tool to illustrate such economic richness that we can start to identify the spaces for platform regulation.

Stack regulation may be the answer. Instead of treating platforms as mere markets, stack regulation can locate all platform businesses that an organization manages within a single frame of analysis. Figure 3.1 summarized the variety of economic functions and practices that centralized cryptocurrency exchanges organize in six major areas of interaction. Once made visible, these areas help us to identify economic events that require regulation. It is impossible to list all the activities that should be regulated on a cryptocurrency exchange platform here; however, we can still identify several rules of thumb to help imagine a general framework for regulation design.

Exchanges are operating like banks, running substantial custodial services as their customers deposit billions of dollars’ worth of data monies. Such services create two crucial risks for economic actors. First, in case of a hack, the exchange can lose all the data monies customers have entrusted to them. However, the terms-of-service agreements do not set out any legal obligation for the exchange to pay back the customers’ data monies. When banks keep customers’ monies, their security is guaranteed by the state; exchanges operate like banks but without any guarantee. Second, because exchanges technically and practically control the data monies that their customers buy from them and, in return, provide them with in-exchange rights to trade with them, these exchanges can also trade with the money that is entrusted to them. Data monies are fungible; therefore, they can be traded at will and for very short periods of time—as short as a few seconds in the case of flash lending. There is no law or regulation that makes trading with customers’ data money impossible. For every person who makes money, there is another who loses it, and exchanges are no exception, for they lose too. As has previously happened to many other exchanges such as QuadrigaCX and Bitfinex these platforms at times fail to send the data monies that they claim to keep on their customers’ behalf. An organizational intervention with a precedent can address these problems of security and market ethics.

Until the late 1960s, stock trading was taking place by transferring paper stocks of companies between traders. Th paper stocks were then sent to the buyers’ physical addresses. When trading volumes increased, material limitations began to constrain the trading activities themselves to the extent that exchanges had to close one day a week for purposes of bookkeeping. The solution was to digitally represent all paper stocks and keep them in a single place. The new Depository Trust & Clearing Corporation (DTCC) began to serve as the custodial clearing- house for all paper stocks, and the federal government guaranteed its integrity and security. This move also prevented these same stocks from changing hands without authorization.

Drawing on the precedent of the DTCC, a Central Crypto- currency Depository (CCD) could be created to supply customers with a custodial service in the form of wallets that secure their crypto assets while at the same time providing security services to customers who choose not to withdraw their crypto assets into their own wallets. In this way, cryptocurrency exchanges could be covered by a public guarantee, and their customers could feel safer when platform trading. One can object to this idea in that it undermines the very definition of blockchains. This is correct, but blockchains are already being undermined by the central authority of cryptocurrency exchanges. Customers are choosing to keep their money in these exchanges, even without security and a guarantee. With the CCD, these assets would be under public protection. Furthermore, the CCD could also contribute to greater transparency regarding the movements of data monies.

Another advantage of the CCD is that it could prevent exchanges from using their own or customers’ data monies in trading. Exchanges usually deny that they trade on the platforms they operate. My fieldwork and interviews suggest the opposite. When asked whether they trade on their own platform, almost all my respondents (98 percent) denied that they do. When asked what percentage of other platforms’ representatives trade cryptocurrencies with or without their customers’ data monies, all traders stated that all other trading platforms trade on their own platforms.

The CCD could address the question of security but could not address possible problems regarding trading ethics. For this and other issues, a new regulatory agency is needed. Instead of taking an analogical approach to cryptocurrencies or enlisting agencies that are designed to regulate other things, such as securities and commodity derivatives, Congress should design a commission specifically to regulate cryptocurrency exchange platforms. A Data Money Exchange Commission (DMEC) would be the only organizational solution to the problems that emerge from a huge regulatory canyon that cannot be covered by existing agencies. Cryptocurrencies are data monies and need to be regulated as such.

Currently, data money exchanges operate like banks and lend money for trading. They also mint their own money and incentivize the use of their own monies in trading, thus creating unfair competition for other community or corporation data monies. This is not very different from operating an exchange while at the same time trading in it. Such a clear conflict of interest reduces trust in exchange institutions and decreases their long-term income as a business—and could be avoided with DMEC regulation.

The DMEC could also work to regulate the financial bridges between centralized exchanges (CEXs) and decentralized exchanges (DEXs). CEXs sell data monies by accepting fiat currencies and thus contribute to the dollarization and euroization of trading. DEXs such as Uniswap do not accept fiat currencies and only allow customers to barter an assortment of data monies among themselves. However, it is possible to buy data money such as Ethereum from a CEX and barter it for other data monies at a DEX. In this way, users can continue to make money from their Ethereum and keep it outside the regulatory and taxation domain while at the same time enjoying all the benefits of a working financial and economic universe that allows for DEXs in the first place. The DMEC could address this invisible regulatory gap by bringing DEXs into the economies’ regulatory framework.

Laying out all the details of a framework for the regulation of cryptocurrency exchanges and the taxation of cryptocurrency income goes beyond the objectives of this book and should be prioritized by Congress in collaboration with industry actors, the Federal Reserve, the SEC, and the CFTC. But before such work can begin, we have to acknowledge that we are witnessing a historically new and materially novel money form. Cryptocurrencies as data money provide economic actors with the opportunity to engage in innovative economic practices that hybridize barter, trade, and gifting in centralized institutional settings. This chapter has argued that we have to design a new regulatory approach to mimic the innovative economic stacking that we observe in exchange platforms. Furthermore, stack regulation of cryptocurrencies and their economic institutions can work only if we tax them with the money materiality that they make and use—that is, data money. The data money tax can be deployed with or without a Federal Reserve data money, the CBDC-USD. With the Fed’s contribution, such a taxation practice would increase the government’s regulatory capacity and tax income more effectively. Without the Fed’s stablecoin, the data money tax is still possible but would require a more complex regulatory environment and increase the government’s organizational and financial costs.

Excerpted from “Data Money: Inside Cryptocurrencies, Their Communities, Markets, and Blockchains” by Koray Caliskan. Copyright (c) 2023 Koray Caliskan. Used by arrangement with the Publisher. All rights reserved.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.