Election 2020 may have come and gone, but there remain outstanding questions about the makeup of Congress and the regulatory outlook for digital assets. While the electoral math is unlikely to be quickly resolved and ambiguity as to who will sit atop of key financial regulatory agencies is unlikely to be clarified until early in the new year, industry and regulators will continue to press forward in the interim toward the development of a mature digital assets ecosystem.
As we continue to discuss how the 117th Congress and a new administration might impact the digital assets space, it is equally important to understand how industry and regulators are currently positioned, the thought processes underpinning the actions that have shaped this industry over the years, and what’s in store as the interplay between innovation and regulation continues to shape the future of the digital assets ecosystem
Last month, Securrency teamed up with the Chamber of Digital Commerce to host “Two Sides of the American Coin’’ — an event that saw prominent figures from across the digital assets landscape come together to discuss innovation and regulation within the space. I had the honor to, along with Hillary Brill, interim executive director of the Institute of Technology Law & Policy at the Georgetown University Law Center, frame the conversations among the guests. These discussions spotlighted several key themes at the epicenter of ongoing industry and regulatory efforts to develop and define the parameters around the growth and maturation of the digital assets space.
“There has never been a better time in our industry, as blockchain is now going mainstream among some of the largest financial institutions,” said Dan Doney, the CEO of Securrency, at the kick-off of this event. “Even at the government level, we are seeing rapid progression in payments, capital formation and trading, and very exciting developments in decentralized finance.”
Shaping the regulatory parameters that drive innovation
On the first panel, which I moderated, Jay Clayton, chairman of the U.S. Securities and Exchange Commission, and Brian Brooks, acting comptroller at the Office of the Comptroller of the Currency, shared the stage to discuss the role of the regulator as a facilitator in establishing the guidelines that mark a path, or several paths forward, for industry innovation.
As Clayton remarked, the principles behind U.S. regulatory frameworks applicable to the financial services industry are time-tested, having responded to many innovations over the years.
“You have to stay true to the principles, which is people who are distributing stock, people who are insiders of the companies for which the stock has been issued, they have responsibilities,” Clayton said. “One of the problems that we had was we got off on the wrong foot in this innovation. There was the theory that, because it was so efficient because it could have so much promise, we could toss aside some of those principles of responsibility and transparency. I think now, three years later, four years later, we are in a much better spot.”
“What Brian and I are doing today, and what we expect to continue to do, is be as transparent as possible as to how we look at this and how our staff’s look at it, which hopefully will continue to foster innovation, but will make any transition a lot easier,” added Clayton, who recently announced he would be stepping down from his post by the end of this year.
Brooks picked up the theme of identifying the policy and regulatory parameters within which industry can innovate and thrive.
What regulators must do, Brook said, “is articulate what we think blockchain adds to the ecosystem. And where the risks are and where the benefits are.”
“Where there are benefits, we should not be stupid and get in the way of American success and competitiveness,” Brooks said. “And where there are issues of scams and frauds and other things, we shouldn’t be shy about saying so. And I think that’s what we’re trying to do today. Is to say, here are some rules.”
Brooks added: “The most important strength we have in this country, which a lot of these countries that have unified regulation don’t have, as well as we do, is we have a strong philosophy that markets rule in this country. And our role is not to command and control the economy. Our role is to create frameworks within which markets can function.”
Developing a mature, thriving digital assets ecosystem
The second panel, an industry panel moderated by Hillary Brill and featuring representatives from WisdomTree, State Street, Depository Trust and Clearing Corporation (DTCC), Digital Dollar Project, Stellar, and Securrency, reflected on the comments made by Clayton and Brooks and explored related topics.
“The founding principles of financial services is digital assets 2.0. The early days of crypto trying to potentially get around foundational principles may have slowed us up, though it did inspire that merging of software and currency as a concept,” said Jonathan Steinberg, founder and CEO of WisdomTree. “But, for true mainstreaming of this effort, I think it really depends on embracing those foundational principles with our regulators who will not give up ‘know your customer, anti-money laundering.’ You’ve got to live with this, own it forever.”
Daniel Gorfine, co-founder of the Digital Dollar Project, said that there is a real effort, on the part of the regulator, to state: “If something is not permissible, articulate what it is, and then this flip side of actually articulating what is permissible and actually stating that publicly.”
“Having the confidence to let the marketplace know what those parameters are and where the line may be is something that can really facilitate innovation and foster innovation,” Gorfine said. “Certainly, the amount of activity that you’ve seen from some of these agencies over the last few months is a very positive step in the right direction.”
The comments from Steinberg and Gorfine were further echoed by Patrick Campos, chief strategy officer at Securrency.
“From Securrency’s perspective, we’ve never been conflicted by [the industry motto of asking for forgiveness rather than permission]. We started off focused squarely on compliance. I can tell you, it’s not particularly sexy in the industry. What ends up happening is that it’s a longer road, but you end up in a place where it works. And I think the converse of that is sometimes when you set off and try to blow past the compliance aspects of it, you end up having to go back and rework some of that stuff and you create more problems.”
“In the industry, we may be viewed as antithetical to the prevailing winds,” Campos said. “But on some level — and Chairman Clayton talked about this — we think that his square focus on compliance has helped the industry to mature. It was really refreshing to hear Brian Brooks really repeat that notion back.”
Of course, how these parameters are defined and shaped, will ultimately determine the extent to which industry can unleash innovation in this space. Seth Hertlein, head of policy and government relations at Stellar Development Foundation (SDF), encouraged policymakers to look at the early days of the internet for guidance.
“You’ve probably heard the acronyms for the technology protocols underpinning the internet: HTTP, TCP/IP, SMTP. You don’t need to know what they mean,” Hertlein said. “What’s important is that the protocols themselves are not regulated directly. Of course, the many activities that have been enabled by the internet are regulated, and rightly so. We at SDF believe that blockchain should follow the same model.”
“The underlying blockchain protocols that many refer to as ‘Web 3.0’ need not be regulated directly — they’re basically just code like the internet protocols,” Hertlein added. “But, the activities that are enabled by blockchain should, of course, follow the same rules that those activities would be subject to off-chain. We should regulate activities; not technologies.”
Where those parameters take industry is anyone’s guess, but we’re already seeing significant focus and resources put towards understanding “what’s next?”
Jennifer Peve, managing director of business innovation at the Depository Trust and Clearing Corporation (DTCC), highlighted two projects that the DTCC is engaged with on how innovations can modernize current processes.
“We’ve got Project Whitney, where we are exploring how DTCC can introduce digital infrastructure to facilitate a digitalized asset ecosystem in private markets,” Peve said. “The second project we’re working on which talks about how do we modernize some of our existing end-to-end lifecycle processing and asset-servicing is Project Ion, which is focused on exploring the value of DLT and digitalized assets for our public market equities and accelerating settlement to a T+1 or T-0 settlement cycle. So I think there are some interesting opportunities that we’ve uncovered in both of these projects, mostly in our deep engagement with the industry and extracting out their insights and learning about their ability to adopt some of the newer technology, [and] their interest in wanting to modernize in this way.”
Jay Biancamano, the head of U.S. digital assets at State Street, described core areas on which the world’s largest custodian bank is focused. “We think [blockchain] technology will probably be proven early in the private asset, alternative asset space and that’s where we’re focusing our resources.”
Innovation and regulation are two sides of the same coin that will continue to fuel American leadership in the global financial services industry. As much as they may appear at times to be at odds, they actually coexist symbiotically. Ongoing challenges in the discourse between the two camps are equaled, if not surpassed, by the opportunities that can result when both industry and regulatory bodies engage in a thoughtful manner that leads to the development of responsible frameworks that protect both sides of the American coin.
The full webinar is available to watch here.