A marathon not a sprint: How the US can win the digital asset race

Transcript

Angie Lau: The market for cryptocurrencies and digital assets is worth trillions of dollars today, and it’s the promise of decentralization and self-custody of one’s assets that’s led to its explosive growth. 

But it’s exactly because of these features that some call it the Wild, Wild West. And how governments, regulators, policymakers are thinking about it will be critical to the next phase of growth. The question is, do they get it?

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau. Welcome, everyone.

Well, today we’re in conversation with the person who’s leading the conversation when it comes to blockchain advocacy and education — Kristin Smith, executive director at the Blockchain Association, one of the most prolific lobby and industry groups that we have in the sector today. And we really appreciate you joining us, Kristin.

Kristin Smith: It’s great to be here, Angie.

Lau: All right. I know you hop around the country — you’re in Miami, you’re in D.C., but predominantly, let’s start there. The crypto industry is really focusing on Washington. We have President Biden’s crypto executive order released in March, urging the government to research and develop a dollar-based CBDC (central bank digital currency). As you know, Kristin — we’ve been talking about it here at Forkast with you — China’s already in the final stages of its CBDC pilot. The question is: Can the U.S. catch up? How soon could we see the first iteration of a digital dollar? How far along is the United States?

Smith: Well, the United States is going to beat China not by trying to ‘out-China’ China with their central-bank-focused digital currency, but instead, it’s what we’re already doing — we’re seeing the proliferation of dollar-backed stablecoins. So these are a digital wrapper that goes around the dollar. There’s a real, true dollar hidden away in a bank account, kept safe, and it’s allowing people to take the advantages of crypto networks and digital assets with the speed, the near-instant settlement, the ability to do macro-payments and micro-payments … All of the features that we would want in a central bank digital currency already exist today due to private sector innovation, working hand in hand with regulators in order to find the right environment for these dollar-backed stablecoins.

So, I think we’re actually winning. And I think today we have a pretty prolific marketplace, where stablecoins are the main source for getting in and out of crypto positions for crypto trading. But now we’re starting to see these also being used for payments. And I think in the next 6-12 months there’s going to be a massive shift in the way that we share money with our friends, in the way that we do payments in business. There are a lot of new services that are coming online, so I do think we’re winning. And we’re winning in a way that is based off of innovation, off of ‘ground-up’ ideas, off of competition, and I think that’s why the U.S. is going to win the currency race in the long run.

Lau: You’ve been on the ground there in D.C. It really felt like this was off the table for a very long time. There was the language coming out of a lot of policymakers, including the Federal Reserve, as well. How much did China’s efforts in advanced CBDC pilots actually hasten or speed up these conversations? What was the impetus or the catalyst from, ‘Meh, we’re just checking things out’ to it becoming an executive order?

Smith: I think the executive order is interesting, because it touches on a lot of different topics related to digital assets. And there are concerns, like illicit finance, for which they want to make sure the right protections are in place to prevent that kind of activity. But then there are questions posed about how we can use this to make our system more inclusive. How do we keep the U.S. competitive? There were a lot of positive aspects of digital assets. The CBDC conversation was put in the mix of this long list of things that the executive order is looking at.

And I think that what’s interesting is that it’s not a standalone effort. The government is really looking at the whole ecosystem to decide if one is needed — if so, what it would look like, what the design choices are. And even in (Treasury) Secretary (Janet) Yellen’s speech in April, she did not conclude that a CBDC was the right choice, that the government is definitely in the investigative phase. But while they’re doing that investigating, we’re going to continue to have the crypto networks and the cryptocurrencies that run on those networks. Those are going to continue to be built out and continue to drive innovation in that space.

So I think China was a little bit of a wake-up call to the U.S., as they were starting to move so quickly. I think when Facebook announced the then-Libra project back in 2019, that also really caught the attention of U.S. government officials, because there’s a lot of skepticism of big tech, but all of a sudden, when they’re starting to get into money, I think that raised alarm bells. But we’ve moved beyond this phase of only the U.S. government needs to be doing this, or we can’t allow any private sector to do it because it’s the big tech companies doing it. We’re at a phase now where there’s a lot of smaller, individual, thoughtful companies that are building to provide these solutions. They’re being built upon these publicly-owned, decentralized networks. And I think the discussion we’re having is how we can responsibly innovate in this space to allow this innovation to thrive while protecting consumers? And that’s a real narrative shift, particularly from where we were in the last two administrations.

Lau: Yeah. And certainly, there was a sense … We saw a lot of lawsuits filed against projects, and there was a lot of sense that policy was being written by enforcement and there wasn’t an opportunity to actually be at least even a sandbox at the SEC (Securities and Exchange Commission). Do you think that that’s going to change with this executive order — the environment?

Smith: So, you have to feel a little bit sorry for all of these federal regulators. You have something so new that comes along, like crypto networks, and they have a responsibility to enforce the laws that their agencies are tasked with enforcing. And so they’re doing their very best to try to fit these new systems into their existing regulatory model, and it’s not always clear cut as to how this works. And so the SEC has tried to create a lot of policy through enforcement actions.

From the industry perspective, that’s not ideal. We would much rather see the rules of the road laid out clearly, and a pathway forward for figuring out how to do that. I think the good news is that we’re in a place right now where crypto policy has caught the attention of Congress. There are members on both sides of the aisle in both the House and the Senate that have really become captivated with the potential of this space, and they want to be a part of the legislative solution. If you back up a year or more ago, Congress, with the exception of a small number of champions, didn’t want to be bothered with this. They were like, ‘This Is too complicated. I don’t want to take the time I need to learn to do this. I don’t think this is going to be anything real. It’s going to go away.’

That has shifted, I think, with the development of these payment tokens, these stablecoins, the proliferation of non-fungible tokens, or NFTs, that we’ve seen this past year. They’re realizing that this is not just the foundation for a new financial services system, but also the foundation for a new and better internet, and they want to figure out how to do it. They’re excited by the innovation. Both parties are excited about it, not exclusively, but I would say the majority. And so I think what we’re going to see is probably what we really need. We’re going to engage through this executive order process and through working with Congress to get a new law passed that will clarify these gray areas that the agencies have had to work within.

I think it’s going to be a long process. I think it’s going to take many years. But right now, because of the executive order that President Biden issued, there’s a thoughtful process that focuses on key public policy objectives. There’s no prejudging of what the outcome should be or how the regulation should work. It’s really like, ‘Let’s figure out the risks and find the regulation to address the risks in a way that doesn’t unfairly advantage a new technology, but also is tailored for the risks that that technology provides.’ So I’m really optimistic that we’re going to get a good outcome, because, you’re right, it’s absolutely untenable to have to change a regulatory strategy as a founder of a company every time the SEC comes down with some sort of enforcement action.

Lau: And it’s a ripple effect across the industry. And I’m really relieved to hear that there is a bipartisan recognition that technology needs to be a concerted effort rather than a political one. By political, you know what I mean by that.

Smith: Yeah. I think it might be the only issue out there today where there’s any consensus that they actually want to work across the aisle with one another. It’s a really special place to be.

Lau: Maybe this is what will unite the country and the world. But look, I mean, be a little facetious but hopeful and idealistic — you talked about a lot of the policymakers who are starting to understand. What is it, from your point of view, from the industry point of view, that they must get right? They can’t get this part wrong. What do they need to understand?

Smith: Well, they first need to understand that they’re not just dealing with a replacement for the dollar — that this space, as I mentioned before, is incredibly vast, and it’s going to bring an element of ownership to the internet. It’s going to allow people to take control of their finances. This is a foundational technology that’s going to impact a vast number of aspects of our lives, and so they want to get it right. And I think they want to have this methodical process that we’ve discussed in order to do so.

I think the biggest thing that they need to figure out is if there is an overreaction and the regulation is too onerous, this technology is going to be built and it just won’t be built in the U.S. — it’ll be built overseas. It’ll be built in Latin America, in Asia, in Europe, potentially, though their regulation right now that they’re discussing is maybe not an ideal solution.

But it’s worth getting this right. And we want to have technology-neutral — this is a phase that’s used — type of regulation. But it means that we need to actually evaluate and figure out what the risks within the new technology are, because you don’t want to treat something differently. But when you’re dealing with something different, you need to evaluate the risks and not assume that they’re going to be the same as they were in a traditional world. So, I think that we’re going to get to a good spot, but there’s a tremendous amount of education that needs to get done. And it’s, I think, incumbent upon the industry to be a resource and to help bridge that education gap so we can have more informed policy discussions.

Lau: To your point, last year’s US$1 trillion infrastructure bill is an example of that. It would have required network validators to provide customers’ details, and the crypto community really mobilized against the bill, asking for an amendment. For those who are new to the crypto space and listening right now and trying to figure things out, how would that have made the industry really slow down to a standstill, almost? And how was that a critical point where a lot of the crypto industry looked at its existential risk that came down from the top when it came to policy.

Smith: Yeah, this is a key moment, I think, in crypto policy history, last summer when the Senate was considering this infrastructure bill. And what was frustrating about it is there was a provision that was tucked in at the very last minute that was vetted with no one, no third-party stakeholders, no crypto industry stakeholders, and it really was based on a misunderstanding of how these networks worked. And if you look at the broadest possible interpretation of this language, you can argue that if you’re a Bitcoin miner, that’s facilitating a transaction. Or if you’re a staking node validator, that facilitates a transaction. Or if you’re a software developer and you’re writing code for a decentralized finance application, you could arguably be considered a broker under the language in that bill.

And the problem is those types of people don’t have customers. They don’t have customer information, because what this bill was doing was requiring brokers of digital assets to report the name, the address, the social security number, the transaction information to the government. These entities — these people — don’t have that information, nor do we want them to have that information. This is the equivalent of having the armed guard who’s moving cash from one bank to the other file a report with the IRS (Internal Revenue Service) as to whose money he was moving around. These are operators of the network.

And so the outcome was — even though we actually never got the language change — we were able to get interpretations that the intent of Congress was much narrower than a very reasonable interpretation of that language is. And so, I think, as we move forward with implementation, we’ll be in a good spot. And because if not, all of these people who are working on these networks here in the United States would just have to cease operating because it would be absolutely impossible for them to comply.

But I think the bigger moment was, as you mentioned, the crypto ecosystem, the community. It wasn’t just the industry, it was users, it was developers, it was creators, apps they activated. And it was done in the most amazing way. It was all really over Twitter and other sorts of community chat rooms and forums. And there were over 41,000 phone calls that went into the Senate in the course of five days supporting the amendment that would have fixed this language. And this wasn’t because there were some expensive, grassroots consultants that had been working on a strategy for years. No — this all happened organically, within a matter of hours. And we had celebrities tweeting about it. We had the industry tweeting about it. We had members of Congress. And it was the first time that I’ve ever experienced, in my career, where a policy issue really played out over Twitter. And it wasn’t even just activating people to weigh in with their senators. It was the senators themselves that would make key statements and inform the audience of key moments via Twitter. And it allowed for a lot of engagement. And it was really cool because, if you recall, the world was not completely open back last summer. And so it was a really great way for people to still be a part of the process, even though they physically couldn’t get on a plane and fly to Washington to have those conversations in person.

Lau: It was incredible to see … Kristin, speaking of last month’s executive order, it marks the U.S. government’s first all-hands-on-deck approach to regulating the crypto space. And now let’s take a look at what we’re seeing in Europe. Is there any sort of referral, reference, concerted effort, collaborative effort between continents?

Smith: Well, at the Blockchain Association, where I work, we have a pretty good network of similar organizations overseas that are trying to influence their local governments there. And a lot of the member companies of our trade association do have operations in Europe, and so there’s a lot of concern about what’s going on over there with their MiCA (Markets in Crypto-assets) regulation. There’s concern that this is going to harm self-hosted wallets and have these … what they call know-your-customer, or KYC, requirements, that, again, apply to entities that shouldn’t be having that type of information.

And I think the challenge that we’re having is that legislation really does seem to be on a fast track through the (European) parliament. And the problem is, unlike in the United States, where there are sort of established organizations such as the Blockchain Association, but other organizations as well that have been engaging with government, the efforts in Europe are very targeted. They’re not fully developed teams. It’s maybe somebody who’s doing it part-time, or it’s maybe somebody who’s hired as a consultant … like there isn’t an actual organization. And with the EU, just from the tactics of how to influence the government, you need to have a team in Brussels, but you also need to have a presence in all of the individual countries.

And so I think the industry right now is trying to figure out, ‘How can we organize more effectively? How can we build out the machinery that we need to be more successful in advocacy?’ But there’s definitely a real scramble right now to try to slow down some of those policies, because they do seem to be moving forward pretty quickly, and there’s concern that it might not actually be able to be fixed.

So from the U.S. perspective, we’re sort of like, ‘Oh, well maybe that’ll drive more people over here.’ But that’s obviously not what we want. What we want is to see uniform regulation around the globe that supports this, because it really is a global industry. I would say, though, that I think a lot of the world has been waiting to see what happens here in the United States, and I think that if the U.S. starts to move forward with a better framework for how to regulate this space, we’ll see countries around the world follow. So the government in the U.S. is a little bit slow to the table, but I think now that President Biden’s executive order is out and Janet Yellen has laid out the Treasury Department’s position on digital assets, there really is a framework that’s getting the ball moving. And again, it’s going to take not months, but probably years for all of this to play out.

But we’re now in a good process that hopefully, we can slow down some of these other jurisdictions from overreacting. Or if they do, once the U.S. policies come in place, they might be able to pull theirs back. But it’s always harder to pull things back than it is to slow things down, so we’re hopeful that that will happen. But yeah, we’re ready. We’re advising our friends in Europe, but it’s really sort of incumbent upon the people there to express their voice and make sure that their local elected officials are accountable and educated so that we can get better policy.

Lau: For the longest time, even among the G20, it was really Japan who was flying the flag for crypto regulations, even in the early days talking about whether or not it was even a thing, and that nations should be talking about it. What about the role of Asia when it comes to crypto regulation in reference to how it should be laid out? We’re seeing a lot of interesting things happening out of South Korea. Obviously, China and India are struggling and considering, and a lot of policy is coming down from the top. Your thoughts there on how Asia can be referenced?

Smith: Yeah. Asia is really interesting, because you have some of the best examples of crypto regulation and some of the worst. There are a lot of companies, particularly out of Singapore, but also South Korea is very much a fan of crypto assets and trying to enable them to exist in a regulated way.

I think that on the flip side, as you mentioned, China — because they have this digital currency of their own — they don’t want to see the use of Bitcoin or other digital assets. There’s been a big crackdown on Bitcoin mining in China, which worked to the advantage of the U.S. because a lot of that mining capability came over to the U.S. But they’re really taking some drastic measures to force people into using their digital currency, where they have total insight into every transaction of all of their citizens, and I don’t think that’s a model we want to see here in the U.S.

But India has had some struggles. There’s some progress there. I think Coinbase just opened up an office there recently, and operations. So I think there’s some progress in India. But yeah, Asia is very interesting because it, in some ways, is leaps and bounds ahead of where the U.S. is, but in other ways, depending on the jurisdiction, very far behind.

Lau: And you speak of so many headwinds politically and policy-wise, when you are talking to your constituents, which is basically everybody in the blockchain industry. How does the industry navigate through all of these really changing tides and changing tastes of various jurisdictions? In an ideal world, what do you think needs to happen for innovation to truly grow alongside reference to policymakers?

Smith: Yeah. I think most of the people who are working in the cryptocurrency space are incredibly passionate about what they’re doing. They feel very strongly that the work they’re doing is going to create better systems for businesses and consumers and individuals, and that they’re enabling freedom. This is an incredibly powerful tool. I think that the biggest challenge we have in the industry is to better communicate what we’re doing. I think there’s a lot of communication within the industry, and it wasn’t really until about a year ago that the industry decided that they needed to show up and engage with policymakers in a real and meaningful way.

But now I think that more time and resources are being devoted to this effort — even groups like the Blockchain Association. Our team has grown, our budget has grown, our ability to influence has grown, because the industry has decided that this is a priority. And so I think continuing to fund the infrastructure for influence, continuing to engage and be available to educate policymakers — these are kind of the important steps that the industry needs to do and that will enable policymakers to get the policies crafted in a way that works for the industry, but also for consumers.

Lau: I think we’re just two sides of the same coin, Kristin. At the end of the day, more people need to understand what’s happening in this space. For that, I totally agree. But hang on to that thought, because … I want to ask you about the role that crypto has played in the Russia-Ukraine conflict … Obviously the world is just watching with such a close eye and with such a heavy heart what’s happening in Ukraine, and the crisis that’s happening there. What we at Forkast and clearly everybody else in the blockchain community saw was the role of crypto. For the very first time, this was the first crisis, the first (developed-country) war, if you will, in the age of cryptocurrency.

And we saw how Russia’s war with Ukraine has been raging on for 40 days. But cryptocurrencies’ role in war relief has become increasingly significant. Apparently, we have DAOs (decentralized autonomous organizations), which have raised US$8 million to date with Ukraine efforts. When you take a look at what’s happening in Ukraine, how is crypto playing a part? And how is that role evolving, and how might we be thinking about the use of crypto in future?

Smith: Well, I think it’s important to talk about how crypto has been used, and also how it’s not been used. On the way it’s positively being used, is that one, as you’ve mentioned, it’s been a wonderful tool for quickly fundraising and getting resources directly into the hands that need them. And so some of this has been done through DAOs. Others are direct contributions to local organizations on the ground. We even saw the government of Ukraine put out wallet addresses to receive funds. It’s really amazing how people, individuals — even somebody sitting inside of Russia who doesn’t like what’s happening within their own country — can fund directly the Ukrainian government. So it was really interesting to see how quickly those efforts were set up. And, to date, I think collectively, the last number I saw was over US$150 million, which is a drop in the bucket compared to the larger thing, but more than other private sector efforts out there.

The other interesting thing is we’ve seen stories where people who had no choice but to flee their homes have been able to retain their value, their savings, because they can take them with them on self-hosted wallets. We saw lines at banks for people who are trying to get their resources out. If you have those assets and crypto and you are doing self custodying, you can escape and still have something to rebuild your life somewhere else. And so that, I think, is also an incredibly powerful use.

There has been some discussion about, ‘Oh no, with all of these sanctions that the U.S. is imposing on Russia, will they be able to skirt the sanctions by using cryptocurrencies?’ And the answer to that is actually no. For the amount of money that Russia needs in order to do what they need to do, they wouldn’t be able to pay and move that money around blockchains without being detected, because, remember, these public blockchains are public. Anybody can go in and see the transactions, and so even a sophisticated money launderer would not be able to move the volume of funds that Russia needs for this war.

And I think the good news is that the U.S. Treasury Department and the White House understand this and recognize this. Crypto companies in the U.S. have to comply with the same banking sanctions that traditional financial institutions have to comply with, so those entities, the U.S. crypto companies, are all on board in blocking certain people from being able to utilize their networks. But this kind of broader concern about crypto being used for sanctions evasion, we’re just not seeing it. And it’s great to see that the senior officials in the Treasury Department acknowledge that and recognize that. There are a couple of members of Congress that are asking questions about that, as they very well should. And there’s even been legislation proposed that actually we think would do a tremendous amount of damage because, again, it sort of misunderstands the fundamental nature of the networks. The good news is that it’s not going anywhere. And the people in government who have really spent time tracking money, chasing down bad guys that are looking at sanctions policy, they know that this isn’t a risk, and they’re working within their existing authority, and that authority has been adequate in the U.S. efforts to enforce sanctions against Russia.

Lau: And, in a roundabout way, we did see a surge of activity around stablecoins. And really a lot of people think that with activity in stablecoins surging over 75% on the day of the invasion, that this could be the coming of an age. And when you have stablecoins predominantly backed by the U.S. dollar, it goes back to where we started this conversation, that the race is still kind of middling, that it’s being defined as the race goes on. And so where is the finish line? Well, I think that’s still being defined to date.

And you’re doing really important work to help people really understand where this industry and this technology could really take us.

Smith: Yeah, I like that. We don’t know where the finish line is, but we’re definitely in a race, that’s for sure. I think that stablecoins have tremendous potential. And when it comes to Russia, we want to make sure that the innocent people who are inside of Russia are able to live their lives and own their own assets and maybe even help their friends in Ukraine. And so we want to go after the billionaires. We want to go after (President Vladimir) Putin. But there are a lot of people that are trying to live their lives and raise their families and be with their friends, and we don’t want to stifle the type of human activity that maybe can be part of the solution to this horrible problem that we’re facing over there right now.

Lau: And this might be completely idealistic, but if this is a system that can allow all of us to live together, and interact and transact with each other in a way that is meaningful for the collective, minus borders, minus jurisdictions, minus all of those old-world lines in the sand that we’ve drawn, this could potentially be that technology, which is exciting for a lot of people, for sure.

Kristin, thank you for helping us realize some of that potential today, and helping us understand it. Really appreciate you joining us on the show today.

Smith: Thanks, Angie. Thanks for having me.

Lau: And thank you, audience, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Forkast Editor-in-Chief. Until the next time.