The digital asset industry is at a major crossroads. Regulators around the world are moving to frame rules for the 15-year-old industry. EU Parliament in April allowed A slate of regulations called the Markets in Crypto Assets (MiCA), the most comprehensive multi-jurisdictional framework for digital assets to date. hong kong (with the tacit approval of China) is planning to deliver a licensing regime this spring, keeping it in a two-horse race with Singapore to join Japan as a digital asset hub in the Asia-Pacific (APAC) region. Group of G-20 countries is pushing global regulationIn collaboration with the International Monetary Fund (IMF).
Meanwhile, in America we have fragmentation, frustration and fighting. It is now a global economy. Blocking digital assets in the US is not going to stop the industry from growing. This directly puts American businesses at a competitive disadvantage.
Mike Belshe is the Chief Executive Officer of BitGo.
The US capital markets are among the strongest and most liquid in the world because of our regulatory regime. But we are well on our way to becoming one of the worst regulatory jurisdictions in the world when it comes to digital assets. If we want a part of this growing global industry, legislators and regulators need to act together – and fast.
Right now we have a situation where we are making rules in pieces. We have per-state handling of digital assets like New York bitlicense, and inconsistent money-transmission rules from state to state. States Are Granting Charters For Crypto Banks While The Federal Reserve Is block access for its system.
The Office of the Comptroller of the Currency (OCC) is denouncing all charters. Securities and Exchange Commission (SEC) is implementing accounting rules which effectively prevents traditional financial institutions from participating in digital assets, while stop again On defining digital assets. Instead, it’s leaning heavily into enforcement, which isn’t a problem in itself. The SEC is not making it clear which companies are doing wrong. groundbreaking firmsSome of the available props are along the way trial Regulators just to get their questions answered.
At the legislative level, the bills in play are mired in partisan politics and it is looking less and less likely that any federal legislation will pass this year.
Overall, the involvement of US regulators and legislators to begin with is more positive. They are important players in the financial ecosystem. The industry cannot build businesses safely without them, but regulators must act quickly. If they don’t, bad actors will flourish, and firms that want to play by the rules will move to jurisdictions where Growth and innovation are possible,
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The best way right now to incorporate digital assets would be to expand the basic investor protections of our traditional financial markets, while thoughtfully crafting new rules that adapt to the technology and exempt firms from other regulations.
The SEC has taken some steps in the right direction. February 2023 of the agency draft amendment A good example of applying a rule that is already in the works is to bring digital assets under the “custodial rule”. In traditional financial markets, trading and custody are separate functions. Crypto has no such market structure, and the lack of regulation leaves the door open for fraudsters to make off with billions.
If we had acted fast, this could have been avoided. When BitGo decided to pursue a trust company charter in 2017, we approached the OCC for federal oversight. At that point, the banking regulator would not charter us, so we became a state-chartered trust company. But we didn’t know if we would be considered a “qualified custodian” according to the SEC.
We formally and voluntarily approached the SEC with that question in 2018. no-action letter, It refused to consider that letter for more than four years. If it takes so long to solve such a basic question, how can we avoid being left behind in competitive markets?
SEC in April statement considering a proposal To update the definition of exchanges to include decentralized exchanges (DEX). Here’s a case where some rules apply, but others not so much. DEX should be regulated and investors should be protected. But decentralized finance (DeFi) actually has the potential to do some of the work for regulators by setting their own written rules in automated, auditable code.
DeFi’s real-time auditability and immutable public ledger are proving very useful in helping investigators recover funds. Spreading similar rules on DEXs like a skimmer of peanut butter would be unnecessarily burdensome and could potentially inhibit the utility of the technology.
[The SEC] refused to consider that letter for more than four years. If it takes so long to solve such a basic question, how can we avoid being left behind in competitive markets?
SEC has also taken a lot Action Against Staking Programs offered by the exchanges. This is a case where new rules are needed. Staking is a fairly new way of validating transactions, and there are many variations on staking that don’t fall neatly into the current rules.
What if instead of just shutting down programs and imposing fines, the SEC said, “Okay, we get it, it’s new and in a gray area. Stop doing these three things.” Do it, and you have six months to get it done and keep going. No penalty needed – we just want to see you move forward and build safe products.”
See also: Wyoming defends the ‘legality’ of its crypto charter
This kind of collaborative approach is what we need going forward – no more action against token issuers for selling unregistered securities, and against exchanges for facilitating their trading. SEC Chairman Gary Gensler has repeatedly said that All issuers and exchanges It needs to register and make the same disclosures about digital assets that companies need to make when offering securities.
Yes, disclosures are in order. However, there are certain disclosures that do not apply, as well as things you may want to know about a digital asset that would not be covered by the current disclosure requirements. For example, MiCA requires projects to disclose the type of blockchain consensus mechanism they use and its environmental impacts. But for now, they may do so in a public white paper instead of a prospectus. Providing such new definitions and rules seems like a better course of action than regulation by enforcement.
The digital asset sector is a trillion dollar industry, which needs commensurate banking support. By refusing to provide clear guidance for traditional banks to participate (and nearly every bank in the US has wanted to participate in digital assets for at least four years), regulators inadvertently significant concentration risk created in a handful of relatively small banks, including Silvergate BankWhich grew its business by offering innovative products for the digital asset industry.
If instead of having one small bank serving 85% of the industry’s banking needs, we had hundreds of banks, each with 1% of the industry, it would be better for both industries. Regulators could help with this.
The underlying cause of all digital asset and bank explosions and the resulting loss of investor money is not due to the inclusion of digital assets in our markets; Taking them out causes problems. Legislative and regulatory failures to keep pace with innovation and create pathways to invest in digital assets under the protection of capital markets supervision are directly responsible for harming the very investors these regulations are supposed to protect.
There is no doubt that our established, regulated trading markets mitigate risk better than crypto markets. The best thing we can do to reduce risk in the crypto markets would be to enlist the help of the participation of established trading markets, banks and custodians – our stewards of risk mitigation. This is not a two month effort. This has been a multi-year, ever-evolving effort, as the difficulty of keeping up with innovation is constant.
Once software enters an industry, it tends to inspire change, and the financial services industry is one that has been particularly slow to change. Digital asset companies building for the long term are not seeking to avoid regulatory oversight or create speculative assets and markets. We are in this to build better financial markets and we look forward to working with regulators to get clear guidance on how to take digital asset products and services to market.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.