The Future of Money: Surmounting Impediments to Adoption

Transcript

oh thanks so funny um everybody can hear me without the mic yet can you hear me you're the only person that's here i'll just shout you do you need the mic okay all right okay all right i'll use the mic yeah okay um well thank you for those of you who stuck around uh six o'clock is a bit of the graveyard hour i'm tina baker taylor and i lead policy and regulatory strategy at circle and i'm going to be giving a talk today on essentially what's happened in the

regulatory climate over the last couple of years and where we're headed toward now and how this either provides a barrier to entry or perhaps a aid to adoption so i'll leave it to you to decide um essentially we're going to cover kind of the evolution of regulatory attention um what it looks like today and what the future holds through the lens of regulation governance and trust and risk management so the regulatory attention today or sorry up until today um has consisted of essentially um you know countries being really quite slow to

um wake up to the development of crypto assets and what they could potentially mean for financial services and other uses across blockchain technology countries first started making statements around crypto during the 2013 bubble so that's when it first became on everyone's radar uh and these primarily consisted of warnings to investors about the risks associated with crypto primarily bitcoin so not not good signals um these charts that you'll see are from the cambridge center for alternative finances a regulatory report that they produced a couple of years ago um the first regulatory authorities to issue statements about crypto tended to

be central banks through the lens of what is money followed by government departments and then financial supervisory authorities and what's notable here is that until this point we kind of saw a broad aggregate of regulators looking at crypto but little activity from legislators and that becomes important later um so most countries need to legislate to change laws before regulators and in some cases central banks as well can take any action one of the key challenges that the industry and authorities have both struggled with is taxonomy so what do we call things and if we don't all use the same language about what these assets are then it gets really confusing for

everyone so we've seen pretty significant changes in regulators terminology over time and this is due to in my view ongoing engagement and education with those regulators so that they understand how these assets are different and how they work um and how they differ also from fiat money in the early use of virtual currency you see there's you know a huge uh proponent of of agencies using that language really kind of conveyed a really unserious implication but as the need for serious regulation has become clearer and our advocacy and education engagement with policymakers has stuffed up we've seen regulators begin to adopt the terminology that's more widely used

by us crypto asset which reflects the diversity of the products and services being created and is inclusive of nft's governance tokens etc so this is critically important when it comes to actually legislating the rule making the regulators will be working from so we've jumped from 2017 to 2019 and we start to see countries taking regulatory actions so as we know early approaches to crypto asset oversight and regulation were primarily focused on square peg round hole approach just kind of wedge it in there and countries were trying to make use of the regulatory frameworks that they already had in place but unfortunately these processes have been fraught given that most regulatory

frameworks don't have provisions for how to oversee financial assets and financial market infrastructure that can be self-custody for example that doesn't involve a cohort of intermediary intermediaries and that uses open source technology so jurisdictions with lower adoption rates reacted more slowly and they were more likely to ban usage because it was easier than addressing the issue given the exposure to crypto was lower in their countries so you can see here about 11 of lower adoption countries attempted to take a bespoke approach but even in jurisdictions where adoption was higher there was a moderately higher attempt to address regulating crypto through a bespoke regime only 19 okay so this map gives us kind of a a

flavor a bit of a heat map across the state of regulatory play in may 2019 so we've jumped ahead two years it doesn't detail which regimes are bespoke or or new or retrofit but it does show how the world is reacting at this particular moment in time to rulemaking for crypto so until this point smaller jurisdictions like switzerland malta gibraltar and bermuda had really led the way in outlining regulatory regimes but by 2019 you can see that the major markets are now responding primarily bringing aml and kyc requirements into the fold and bringing market participants into existing so we're back to existing e-money or

money service business type regulatory regimes most notably in the u.s and in the uk for me japan is notably missing from this map japan led the industry in combining bespoke regimes with a really unique model for a regulatory oversight and they did that through an sro which is a self-regulating organization so essentially what they did was they took the the regulator the fsma um basically appointed the country's trade body and said you oversee the industry and here's a guideline and a set of rules that um you need to enforce and believe it or not it worked really

terribly well um and it still works today and you know we talk to a lot of jurisdictions about this potential model because for the industry it is you know more productive to be self-governing and ultimately we'll probably find you know blips in the matrix before any regulator is going to so today's regulatory environment um there has been some considerable changes so we got a new heat map and so you can see there's a lot more green on this map than there was in 2019 but we also see a lot more red and pink um so recent amends to this map that that i would have made if i had more time were that russia should really be read um based on the new law signed by

putin this week excuse me effectively banning the use of digital assets for payment or goods and services in russia and while it's not an outright ban it's a continuation of anti-crypto policies laid out in their digital currency bill which was introduced a year before last year i think um but was amended last year so it was introduced two years ago and amended last year to really curtail crypto trading and mining there's been positive development in the nordics south america and the middle east um but one thing that is certain when you look at this map is that there is a lot more color and a lot less gray areas so regulators have absolutely woken up and not only have they woken up but

we're starting to see new legislation so in the beginning i said lots of kind of regulatory retrofitting um because there wasn't legislation and legislation is what gives us the opportunity to have bespoke frameworks so now we're starting to see uh policymakers or lawmakers kind of wake up and uh standard setting bodies more in major markets um with a focus on bespoke treatments for crypto so just in the past 12 months we've seen the u.s president's working group report on stable coins um i actually expect that a bill will be leaked this week from that president's working group f sock review to regulate stable coins in the us

um there's been major congressional hearings on crypto the fed published a cbdc paper the ecb has announced a cd cbdc trial as well the uk um just today about an hour ago proposed the financial services markets act which is going to bring stable coins and crypto asset advertising into the regulatory perimeter mica was approved uh last month yeah we're in july um so there's a lot of things happening here and that just gives you a little snapshot so who plays a role in making these rules i think this is really important because we all focus on the regulator is the regulator going to do

something why don't they regulate why are they regulating and really there's a whole myriad of players that contribute to rulemaking and so what's kind of important to note here is you have the legislative branch you have the executive branch and then you have you know national agencies and within that then you have super national regulators or policies standard setters as well like fataf or the bank of international settlements and what we've seen over the the course of the last couple of years is they've all become quite competitive with each other right everybody now wants to be the first to issue rules um and so through that we're starting to see

legislators actually push back in a number of these cases namely in the u.s the uk and the eu basically making new laws instead of allowing regulators to retrofit um i personally think this is better for crypto overall but it definitely does take longer so here's a snapshot of what now we've jumped ahead we're at 2020 this takes us out through 2024 and this just gives you a bit of a highlight around all of the things that are happening today um and you can see there's a lot right so this is this is a tiny tiny snapshot um so the plethora of regulatory and

notable now legislative activities being undertaken um has exploded so i talked about the president's working group um there's a number of bills in here that have been introduced in the u.s so the digital commodities exchange act would basically give the cftc a lot more permissions than the sec kind of ending the debate around what's a security and what's not and focusing on what's a commodity really interesting bill the responsible financial innovation act you probably have heard of it as the lummus bill or the lummus gillibrand bill um so that came out recently and is being debated uh today we expect a bill um from the house financial services committee to be leaked from maxine

waters and um representative mchenry on stable coins so there's a lot of legislative action i talked about the uk's legislative action talked about mica but then you can also see there's other activities here france put in place a crypto asset framework singapore has become a lot more um has done more scrutiny around what they're allowing um and they've banned crypto advertising similar to what the uk has done so this is just to give you a sense of kind of what's happening in the space and how things are heating up so for anyone who's been through a number of these cryptocycles you'll know that crypto markets have grown really through explosive bull markets

and pretty brutal bear markets and the last bull that we experienced i believe was a direct result of what i call the cleansing that took place um during the last crypto winter and the opportunistic and value bereft token projects basically evaporated and were replaced with a period of building which resulted in a litany of new products and services and i think that the most recent down cycle actually reflects a maturation in the industry and the reasons why so we've had similar excuse me smaller uh relatively relatively smaller price drawdowns institutional inquiries are still high regulatory interest is at an all-time

high so if they believe crypto isn't dead i don't think that anybody else should um and new products and services are still launching every day but extreme volatility absolutely freaks out policy makers right um their primary mandate is to ensure monetary stability and consumer protection and i would argue as volumes and participation grow um and the demand for crypto becomes more mainstream the requirement for equivalent levels of governance and risk management also increase and if you disagree with me let's just think about what's happened just in the past couple of months so the chart that we're looking at shows the luna usd price the dramatic crash of

luna once the third largest crypto token has wreaked absolute havoc on the lives of investors when crypto prices started collapsing a number of companies found themselves pulling what i said was a kind of a move from the 1920s playbook and just started freezing withdrawals so um you know it was reported that stable gains took usdc and usd from customers promising them 50 returns put all the money into anchor didn't tell them skim four percent off the top and then ultimately lost 42 million dollars in customer funds and they've shut down um then we had celsius they wanted us to embank ourselves

um and then this week they've hired a bank so that they could declare bankruptcy three arrows capital starts to unravel and now we're seeing creditors lists on twitter and i think that if we can all agree that these show operational governance and risk management failures and these examples and if i'm a regulator who's you know listening and watching this i you know start to really kind of challenge that narrative that crypto is going to enable financial freedom um and i'm going to be reasonably skeptical and the other thing i was just discussing with a friend the other day and we're looking at the the twitter thread with the 3ac you know investor exposures

and i got a little bit of for this but essentially the due diligence that is taking place between investors is on telegram now i use telegram we all use telegram but you know typically when you're doing due diligence there's documents there is you know email audit trails i mean maybe i'm just like an old fuddy-duddy but to me this didn't feel like you know adequate basic risk management so what does the future hold what's the direction of travel and we talk a lot about clarity we want regulatory clarity i think we're getting that um i think it's more about the codification of what that regulation is going to look like and what it means in practice the industry is working with policy

makers to develop viable frameworks for regulating crypto asset activity and i personally believe that the implementation of thoughtful fit-for-purpose frameworks will encourage billions of people to enter the web3 ecosystem with more trust and greater confidence and that trust and confidence is really the key confidence that holding your asset on a balance sheet will negatively impact your business clarity around how crypto should be accounted for and taxed may be a bit boring but it's critical for institutional adoption and growth competitiveness at national levels will also ensure that greater clarity and surety for builders is is presented and should create better opportunities for major markets who are now vying for your attention to to move to their

jurisdiction and set up your company and globally there's a cry at supernational levels for harmonization of regulatory treatments so crypto is a global asset and moves freely around the world but if you're a multinational firm trying to accelerate in a number of jurisdictions it's an operational and compliance nightmare so harmonization should greatly improve this i think there's two key things that i you know think that we haven't yet really solved for um and policymakers have addressed broadly concerns around aml and kyc and concerns around privacy and sorry aml and kyc they've kind of solved but

concerns around privacy and consumer protection namely around safeguarding customer funds so when someone goes bankrupt where does your crypto go um those are kind of the key areas of concern today and privacy and self-sovereignty need to reach parity with technology and educating policymakers on the difference between pseudonymous and anonymous is still really difficult and with the rise in interest around cbdc's i think privacy discussions have never been more important than they are today so if you're interested in building something this is an area where we definitely need more examples of how blockchain technology can solve challenges in new and different ways

which plagued policymakers the challenges that plagued them and if we don't i predict that we'll see more policy where policymakers apply existing governance methods which aren't fit for purpose so anybody remember the travel rule i mean you know that was a mess and essentially captures one percent of money laundering today but they would have did it anyway um so if we don't you know when i walk into policymakers and i say oh well you know it's transparent and you know we can solve for this and we can solve for that and we can you know digitize identity and we can you know tokenize kyc and they're like great how do you who's doing that and you know it's in theory somebody needs to build it

and my own personal bugbear i think we need to build more user-friendly services that are not only easy to use but easy to secure so using crypto today is still too hard i i you know relatively know what i'm doing there was a question earlier in another panel about are you digitally native um you know maybe maybe i am i don't know but i just you know sent a bunch of stuff to the wrong chain literally three weeks ago gonzo bye um and i sat there and laughed at myself like how did i just do this but i did um because the interfaces i were using were clunky um and i wasn't paying attention so these services need to be accessible to the least geeky among us

and again jurisdictions will implement different laws but the world can coalesce around standards and i think that the industry has really taken the lead in establishing best practices which address policy makers concerns and if we don't set the bar high they will set it for us so what is our role today what can we do so my key takeaway for for you today if you remember anything i've said please let it be this first go build something go build something cool and useful make products that users love improve the user experience please do that and continue to push the boundaries of technology and innovation

good examples of what crypto is good for and how it is used help advocates like me uh speak to policy makers and and help the industry um who you know these policymakers just don't understand what the value is i get asked often so you know what is it good for people are just speculating on the price um i know that we're building cool stuff build more of it behave yourselves just because you can doesn't always mean that you should be prudent about what you're building think long term about the success of your protocols adapts and how your users will fare and good times and bad and you know honestly i also hear this a lot from regulators just drop the hubris when you walk in

and you say blockchain's on the cutting edge it's decentralized you know all of the the you know keywords that we use um that that hubris that you can't regulate d5 for example well you know they can turn the power off right so plan that in understand that there are going to be expectations around risk management and governance and dedicate resources to manage that seek good legal counsel and don't treat your compliance team like their bench players and finally be engaged start following reliable sources of information and find out what's going on in the regulatory and government world join trade organizations or donate to

organizations or people that you think represent your interests and most importantly if there's something that you have expertise in make the time to explain it to somebody like me so that i can explain it better to the people that are influencing the roles that that will be governed under so that's it from me happy to take any questions um thank you guys for staying um and if you come up with a question letter my dms are open on twitter thank you for for this pronunciation um

you mentioned the the the question of tfr and and the obvious lack of uh the crypto technological sensible approach that there is do you have some some work inside circle on uh being more proponent because i think a lot of regulation are by default applying all recipes in a sense and or have you identified the places or trade organizations where you find the possibility to to to suggest that because as you was underlying i think in your presentation is also a lot of d5 protocol don't have the don't make the e4 to really propose something which i think should be

the work but yeah yeah so i mean i think that from the kind of trade body or advocacy um space that has also improved a lot um there are four for d5 specifically there's the d5 education fund they do a lot of work globally and a direct result of active advocacy you mentioned the tfr so um everybody doesn't know within europe kind of adjacent to the crypto asset bill that they've pushed forward there was a transfer fund regulation um which basically detailed what information i needed to send during a transaction and

similar to the fataf travel rule and they wanted to have no de minimis on transactions so basically every single transaction that was ever sent from any exchange and they wanted to ban basically exchanges being able to send transactions to a unregistered unhosted wallet so that's like your personal treasure right or or your ledger um and so that would have been disastrous right that bill basically was amended in the very very last you know minutes uh the last weeks running up to it being implemented

and voted in because the industry spoke up um and they did that through a couple of different avenues and defy education fund was won um i personally have done a lot of work with fat f and fat f was looking to in this this cycle so this year in june their new guidance came out and they had intimated that they were going to um look at addressing how they were going to regulate d5 and nfts um and so we spent basically six months negotiating with them to say look we don't even know enough about how these assets could potentially work and so if you start putting rules around them now

they're going to be preemptive they're going to be not fit for purpose and they're going to stifle innovation and so fad off backed off so when when you not everybody has the the time or the money to be you know advocating at you know the government level um or the inclination right it's it's not always a fun job and that's not your job your job is to build things but it is helpful if you guys give us the information so that we go in and we can speak confidently about what's going on and about the potential future opportunities and that's that's always helpful um so yeah so good firms to look at would be d5 education fund cci is

another one crypto something count except google cci can't remember what it sounds for crypto council for innovation i think um in the us blockchain association uh the digital chamber of commerce in the uk there's crypto uk there's blockchain for europe um there's a number of organizations that you can contribute to that are having these conversations on a daily basis great well thanks you guys for coming appreciate it