Cryptocurrencies need new regulations. Or cryptocurrencies need regulations built on top of old ones.
Conventional wisdom holds that financial services — all aspects of financial services — remain highly regulated. And the overarching principle is that where money is being moved, oversight must be in place to make sure some semblance of protection has been set up.
But the debate exists as to just how new classes of digital issues — stablecoins and cryptocurrencies among them — must be scrutinized, perhaps even restricted. The idea that a permissionless system might be completely free from government interaction seems unlikely in the face of worries about money laundering and terrorist financing.
But as Gerety noted, in the crypto and development financial institution (DFI) ecosystem, people are stirred by the spirit of collaboration, the open-source buildouts. They’re certainly excited by the extremely large gains that early adopters have had in this ecosystem.
“There’s a gold rush characteristic,” he said. “People want it to be different, but wanting it to be different … doesn’t make it different.”
Past is prologue, said Gerety, who noted that any financial transaction includes a payment in exchange for a promise. This is no different in decentralized finance (DeFi) than in our traditional finance world. Make a promise to hold money and keep it safe, or take the money to be used with some other aim, but pay interest in the meantime. To quote an old song: The fundamental things apply.
Or as Gerety put it: “Just because you’re using technology that is new or innovative in some way does not necessarily imply that you need new regulations … we have to start from a skeptical place when we claim that something is new or different.”
One of the overarching themes in crypto is that it’s the innovators battling against the confines of central banking — and the central bankers want to keep control and keep the dollar dominant, he said. The reality is simpler, as the regulators are legitimately worried about fraud and Ponzi schemes (we are not all that far from the days of Bernie Madoff, after all).
“There’s a very legitimate and sincere interest in regulating promises that corporations or people make to consumers about money,” he said.
The Existing Regulations
He noted to Webster that U.S. laws are broad enough in scope to cover cryptos, even if they have not been written in reference to specific technologies.
Regulators need to know what the technology is capable of, but they need not know every technical detail just to make good law.
“If you can understand clearly what the technology is doing, I think that you can make pretty good judgments about what the fundamental financial activity is and what regulatory box that financial activity can or should fit in,” he told Webster.
Strip those technologies down a bit, and they boil down to some basic underpinning concepts that lend themselves to governance.
At the core of blockchain and cryptos is database architecture, said Gerety.
“It has some neat properties, but nowhere else in the financial services industry do you get regulated differently if you use SAP or Oracle,” he said.
To get a sense of how one might approach “newness” in a sector, he offered a concept of a matrix, with axes denoting what the future “feels like” and might actually “be.” Babies will pretty much always “be” and “feel” the same. Not much in the way of technology will change the experience or feelings one will have with birthing and raising a child, despite the newness of, well, becoming a parent.
Conversely, technology might change the way we experience sports (say, through virtual reality), but it will still feel the same as we root for the heavyweight champion or our favorite home team.