As the fallout from the collapse of FTX continues, different reactions to crypto have emerged. These range from ‘let it burn’ to ‘contain it through regulation’ to ‘existing securities and banking laws are sufficient’. Legitimate questions remain about the definition of securities, oversight of a cryptocurrency spot market and the emergence of a regulatory framework for stablecoins.
Even though FTX appears to be more about old-fashioned fraud and a disregard for corporate governance and risk controls than cryptocurrencies, it has generated a broad consensus that greater regulatory clarity is required for the growing digital assets ecosystem.
Tell-tale signs abound. The US Securities and Exchange Commission has increased its enforcement actions, there have been more calls for ‘proof of reserves’ in the absence of clear capital requirements and a new congressional subcommittee on digital assets has been established under the chairmanship of Representative French Hill.
These actions – coming on the heels of the President’s Working Group report on stablecoins, further reports on tokenisation and decentralised finance under last year’s executive order on digital assets and new legislative initiatives – hint that greater regulatory clarity may be coming.
The real push towards public sector action, however, may come from innovation. While the public sector debate on risk and regulation has gone round and round in past years, technology and innovation have only moved forward – and this may be the nudge. Most central banks gave little thought to central bank digital currencies prior to Meta’s (then Facebook’s) introduction of its digital currency, Libra, in 2019; now nearly two-thirds of the world’s central banks are exploring CDBCs.
The real story in the wake of FTX is less about cryptocurrencies than advances in the underlying blockchain and other technologies. These are quietly creating transformational tools and applications that will help propel Web3 and reshape the financial industry. These tech advances are occurring in both the DeFi and traditional finance worlds where distributed ledger technology is being used to enhance efficiency, drive revenue and find cost savings, for example in currency payments and cash settlement.
In foreign exchange payments, HSBC uses DLT to enable settlement with Wells Fargo across several currencies. Goldman Sachs launched a tokenisation platform in November to facilitate issuance, registration, settlement and custody of digital assets that went live with the European Investment Bank’s second digital bond issuance of €100m.
Blockchain is a foundational technology that goes beyond digital assets, capable of transforming business and commerce. While questions remain about interoperability with legacy and other public chains, blockchain’s technology and applications are rapidly evolving. As issues of scalability and accessibility are tackled, new possibilities are enabling more movement from permissioned to permissionless open-source public blockchains that can benefit from enhanced data privacy, speed and lower costs. These will all be key components of the Web3 economy, which is well underway.
The crypto and digital assets ecosystem needs greater regulatory clarity – whether in the application of existing laws, the adoption of new regulations or in fine-tuning responsibilities of oversight agencies. Ensuring the guardrails for investor protection and financial stability are in place is important, but it is equally important to allow development and evolving technologies to thrive. Without that, we miss out on improvements to financial products, services and inclusion, as well as opportunities for risk mitigation. Greater regulatory action may be called for, but regulators must not stifle innovation.
These issues were the focus of an OMFIF roundtable discussion with leaders from crypto firms, banks, asset managers, payments providers, big tech, fintech and regulatory agencies in Washington DC.
Patricia Haas Cleveland is US President of OMFIF.