Exclusive conversation in Austin: U.S. encryption regulation growing from institutional "pull"
Original source: Okey Cloud Chain Research Institute
Original Author: Bi Lianghuan
foreword
Original source: Okey Cloud Chain Research Institute
Original Author: Bi Lianghuan
secondary title
forewordAustin CampbellOn April 25th, in Austin, the capital of Texas, a city full of vitality and creativity, Okey Cloud Chain Research Institute and Professor Austin Campbell from Columbia Business School conducted an in-depth discussion on US encryption regulation and related topics. discuss. The two sides discussed hot topics such as the overall regulatory issues in the United States, regulatory logic, and the latest stablecoin draft. In addition, Professor Austin Campbell shared his observations on the acceptance of the encryption industry by the banking system that has been strictly regulated, and his future Web3 .0 Center and the professor personally optimistic about the investment track to discuss. This exchange provided in-depth insights and reflections on crypto regulation and the future development of the cryptocurrency industry.
"Interviewer" Prof. Austin Campbell, Columbia Business School
Austin (A) ：(hereinafter collectively referred to as "A")
"Guest introduction"
is the managing partner of Zero Knowledge Consulting and an adjunct professor at Columbia Business School. Previously, he worked on stablecoin platforms and portfolio management at Paxos, fixed income trading at JPMorgan and Citibank, and worked as a portfolio manager and structurer at Stone Ridge, the parent company of NYDIG.
A: Bi Lianghuan (B): Austin, before we officially enter our topic, please introduce your own experience in the encryption industry, when did you enter the encryption industry and why did you want to enter this industry?
I started studying knowledge related to the encryption industry in 2016, when I was working at JPMorgan. So to me, the interesting thing about cryptocurrencies has always been the transaction structure. There are a lot of people who look at cryptocurrencies for ideological reasons, like the perception of government currencies, but for me, I've been thinking about transaction structures because I used to run a trading desk where the After the 2008 financial crisis, you had to rearrange and put together a lot of things.
For someone in traditional financial markets, counterparty credit risk is very attractive, and the transparency and 24/7 trading in the cryptocurrency space also attracted me. So in 2016, I started exploring the cryptocurrency space from a research perspective. In 2018, I left JPMorgan and started thinking about how to integrate cryptocurrencies with the US banking system. I'm not just thinking about how to borrow cash from banks and lenders, I'm thinking about how to transact within the system, which is a very different way of transacting. So I did structured lending and market structure related research between 2018 and 2020, and then I joined Citibank, but we couldn't launch that within the bank due to regulatory reasons. After that, I managed stablecoins and partnerships at Paxos. Now, I teach related courses at Columbia University and own my own consulting firm.
A：B: At present, we see that there are only some proposals and initiatives in U.S. regulation, and there is no framework for the time being. So is there a set of logic in U.S. encryption regulation?
I think we can learn something from the American political system. This is actually different from other countries, in the United States, the government actually has many components and agencies, and these agencies like to fight each other. There are 50 different states in the United States, and the states are not pure subsidiaries of the federal government, they can't do whatever they want, and the states often have different opinions. For example, we're in Texas right now, and Texas politics don't like California and New York, and they don't like Texas either. So remember, step one, we have 50 different states with different viewpoints. The second step, at the federal level, we are different from many places, we have many different regulators.
A：In the US, you have the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC), all of which deal with different (though sometimes related) areas. Moreover, there are often disagreements between them. In the U.S., the federal government is trying to figure out what they want to do, and federal regulators have different views on what they want to do. Also, 50 different states have different ideas of their own. So the mess we face is pretty much designed by the American political system.
B: Like a balance of power.
A: Yes, the idea is to decentralize power so that no one person has all the power, which reduces tyranny and bad behavior. Of course, this comes at the cost of less chance of coordinated action.
B: It is hard to imagine doing business without a local compliance team or legal team in the US.
A：Yes, doing business in the US is crazy without a local team to back it up. In the field of cryptocurrency, if you are a gaming company, or a wallet company, compared to an exchange, a lending company, or a stablecoin company, the problems you face will be different. I think the U.S. is particularly messed up right now for certain types of activities. If your business is more like traditional financial activities, such as exchanges, stablecoins, and lending companies, then you will face even more difficulties. This ties in with the fragmented view of regulators I mentioned earlier, because banking regulators are skeptical of cryptocurrencies.
B: At present, we have observed that some policies are positive and beneficial, such as the progress of DAO legislation, etc.; but from some media, including ours, there is another attitude about the banking system, which is not so friendly. How do you view this contradiction?
This ties in with the point I made earlier about the fragmentation of regulators, because the banking regulator handles the way you deposit and withdraw money into the system, whether I go to Bank of America and use an ATM to get cash, do a credit card transaction, or It is the same regulatory agency that operates stablecoins. They are very skeptical of cryptocurrencies. On the other hand, regulators dealing with blockchain technology, such as the Federal Trade Commission (FTC), are more supportive of cryptocurrencies and less problematic when handling funds. Of course, an industry like gaming or the NFT space is completely different. So what you're observing is actually a fragmentation and a variety of different perspectives on the U.S. regulatory system. The question is, are the views good or bad in your area.
A: B: In your opinion, which aspect of supervision is the most stringent?
I think number one on the list right now is our securities laws, which is primarily related to the conduct of our securities regulator, the SEC. They are trying to say that most cryptocurrencies are securities and want to regulate them, and companies operating in the cryptocurrency space must proactively engage with regulators and find solutions to ensure compliance with regulations and regulations. The SEC has developed a “reputation” of their own — they have been hostile to the space, and many U.S. companies are now embroiled in legal battles, including Coinbase.
A：A lot of crypto companies might try to use offshore bank accounts to avoid the US, but that's impossible with US customers because you already know what the rules are, and they're very strict. They don't want people to get more permission than those two things.
B: Regarding the news on the 24th: The Republican Party of the U.S. House of Representatives issued a new stablecoin draft, intending to compete for stablecoin supervision from the SEC. Why is there a transfer and the impact of the transfer? How do you view the regulatory disputes between different agencies?
The only one who currently thinks the SEC has jurisdiction over stablecoins is the SEC itself, and they are not popular. To be clear, at the state level, New York state regulator NYDFS has been regulating stablecoins since 2018. They are now unhappy with the SEC showing up and trying to assert regulatory jurisdiction, and they see stablecoins as a banking product that they regulate. Meanwhile, federal banking regulators such as the OCC, FDIC, and Federal Reserve believe that stablecoins look a lot like banking, and I tend to agree with them. They also don't think the SEC is the right regulator and they should be in charge. The bill before Congress came when it was more of a product of some sort under these regulators. For now, the latest bill to Congress basically says these stablecoins are products similar to other banking products that should be overseen by federal regulators, not the SEC. So I think it's just an effort by Congress to push for stablecoin regulation. Every country needs to move forward in this area.
B: I also agree that stablecoins undertake part of the attributes of bank lending business, so what do you think is the difference between the two from the perspective of financial risks? What kind of process do you think the banking system will go through in the future?
A：This is a complex issue. To answer it, we must first understand the current banking system in the United States. When you deposit money in a bank, it works completely differently than a stablecoin. If you give money to Circle (USDC) or Paxos (BUSD and USDP), they will take that dollar and buy T-bills, short-term U.S. Treasury bonds. If you give your money to a bank like Bank of America, they will use that money to issue business and mortgage loans, so the bank is riskier, allows leverage, and stablecoin issuers do not, and must always be fully reserved. Stablecoins are a very "boring" financial instrument, and banks' lending business is very risky. Without regulation, these things have historically tended to end badly, collapsing when you let them have their way.
When thinking about the future of stablecoins and banks, it is important to understand that while stablecoins are similar to banks, they are not actually banks. If we move to a system that uses bank deposits instead of stablecoins, this will change the underlying structure dramatically. And it will raise questions about liquidity, FDIC restrictions, and how to get in and out of the system.
Stablecoins are pretty boring because they're reserved, that's why everyone accepts them, it's more like cash. In contrast, if we use bank deposits, we take on a lot of risk that stablecoins do not. There are two different currencies here and it is important to understand the differences between them.
A：B: In addition to banks, do you think other traditional financial institutions in the United States have adopted the encryption industry smoothly?
not. The regulatory environment is an important factor driving the development of the cryptocurrency industry. U.S. financial institutions must comply with regulations from the SEC and other banking regulators, which are skeptical of cryptocurrencies. Many U.S. funds want to launch Bitcoin ETFs, which have happened in Canada and Europe, but the SEC has blocked them. Likewise, many companies in the U.S. financial sector want to use blockchain technology, but they face regulatory hurdles.
To launch an ETF or trade cryptocurrencies on behalf of clients, you need approval from the SEC or banking regulators. If they don't approve, you can't do it. This can cause problems for those who want to carry out legal activities but are restricted by regulations. For example, Fidelity cannot launch an ETF in the US on its own will. The problem is not Fidelity, they want to get in, the problem is regulators.
B: In your opinion, apart from regulation and government attitude, what is the biggest obstacle to the development of the U.S. encryption industry?
A：Beyond regulation, there are two challenges. One is that traditional financial institutions in the United States are usually not a gathering place for technical talents. As a result, they sometimes struggle to attract people with relevant expertise, which can be very difficult for these tasks.
Two, I think that in the United States, we already have fairly developed capital markets that are mostly functioning well. Marginal costs here are low relative to benefits, which are low compared to many other jurisdictions. If I were in Africa or Southeast Asia, where the banking and payment systems are less developed, jumping straight to a cryptocurrency system with 24/7 full transparency would be a huge benefit. But in the U.S., we've basically reached that level, so those benefits are relatively small.
A：Therefore, convincing U.S. financial institutions to adopt cryptocurrencies is more difficult. I think that if you think about who stands to gain the most from cryptocurrency, emerging markets and those places where the financial system has been very localized and not really integrated anywhere, like India.
B: From the information we learned from Circle yesterday, Circle is also letting everyone use the traditional financial method - credit card, but the underlying transaction uses USDC. American users are now very accustomed to using credit cards and other methods.
This makes sense in a way, since blockchain is the underlying technology of fintech. In the encrypted market, the user experience is very bad. Like in the United States, it is much easier to use PayPal in the United States or Alipay in China than MetaMask. So our point of view is to replace the current bottom layer with a more effective way, while keeping users from noticing this, this may be a very good strategy.
B: What do you think of US regulation as a whole? What do you think the U.S. regulation can do more?
In summary, there are many politicians who are disappointed with this industry and feel that there is unfair competition in this industry. Especially the SBF incident and some projects in Asia, the government holds a relatively negative view. These often come from misinformation, xenophobia, and one-sidedness.
Therefore, there are three points that need to be improved:
The industry needs to maintain communication with the government, because the government does not really understand the industry. For example, I went to Congress to testify, and there, what happened in the encryption industry in 2018 was still news to some politicians in Congress.
A：The industry needs to do a better job of fighting fraud and bad behavior, because if cryptocurrency keeps appearing on the front page of every newspaper, reporting some negative behavior, then it makes perfect sense that people won’t trust it. Because if you're an outsider with no expertise and all you see is people getting scammed, what conclusions do you draw?
Cryptocurrencies need better risk management as the number of companies going bankrupt in 2022 is quite staggering. Take the lending space for example, pretty much all the companies went out of business and that changed until you could handle client money in a serious way instead of taking it for something else and making sure they get their money back , you can be respected.
I think the blame is split between politicians and the cryptocurrency industry. Politicians are not being educated enough about cryptocurrencies, and the industry needs better communication, clear messaging, and regulatory behavior. Both require effort.
B: With regard to risk management, the encryption industry actually lacks a risk management team similar to that in the traditional financial system to do this.
Yeah, I think what's worse is that sometimes people don't even realize they need to. A good example of this is Mango Markets. The protocol was hacked and roughly $100 million was lost. The attack was related to oracle manipulation, where someone took a token with minimal trading volume (i.e. the mngo token), pumped its price up, and borrowed money.
A: In traditional financial services, there are very basic and clear safeguards to prevent this kind of activity. One of them is not allowing people to borrow small amounts of illiquid tokens because the price is very volatile and can cause all kinds of problems. The other is not to internalize immediately when prices fluctuate significantly, but to take measures such as 24-hour moving average prices instead of just taking spot prices. This is standard financial operating procedure, like Finance 101. At JP Morgan, we teach our analysts how to think about these questions, even for the most junior employees.
The fact that something like this is happening in the cryptocurrency space really blows my mind. There are a lot of people building financial products with absolutely no financial literacy, and it's a disaster. Like people in finance who think they understand how technology works, but haven't learned anything about it, and using it would be a disaster. In my opinion, to really do well in the cryptocurrency field, many projects need to be recognized as both financial (Fin) and technological (Tech) projects.
It's going to be a bad time until they start hiring financial professionals who understand risk management and listening to them when hiring them.
B: You said in your tweet that crypto is getting farther and farther away from the United States, so which cities/regions do you think are the most friendly to crypto and the most conducive to its application development, instead of empty slogans?
A: I think responsible regulation of the crypto industry will make people more open to challenges in places like Singapore, Hong Kong, Bermuda, the UK, and Europe (now that MiCA has been passed). I think this will be an important trend. While I'm not happy with what all of these places are doing, they've put a lot of effort into establishing a complete regulatory framework that can be iterated on. Therefore, I am optimistic about these places.
Also, I would like to mention Japan. They have been at the forefront of many cryptocurrency regulations. But sometimes, they come up with rules that are more specific to the local Japanese market than general rules. Still, the JFSA is very keen on many of these things. I have similar thoughts about Korea. Therefore, I think these countries should all be at the top.
One level down, I'd include Dubai and Abu Dhabi. The reason I listed them in the next tier is because they have more concerns around KYC, AML, Sanctions, etc.
B: If you wanted to start a blockchain project company, where would you choose to start your business?
A: It depends on what my business is. If I were thinking about a relatively institutional use case for cryptocurrencies, I'd probably choose Singapore, maybe the UK. If I were thinking about a retail-oriented application scenario, I would probably choose Hong Kong. In the above two scenarios, I may also choose Bermuda. As it relates to how long the permit application process takes, if the queue is full you may have to wait 2 years which is unacceptable. The Bermuda Monetary Authority's division is not very large and they are very good at what they do.
I think it depends on the specific application scenario.
I would keep a close eye on Singapore, Hong Kong, the UK as they are small enough to be nimble enough to adapt and do things well, all three are regulatory jurisdictions that take regulation seriously. So I'm probably the most bullish on these three regions.
B: HK policy is very positive, especially the VATP license will be issued on June 1st. What do you think is the best place for regulation in the United States? Is it worth studying in Hong Kong?
A: I would say, New York Department of Financial Services (NYDFS) regulation of stablecoins. Their regulation of stablecoins actually works very well. If you look at the stablecoins that NYDFS allows, it’s basically Gemini’s USD, JPY stablecoin, Circle’s USD stablecoin, and Paxos’ USDP and BUSD. None of these have actually had bank stability issues, nor lost users' money. Looking at it over the past few years, it can be said that the framework of NYDFS is very good.
Another one that I think is very interesting to try in the US is Wyoming. The state passed a law giving DAOs (Decentralized Autonomous Organizations) legal status as a registered form. Because the current problem with DAOs is that if there is a lack of legal form factor, then the responsibility does not disappear, it just may mean that someone personally bears it. Having a legal body is beneficial to promote the continuous development of DAO.
For a meaningful DAO it's nice to have a legal form factor that works in some coherent way. If I were to look at what America does best, it would probably be these two.
