By Mike Castiglion, Director of Regulatory Affairs, Digital Assets, Event
Crypto policy debates are often seen as warring sides fighting over values. Not unique to crypto, policy formation is almost always an exercise in identifying and balancing trade-offs. Common Transactions in a Policy:
- Individual rights and common good
- Innovation and safety
- Continuity with new examples
- Avoid the damage as opposed to holding it up
The tension is giving up something to get something else. However, there is one element, one variable, that gives more options. And this is technology. In economics technology pushes out the frontier curve. In business, it opens new markets. In politics, it can make many constituencies happy. And in business, technology allows us to achieve safety goals without stifling innovation.
Of course, technology requires making wise decisions and implementing it. But when it works, it empowers and makes difficult decisions easier. So where is technology in crypto regulation?
Crypto upgrade
Technology should be at the center of the crypto policy debate. Crypto itself is a technology – Layer 1 and Layer 2 blockchains, dApps, zk-SNARKS, other engineering components – that make distributed networks work in practice. However, crypto technology also includes support capabilities that make it useful for many people in the long term. The current internet requires antivirus, two-factor authentication, encryption and penetration tests. At the same time, there is a new set of technologies to give crypto an upgrade in its trust and security.
Part of this ecosystem is trade monitoring that detects fraudulent transactions and transaction monitoring to help Cubans manage financial risks. This supporting technology universe includes blockchain analytics for financial crime investigations, code audits to ensure smart contracts are in place, and security services to protect private keys.
Policy makers who are aware of these support capabilities will learn that there are expanded options. You can choose to outline more flexible, principled rules and specific rules. And they can rely on private organizations. Companies that use this supportive compliance technology build their businesses with integrity and transparency and send a strong positive signal to customers and regulators.
Exploring regulatory uncertainty
For crypto, there is regulatory transparency on anti-money laundering (AML) and, in major jurisdictions, the need to regulate platforms for abusive trading. The EU’s pending Markets in Crypto Assets (MiCA) regulations, along with laws in Abu Dhabi, Dubai, Hong Kong and the crypto-friendly Bahamas, all require monitoring to detect market abuse. Most draft legislation or regulations in the US, UK and Australia include some form of market surveillance.
Regulations are still being written. As crypto is a growing industry, we will be operating amid regulatory uncertainty for the foreseeable future, even if initial legislation is enacted in the United States. When I served in the CIA, we often dealt with ambiguity and had to make objective, measured decisions in the fog. The reality is that when faced with uncertainty, both business and national security strategies must plan for different scenarios.
So the best way to do it now is to focus on the controllable. A simple framework to follow is People, Process, Technology.
- People: Look for experienced talent who are skilled enough to apply the lessons of other asset classes to crypto. They can bridge cultural gaps between crypto, financial institutions and regulators.
- Process: Develop practices for compliance, such as conducting market abuse risk assessments and due diligence, documentation, escalation and reporting of market abuse cases. What most controllers want is incredibly process-based.
- Technology: As mentioned above, the right software stack unlocks the ability to track data ahead of problems.
If we fail to apply the knowledge, processes and compliance technology that works in other asset classes, crypto’s market integrity will be left behind. Companies, especially those innovative enough to transition to crypto, are faster than policy and can get this right.
