© Stephen Lovekin/Shutterstock BitGo CEO Mike Belshi in an interview with journalist Helene Braune and Coinsensus 2023. (Shutterstock/CoinDesk)The digital asset industry is at an important crossroads. For 15 years, regulatory bodies around the world have wanted to create rules for the industry. In April, the European Parliament adopted a set of rules called Markets in Crypto Assets (MiCA), the most comprehensive multi-jurisdictional system ever established for digital assets. Hong Kong plans (with China's tacit approval) to launch a licensing system this spring in a two-way race with Singapore for Japan's role as a digital asset hub in the Asia-Pacific (APAC) region. The G-20 group of countries, with the support of the International Monetary Fund (IMF), is pushing for global regulation.
Meanwhile, America is divided, disillusioned and strife. It is now a global economy. The digital asset freeze in the US is not stopping the industry from moving forward. It simply puts American companies at a competitive disadvantage.
Mike Belshey is the CEO of BitGo.
US capital markets are the strongest and most liquid in the world, thanks in large part to our regulatory system. But when it comes to digital assets, we're on track to become one of the worst regulators in the world. If we are to participate in this growing global industry, legislative and regulatory bodies must act together and quickly.
Now we have a situation where we are gradually developing the rules. We have state management of digital assets, like New York's BitLicense, and inconsistent rules for moving money from state to state. States grant privileges to cryptocurrencies, and the Federal Reserve blocks access to their systems.
The Office of the Comptroller of the Currency (OCC) rejects all letters. The Securities and Exchange Commission (SEC) is introducing accounting rules that effectively prevent traditional financial institutions from dealing in digital assets, again blocking the definition of digital assets. Instead, it relies heavily on law enforcement, which in itself is not a problem. That's because the SEC doesn't make it clear what companies are doing wrong. Innovative companies with few legal remedies are suing regulators to get their questions answered.
At the legislative level, future bills are mired in partisan politics, and federal legislation appears increasingly unlikely to pass this year.
All in all, the fact that US regulators and lawmakers are starting to get involved is more good than bad. They are key players in the financial ecosystem. Without them, the industry cannot safely build its business, but regulators must act quickly. Otherwise, the bad guys will continue to thrive and companies that want to play by the rules will move to jurisdictions where growth and innovation are possible.
See also: According to Coinbase, the SEC reports violations of the law "on the fly".
A better approach now would be to extend the basic investor protections of our traditional financial markets to digital assets by carefully crafting new technology rules and exempting companies from other technology regulations.
The SEC has taken some steps in the right direction. The Agency's February 2023 draft amendment to subject digital assets to the "custody rule" is an excellent example of an application of this rule that is already in place. In traditional financial markets, trading and custody are different functions. Cryptocurrencies have no such market structure and the lack of necessary regulation has opened the floodgates for fraudsters to make off with billions.
This could have been avoided if he had acted faster. When BitGo decided to request a trust charter in 2017, we approached the OCC for federal oversight. Because banking regulators didn't want to hire us at the time, we became a state-licensed trust company. But we didn't know if the SEC would consider us a "qualified custodian."
We proactively and voluntarily raised this matter with the SEC in 2018 and filed a formal “No Action Letter”. He refused to comment on the letter for more than four years. If the answer to such a fundamental question takes so long, how can we avoid falling behind competing markets?
In April, the SEC issued a statement addressing a proposal to update the definition of exchanges to include decentralized exchanges (DEXs). In this case, some rules apply and others don't. DEX needs to be regulated and investors need to be protected. But decentralized finance (DeFi) can actually do some of the work of regulators by putting their written rules into automated, auditable code.
DeFi's real-time validation and immutable public ledger go a long way in helping researchers get their funds back. Applying the same DEX rules as peanut butter would be unduly cumbersome and potentially hinder the utility of the technology.
The [SEC] has refused to comment on that letter for more than four years. If the answer to such a fundamental question takes so long, how can we avoid falling behind competing markets?
The SEC has also taken a number of actions against betting programs offered by exchanges. New rules are needed here. Opt-in is a whole new way of validating transactions, and there are many options for opt-in that don't quite fit the existing rules.
What if, instead of shutting down programs and levying fines, the SEC said, “Okay, we get it, this is a new and gray area. Stop doing these three things. Do those other three things and you'll have six months to make progress to finish it and move on. No ticket required, we just want you to move forward and develop safe products.
See also: Wyoming defends 'legitimacy' of its crypto statute
This is the cooperative stance we need moving forward: no action against token issuers for selling unregistered securities and no action against exchanges for facilitating trading. SEC Chairman Gary Gensler has repeatedly said that issuers and exchanges simply need to register and provide the same information about digital assets that companies are required to provide when offering securities.
Yes, openings are fine. However, there are some disclosures that do not apply, and things you may want to know about a digital asset that are not subject to current disclosure requirements. For example, MiCA requires projects to disclose the type of blockchain consensus mechanism they use and their environmental impact. But for now, they can do it in a public technical paper instead of a prospectus. Providing new definitions and rules like this seems like a better way to go than regulation through enforcement.
The digital asset sector is a trillion dollar industry that needs bank support. By refusing to provide clear guidelines for the participation of traditional banks (and almost all US banks have wanted to engage in digital activities for at least four years), regulators inadvertently created a significant risk of concentration among a few relatively small banks, including Silvergate. A bank that has expanded its business by offering innovative products in the field of digital assets.
If instead of one small bank serving 85% of the industry's banking needs, we had hundreds of banks each serving 1% of the industry, it would be better for both industries. Regulators could help make this happen.
The root cause of all banking and digital assets and the loss of investor funds is the non-listing of digital assets on our markets; The problems are caused by their exclusion. The failure of lawmakers and regulators to keep pace with innovation and create avenues for investing in digital assets under the watchful eye of capital markets safety is directly responsible for harming the very investors these rules are designed to protect.
Without a doubt, our established and regulated trading markets reduce risk better than cryptocurrency markets. The best thing we can do to de-risk the cryptocurrency markets is to help trading markets, banks and well-known custodians, our de-risking gatekeepers, to get involved. This is not a two-month effort. It is a multi-year effort that is constantly evolving as keeping pace with innovation remains constant.
Once software enters an industry, it drives change, and the financial services industry is particularly slow to change. Long-dated digital asset companies are not looking to avoid regulatory scrutiny or create speculative assets and markets. We are here to build better financial markets and want to work with regulators to get clear guidance on how to bring digital asset products and services to market.