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Cryptocurrency is here to stay and 'regulation can't stop it': Blockchain Assoc. Exec

Yahoo Finance's Julie Hyman talks to Kristin Smith, Blockchain Association Executive Director and Nic Carter, Coin Metrics Co-Founder about the future of crypto and crypto regulation.

Video transcript

- I want to start broad, and just dive right into it here you guys. Is there an existential threat to crypto writ large from regulators, whether it's in the US, in China, other places around the globe? And Kristin, I'll start with you on this.

KRISTEN SMITH: I don't think there's an existential threat to crypto markets. As we were hearing in the last panels, decentralization is incredibly powerful, and these networks can exist in many different places. And China has attempted to crack down on crypto multiple times now. And they may be getting more aggressive on that front. But as long as the internet persists, crypto networks will persist as well.

I think when we look at D.C., there is a lot of conversations going on right now around regulation, and what proper regulation should look like. But the reality is, is we saw with the infrastructure bill over the summer that contained a poorly written crypto provision, there is a massive user base. There is a massive number of people that are contributing to these networks, whose livelihoods depend on these networks. And this is a very powerful political force. So in the United States, I don't think we're going to see anything so draconian that it could shut all of this down. But we may see some changes around regulation around the edges. But crypto networks are here to stay, and regulation can't stop it.

- Yeah and we're going to get into the specifics of what you referred to is going on in Washington in just a second. Nic, I want to bring you into this though. Ray Dalio said recently, if Bitcoin is really successful, regulators will kill it. Now, if what Kristen says is true, then that's not really going to be possible to do. And indeed you have said, I was looking at an essay of yours from 2019, which you said effectively, bitcoiners understand the only winning move in politics is not to play. So I assume you agree with Kristen, this is not something that is going to be crimped by regulation.

NIC CARTER: Well, Kristin might disagree about my line about participating in politics or not, but I fully agree. I mean, when markets and the state clash, generally speaking, the market will win eventually. I mean, the Soviet Union could only sort of hold economic forces at bay for so long, and capitalism ultimately prevailed. There's countless examples throughout history of countries trying to ban currency conversion, and they always failed, because free markets are a bottom up phenomenon, and individuals will make the best decisions for themselves, for their savings, and to store their wealth in whatever medium makes the most sense for them.

And it just so happens the cryptocurrency being virtual-izable, being something that's peer to peer by its very nature, something that you can take full ownership of on a smartphone, is uniquely resistant to state control. So you can't legislate a market out of existence. You can sort of locally suppress it maybe, or you can hold back its growth for a period of time within your borders, if you're an authoritarian state like China. But in the United States, you know we have our nation is founded on a respect for property rights. And that's written into the fabric of our Constitution. So it doesn't really map I think. It would have to take an extreme turn towards authoritarianism for cryptocurrency to be legislated out of existence in the US for instance. So I think when markets and the state clash, the market is going to win.

- And Nic, you know I know that there is a view among some in the crypto world who sort of welcome regulation in the United States, as offering some level of clarity to certain parts of the market. Do you share that view?

NIC CARTER: I think it depends on which portion of the market you're talking about. The securities law, I think most would argue probably convincingly, that it's still unclear what constitutes a security, and how exactly to apply the various tests to the novel asset class. With regards to treating Bitcoin from a tax perspective, or from a commodity perspective, how it's taxed, and capital gains and things like that, I think that's pretty clear already. But I think certainly the SEC could do more to make it clear what the delineations are in terms of the security. But it seems like they want to keep things deliberately opaque for now, and maintain discretion over those kind of assessments.

- So since you mentioned the SEC, let's talk a little bit more about that. Kristen, you engage with regulators in Washington. Have you talked to Gary Gensler recently? What have the interactions been like? What kind of guidance, or even if not guidance, what kind of sort of tenor do your conversations have as of late?

KRISTEN SMITH: Yeah. No, we've tried several interactions with Gary Gensler and his staff. And he you know, is accessible, and does have a lot of thoughts on this. He very much believes that the securities laws are clear, and thinks that different players within the ecosystem should come and work with him, and register. We disagree with him on that front. We don't think the securities laws are clear, like Nic said. We do think there needs to be some more thought and guidance on how to apply those to crypto networks.

But what Chair Gensler is doing right now, is he has seven different work streams of things that he's looking at, ranging from DeFi, to lending, to spot market regulation. And we are working within our membership to develop what we think would be thoughtful proposals that we could take to him, and have those dialogues. So you know, it's ongoing. He definitely wants to see more regulation in this space. You know, I do like to remind people that this space is not unregulated. A lot of the entities that are acting as intermediaries in the crypto space are registered as money services businesses. They have state money transmitter licenses. They have full AML BSA compliance. So to say that this space is the Wild West is just simply not true.

That being said, I think there's probably a better, smarter, more efficient way that we can do regulation in this space. And it's important to have that dialogue back and forth, because to date, especially on the securities laws front, a lot of the guidance has really come from enforcement actions, and interpreting very old cases that don't necessarily make sense when you're looking at them through the lens of a crypto network. So I do think we have a lot of work to do. I would also say I think Congress is very interested in this issue as well, because it might not just be that the SEC has a role to play here. It's probably that there are multiple agencies that need to be looked at, to figure out the best way to do regulation. So it's an ongoing dialogue. And I would emphasize that the industry is happy to engage in these conversations, that they have ideas. They want to make sure we get the regulation right so consumers are protected, so the markets have integrity, but that it's not stifled in a way that prevents the innovation from happening here in the United States.

- Kristen, what do you think accounts for that gap that you were talking about? In other words, you say Gary Gensler says, he thinks things are clear. When you look at things like Brian Armstrong from Coinbase talking about how confused, he m they were by the SEC guidance. Why is there that gap?

KRISTEN SMITH: I'm not sure I know a reason why there is that gap. I mean, I can say from working with our 53 member companies at the Blockchain Association, I don't think there's a single one of them that thinks everything is crystal clear when it comes to applying how we test to a decentralized network. And I think maybe it's a matter of perspective. It's quite a different thing when you're someone who's building, who is trying to figure out how to apply this. Do you launch in the US? Do you launch someplace else? You know, that's a very different perspective than I think one sitting on the other side of the table from the regulator. And so I'm not sure what accounts for that disconnect, but I would definitely say there is a disconnect there.

- Nic, Kristen mentioned that this is not a totally unregulated industry. And there are definitely a lot of players in the industry now that are big traditional financial institutions who have gotten into crypto in one way or another. As something that, in that same essay I was referring to, you called it a revolution, as something that does have this revolutionary spirit if you will, very much non-traditional, non-establishment spirit, how do you think about the interaction between upstart players and technologies, and traditional finance, and what role do you think traditional finance should be playing in all of this?

NIC CARTER: Well, I think it's a tremendous opportunity for traditional or legacy finance. I used to work at one of the largest asset managers in the US, at Fidelity on their crypto practice. And they were fully bought into the industry from 2014 onwards. They were actively mining Bitcoin. They've now built Fidelity Digital assets. They custody huge amounts of digital assets. And you know, they're active on the blockchain directly. And I think many, many more investment banks, custodians, and asset managers from the legacy finance space, will begin to engage with the asset class. And we've seen the partial institutionalization of crypto already. You know, that's very well underway. And I think they're seeing it as an opportunity, as a system that's more open than open banking. Or you have those open banking rails in Europe where you have some limited access to sort of shared databases.

But if you look at DeFi, or public blockchains, you know, everyone has read write access to the database. And that's pretty transformative. And I think you'll see increasingly public blockchains being treated as an opportunity by the largest banks in the world. And we're seeing Citibank getting more active now. We're seeing Goldman getting more active. They're investors in coinmetrics. Fidelity has been active. You know, State Street is getting more active now. BNY Mellon is getting active. So there's very few financial firms that have not begun to think about their crypto strategy. And actually, I think you're going to see a lot of strength on the lobbying side, on the public affairs side, from Wall Street, embracing crypto. I don't think they see it as a disruptor.

I think the biggest threat to Wall Street and banks, and the commercial bank sector is actually CBDCS, would be the government trying to nationalize you effectively nationalize the commercial bank sector by pulling it all in house, and creating a central bank digital currency, that sort of disintermediate the commercial bank sector. So it's kind of a strange bedfellows type situation. But I think that's really the direction this is going. If you just look at the flow of investment, you look at the flow of activity, proofs of concept, and actual deployments on public blockchains, it's pretty unambiguous there's been a market sentiment shift in favor of open crypto, open crypto, not private blockchains, from those Wall Street incumbents.

And you know, some people think in the crypto space, that that dilutes their values, and undoes the crypto anarchist nature of the system. But to the extent they're participating as equal peers with everyone else, I think that's tremendously powerful for sort of the value proposition of blockchains.

- And Nic, there have been some discussions, very, very initial early discussions, by the Fed in terms of creating a coin such as you describe, or doing that intermediation that you were talking about. What's the probability of something like that? Is that something that you think is really a concern at this point?

- I'm extremely concerned about it. And even if the probability is low, the potential for harm is extremely high. So you have to multiply the possible outcome against the probability of it happening, and it still leaves me in a state of concern. Because ultimately a CBDC will give central bank extreme, and in my view, potentially unconstitutional control and discretion over the economy. It's a way to take an end around legislation, and give this group of unelected bureaucrats effectively, and largely unaccountable, folks technocrats control in a very detailed and specific way, not only for the money supply, not only giving them new tools to impose negative interest rates should they want to, but also potentially giving them discretion over who can transact with whom, and when, and where, and how. And so that brings us close to the Chinese approach to credit, and to the flow of funds in an economy.

And I haven't really seen enough persuasive evidence that the architects of the CBDC would take true transactional privacy to heart. All I see is these statements about building in KYC and building in AML, and counter-terrorist financing into the system. And so it doesn't look to me like we're going to get a digital version of physical cash. If the state were to produce such a thing, I think it would be tremendously useful and a great product. But I've seen no indication that that is what we're likely to get with the CBDC. And so you know, I think the crypto industry has made its feelings very clear by embracing stablecoins as a private sector alternative. But it appears that it's very high on the agenda list for Central Bank officials in this country to pursue a CBDC. And I wouldn't be surprised if they tried to push out a pilot.