Source:coindesk (SwapnIl Dwivedi/Unsplash)
Legislators need to educate themselves on Web3 if they care about protecting consumers, Steven Eisenhauer, chief risk and compliance officer at Ramp, writes.
For years now, the compliance community has been consistently warned that a deluge of new regulation for all things crypto, which would see the industry forever changed, is coming. We are still waiting for even the slightest of rains.
The only potentially well-informed (although imperfect) legislative efforts on the horizon – Europe’s landmark crypto legislation, MiCA – has been held up for a second time, apparently to allow more time for translation.
Instead, what we’re seeing is redundant legislation being proposed to solve a problem that has been misdiagnosed for political expediency. This reflects poorly on the depth of knowledge that our regulators have on Web3 technology as a whole, and how competent they actually are in protecting consumers.
Sometimes new technologies require new approaches to regulations. Let’s consider what's wrong with the current approach, try to identify the real issues, and propose solutions to forge a new way forward.
Take for instance the so-called Digital Asset Anti-Money Laundering Act introduced by Sens. Elizabeth Warren (D–MA) and Roger Marshall (R–KS) in December of the previous year.
The proposed legislation was presented at a Senate Banking Committee titled “Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers.” It would do little to protect consumers and would have done nothing to prevent what happened at FTX – as the almost singular focus of crypto-related regulations to date, a robust set of anti-money laundering (AML) rules have been widely applicable to crypto firms since before Sam Bankman-Fried even founded FTX.
As evidence of the effectiveness and application, we need only consider the settlement between Coinbase and the New York Department of Financial Services (NYDFS), which is only the latest example in a long list of regulatory actions taken against crypto firms related to anti-money laundering and sanctions failures.
Warren’s involvement in this bill and the wholesale mischaracterization of its impact is particularly surprising, given her strong consumer protection bona fides (Warren is alternatively vilified and praised, depending on one’s political standing, for her leading role in the creation of the Consumer Financial Protection Bureau).
To many in crypto, this is nothing more than a direct attack on the entire space.
More likely, what we are seeing is all too common in politics: uninformed and desperate attempts to appear to be doing something – anything – in the aftermath of a disaster. Presenting more anti-money laundering legislation is easy and politically safe.
Overlooking the real issues
To be clear, there are gaping holes in the global regulatory frameworks for digital assets.
Most countries lack robust financial regulation applicable to crypto firms in the areas of consumer protection, safeguarding of customers' funds, capital and liquidity requirements, concentration risk management and disclosure requirements.
The need to address these regulatory gaps is widely acknowledged and quite urgent. The problem seems to be an unwillingness of some legislatures to educate themselves – a surprising statement in the wake of FTX!
This is all akin to a doctor that is unable to diagnose a patient’s ailment, yet opts to prescribe antibiotics so that they are seen to be treating the patient. Not only is it dangerous for the patient, who may forgo further tests in the false hope they will be cured, but it also contributes to global antibiotic resistance.
Prioritizing redundant legislation is similarly insidious, as it gives consumers a false sense of protection and further erodes confidence in global financial systems.
The way forward
If global legislatures are feeling overwhelmed by the body of knowledge required to effectively regulate crypto, they should take a methodical approach and rely on archetypes of successful financial regulation.
I recommend looking to the EU’s Payment Services Directive and its revisions for inspiration.
Instead of fiddling about trying to determine the different types of market participants to which the resulting regulation could apply, the law should describe and create regulations for each of the activities in which they are engaged.
The first step of the process needs to be to create a complete taxonomy of applicable products and services.
Stepping through each defined product and service to determine appropriate rules will require politicians to educate themselves on the intricacies of blockchain technology and the varied services available to consumers - a net positive from the start.
For example, any effective prudential regulation for crypto would need to differentiate between custodial and non-custodial services.
Safeguarding requirements should apply to services involving the holding of a consumer’s assets but would be hilariously ineffective and irrelevant for self-custodied assets. Disclosure and transparency requirements could apply broadly, but need to ensure informative and specific information is provided to consumers.