Give technology a leading role in cryptopolitics

By Mike Castiglione, Director of Regulatory Affairs, Digital Assets, Eventus

Cryptopolitical debates are often portrayed as warring sides fighting over values. Not unique to crypto, policy formation is almost always an exercise in identifying and balancing trade-offs. Common trade-offs in politics are:

• Individual rights vs. common good
• Innovation vs. Safety
• Continuity vs. new paradigms
• Protect the downside vs. capture the upside

The thrill is giving up something to get something else. Nevertheless, there is one element, a variable, that provides several options. And there is technology. In economics, technology pushes the limit curve outward. In business, it opens up new markets. In politics, it can please several constituencies. And in regulation, technology allows us to achieve safety goals without stifling innovation.

Of course, technology requires wise decisions and skillful use. But when it works, it empowers and it makes difficult decisions easier. So where is the technology in crypto regulation?

A crypto upgrade

Technology should be at the heart of the crypto-political debate. Crypto itself is a technology – Layer 1 and Layer 2 blockchains, dApps, zk-SNARKS, other technical parts – makes distributed networks work in practice. Nevertheless, crypto technology also includes the supporting features that make it all useful for more people in the long run. The current Internet needed antivirus, two-factor authentication, encryption and penetration tests. Similarly, a new suite of technology is available to give crypto an upgrade in its trust and security.

Eventus is part of this trade monitoring ecosystem that detects fraudulent trading and transaction monitoring to help companies manage financial risk. This supporting technology universe includes blockchain analytics for financial crime investigations, code audits to ensure smart contracts work as designed, and escrow services to secure private keys.

Politicians who are aware of these support functions learn that they have expanded options. They can opt for more flexible, principles-based regulations as opposed to having to list specific rules. And they can rely on private self-regulated organisations. Companies using this enabling compliance technology can build their businesses with trust and transparency built in and send a strong positive signal to customers and regulators.

Navigating Regulatory Uncertainty

For crypto, there is regulatory clarity on anti-money laundering (AML) and, in leading jurisdictions, the need to monitor platforms for abusive trading. The EU’s pending Markets in Crypto Assets (MiCA) regulations, along with current rules 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.

Nevertheless, rules are still being written. Given crypto is an emerging industry, we will be operating in regulatory uncertainty for the foreseeable future, even if basic legislation is passed in the US. When I served in the CIA, we often worked with ambiguity and had to make targeted, measured decisions in a fog. The reality is that when faced with uncertainty, a strategy—whether business or national security—must plan for a range of scenarios.

So the best way to operate now is to focus on what is controllable. A simple framework to follow is People, Process, Technology.

• People: Seek out seasoned talent who are adaptable enough to apply lessons learned from other asset classes to crypto. They can bridge cultural gaps between crypto, financial institutions and regulators.
• Process: Building compliance habits, such as conducting market abuse risk assessments and creating internal standards for due diligence, documentation, escalation and reporting of market abuse cases. Much of what regulators look for is surprisingly process-based.
• Technology: As outlined above, this is where the right software stack can unlock the ability to monitor data to stay ahead of potential problems.

If we fail to apply the expertise, processes and compliance technology that works in other asset classes, crypto’s market integrity will suffer. Companies, especially those innovative enough to enter crypto, are faster than politics and can get this right.