Crypto remains under scrutiny as underlying technology takes off

As the fallout from the collapse of FTX continues, different reactions to crypto have emerged. These range from “let it burn” to “contain it through regulation” to “existing securities and banking laws are sufficient”. Legitimate questions remain about the definition of securities, oversight of a cryptocurrency spot market, and the emergence of a regulatory framework for stablecoins.

Although FTX appears to be more about old-fashioned fraud and a disregard for corporate governance and risk control than cryptocurrencies, it has created a broad consensus that greater regulatory clarity is required for the growing digital asset ecosystem.

Agreement signs abound. The US Securities and Exchange Commission has increased its enforcement efforts, there have been more calls for “proof of reserves” in the absence of clear capital requirements, and a new congressional subcommittee on digital assets has been created under the leadership of Representative French Hill.

These actions — which come on the heels of the president’s task force report on stablecoins, additional reports on tokenization and decentralized finance under last year’s executive order on digital assets and new legislative initiatives — suggest greater regulatory clarity may be coming.

However, the real push for public action may come from innovation. While the public sector debate on risk and regulation has gone round and round in recent years, technology and innovation have only moved forward – and this can be profound. Most central banks thought little of central bank digital currencies until Meta’s (then Facebook’s) introduction of its digital currency, Libra, in 2019; now nearly two-thirds of the world’s central banks are exploring CDBCs.

The real story in the wake of FTX is less about cryptocurrencies than advances in the underlying blockchain and other technologies. These are quietly creating transformational tools and applications that will help drive Web3 and reshape the financial industry. These technological advances are occurring in both the DeFi and traditional financial worlds where distributed ledger technology is used to increase efficiency, drive revenue and find cost savings, for example in currency payments and cash settlements.

In currency payments, HSBC uses DLT to enable settlement with Wells Fargo across multiple currencies. Goldman Sachs launched a tokenization platform in November to facilitate the issuance, registration, settlement and custody of digital assets that went live with the European Investment Bank’s second €100 million digital bond issue.

Blockchain is a foundational technology that goes beyond digital assets, capable of transforming business and commerce. While questions remain about interoperability with legacy and other public chains, blockchain’s technology and applications are rapidly evolving. As scalability and availability issues are addressed, new opportunities are enabling more movement from permissionless to permissionless open source public blockchains that can benefit from improved privacy, speed and lower costs. These will all be key components of the Web3 economy, which is well under way.

The crypto and digital asset ecosystem needs greater regulatory clarity – whether it concerns the application of existing laws, the adoption of new regulations, or the fine-tuning of responsibilities for regulatory agencies. It is important to ensure that the guardrails for investor protection and financial stability are in place, but it is equally important to allow development and emerging technologies to thrive. Without it, we miss out on improvements to financial products, services and inclusion, as well as opportunities for risk reduction. Greater regulatory measures may be needed, but regulators must not stifle innovation.

These issues were the focus of an OMFIF roundtable discussion with executives from crypto firms, banks, asset managers, payment providers, big tech, fintech and regulatory agencies in Washington DC.

Patricia Haas Cleveland is the US president of OMFIF.