The case for a crypto-only agency- POLITICO

Not to get metaphysical about it, but what exactly is crypto?

For regulatory purposes, that is. The decision by regulators on whether to classify cryptocurrencies as securities, commodities or something else entirely means a lot for the future of a trillion-dollar industry that many see as defining the next wave of internet technology.

When I spoke last week with Agostino Capponi, a Columbia University Associate Professor and founder of the Columbia Center for Digital Finance and Technologies, he argued that Washington have to get a brand new one approach. I called him back to get more insight into what this new class of digital assets might look like — and how crypto regulators need to be as much computer scientists as they are economists to be truly effective.

If you were the czar of digital asset regulation, how would you classify cryptoassets?

If we want to think of crypto as an asset class, the first point is that we have a very large and complex taxonomy of tokens. We need to think about how to regulate a large class of assets, not a single asset.

Think Bitcoin and then UNI management token issued by Uniswap. If I have Bitcoin, I have a volatile cryptocurrency that I can use to make payments or transactions on a DeFi exchange. If I have a Uniswap token, I can participate in decisions to make changes to the network, or steer the direction of Uniswap projects.

Another example is stablecoins versus non-stablecoins. With a stablecoin, the value of the currency depends on the security used to back the assets. You have to think about completely different regulatory regimes.

If you think about the traditional reasons for financial regulation — to create stability, protect consumers, everything that an agency like the SEC is supposed to do — how would it look different for cryptocurrencies?

This ecosystem must take into account the regulation of the software that receives each transaction. The distributed ledger technology – which is based on “smart contracts” — must be carefully certified and verified so that we can make sure that only users with credentials to do so launch new projects on the blockchain. It must also ensure that the underlying technology of the digital exchange is solid.

Most of the regulatory system right now is based on regulating individual units or tokens, but in the case of cryptocurrencies, we should regulate the flow of transactions on the blockchain, rather than the specific units.

It sounds like the existence of the blockchain empowers engineers and computer scientists who understand this technology, reducing the relevance of regulatory expertise in the traditional financial system.

I agree. The new regulators of the crypto ecosystem will need to be educated in the technology. Otherwise, there will be no way to regulate, because the risk is quite unique.

We never thought about the technology risk in thinking about regulating stocks or bonds because the risk of hacking is quite low, but with cryptoassets that has changed.

Another point is that these markets are open 24 hours a day, seven days a week, so it may be necessary to create new rules. There may need to be a new agency created specifically to regulate cryptoassets that will operate without interruption.

Federal Reserve just made the regulatory landscape around crypto just one a little less murky — but the party political lines around the issue are becoming clearer.

Late yesterday POLITICO’s Sam Sutton reported for Pro subscribers on new guidance issued by the Fed to US banks, which must now notify regulators before officially engaging with crypto in any way. The bank’s official letter says that these banks “face potential legal and consumer compliance risks” and that the banks must do their due diligence to ensure that any crypto activity is “legally permitted.” (which follows a “Final guidance” published Monday that opens the door for crypto companies to create the kind of “main accounts” traditional banks have to deal directly with the U.S. government.)

But the more agencies like the Fed make these seemingly neutral rules, the more opportunities open up for partisan back-and-forth. On Thursday, a group led by Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) published a letter is asking the Office of the Comptroller of the Currency to rescind Trump-era guidance that allowed banks to do business with crypto companies. And yesterday, Sen. Pat Toomey (R-Penn.) sent his own letter to the FDIC, alleging that the agency has “improperly taken steps to deter banks from doing business” with crypto.

Technology accessory company Logitech announced today one new headphones which is meant to connect to Meta’s Quest 2 headset, plunging users into the “biggest moments and smallest details of the metaverse” (at least according to their ad copy).

We’ve talked a lot in this newsletter about the importance of high-quality visuals to the metaverse—and the computing power and network necessary to make them persistent among potentially thousands of users—but what about audio? Virtual spaces will be much more conducive to speech as a primary form of communication as opposed to text; choppy, shifted sound can be as jarring as rough or creepy-valley style avatars.

Coincidentally, an old-school metaverse pioneer has recently focused on this very issue. When I spoke with Second Life founder Philip Rosedale earlier this summer, he described why he decided to co-found High Fidelitya spatial audio company that seeks to create more immersive sound for the metaverse with the very basic goal of making users more comfortable in a lifelike virtual environment, saying they “realized that VR headsets were not yet ready to bring people into the space in a fair and inclusive way, whatever the technology.”

If people end up spending a significant amount of time in virtual spaces, accessories like Logitech’s headphones may end up being more affordable gadgets than a quality of life investment.

• Lyft made the announcement Tuesday automated taxis would be available on the Las Vegas strip… but not without human backup drivers in tow.
• “Hey, Google: make me a burger.”
• A major Bitcoin miner is liquidate their mining rigs to reduce debt, the latest sign of the crypto downturn’s effect on the nascent industry.
• A 36-year-old quadriplegic only set the record the longest time spent with a brain-computer interface that vastly improves his mobility.
• Should the government consider private satellites part of America’s critical infrastructure?

Keep in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). follow us @DigitalFuture on Twitter.

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