Technology

The case for a crypto-only agency


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

For regulatory purposes, that is. The decision by regulators as to whether to classify cryptocurrencies as securities, commodities, or something entirely different matters 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 founding director of the Columbia Center for Digital Finance and Technologies, he argued that Washington needs to take a completely new approach. I called him back to get more insight into what this new class of digital asset might look like — and how in order to be truly effective, crypto regulators might need to be as much computer scientists as they are economists.

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

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

Think about Bitcoin and then UNI, the governance token issued by Uniswap. If I hold Bitcoin, I have an unstable cryptocurrency which I can use to make payments or transactions on a DeFi exchange. If I hold a Uniswap token, I can participate in decisions about making changes to the network, or steering the direction of Uniswap projects.

Another example is stablecoins versus non-stablecoins. With a stablecoin the value of the currency depends on the collateral that is being used to back the assets. You have to think of 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 meant to do how would that look different for cryptocurrencies?

This ecosystem would have to take into account the regulation of the software that receives every transaction. The distributed ledger technology — which is based on “smart contracts” — needs to be certified and verified carefully, so we can make sure that only users with the credentials to do so are launching new projects on the blockchain. It would also need to make sure the underlying technology of that digital exchange is solid.

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

It sounds like the existence of the blockchain empowers engineers and computer scientists who understand that technology, and diminishes the relevance of regulatory expertise in the traditional finance system.

I agree with that. The new regulators of the crypto ecosystem will have to be educated in the technology. Otherwise there will be no way to regulate, because the risks are quite unique.

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

Another point is that these markets are open 24 hours, seven days a week, so might need to make new regulations. There might have to be a new agency created specifically to regulate crypto assets that would operate without interruption.

The Federal Reserve just made the regulatory landscape around crypto just a little less murky — but the partisan 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 America’s banks, which now must notify regulators before they officially engage with crypto in any way. The bank’s official letter states that those banks “face potential legal and consumer compliance risks,” and that banks must do their due diligence to make sure any crypto activities are “legally permissible.” (That follows a “Final Guidance” published Monday opening the door for crypto companies to create the kind of “master accounts” traditional banks have to directly transact with the U.S. government.)

But the more agencies like the Fed create these seemingly neutral rules, the more opportunity it tees 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 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 arguing that the agency has been “improperly taking action to deter banks from doing business” with crypto.

Tech accessory company Logitech announced today a new pair of headphones that are meant to link up to Meta’s Quest 2 headset, plunging users into the “biggest moments and the tiniest details in 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 networking necessary to make them persistent among potentially thousands of users — but what about sound? Virtual spaces will be much more conducive to speech as a primary form of communication as opposed to text; choppy, displaced audio could be just as jarring as crude or uncanny-valley-style avatars.

Coincidentally, an old-school metaverse pioneer has been focusing recently on exactly this issue. When I spoke with Second Life founder Philip Rosedale earlier this summer he described why he decided to co-found High Fidelity, a spatial audio company that seeks to create more immersive audio 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 ready yet to bring human beings into the space in a fair and inclusive way, no matter what the technology was.”

If people end up spending a significant amount of time in virtual spaces, accessories like Logitech’s headphones might end up being less expensive gizmos than an investment in quality of life.

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

Stay 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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