The Good, The Bad And The ‘Ugly Baby’: Regulators Discuss Crypto At DC Fintech Week

October 19, 2022
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Regulators and lawmakers were out in force at last week’s DC Fintech Week, praising the EU's approach to crypto regulation, discussing challenges of bipartisan legislation and questioning sham skeuomorphism.

  • McGuinness says Brussels effect possible in global crypto regulation
  • Bipartisan stablecoin bill a hope in political turmoil
  • Fed's Barr underscores importance of right timing in crypto regulations
  • OCC's Hsu says crypto is a disguise of "skeuomorphism"

Regulators and lawmakers were out in force at last week’s DC Fintech Week, praising the EU's approach to crypto regulation, discussing challenges of bipartisan legislation and questioning sham skeuomorphism.

The Brussels effect

Speaking at the second day of the DC Fintech Week, Chris Brummer, faculty director at the Institute of International Economic Law, praised European policymakers for taking a leading role in crypto regulation and acting swiftly to propose legislation for the rapidly scaling sector.

In early October, the European Council approved the final version of the landmark Market in Crypto-Assets (MiCA) regulation, laying down a solid framework for cryptocurrencies and stablecoins.

Asked about the potential impact of MiCA on global regulations, European commissioner for financial stability Mairead McGuinness said there may be a “Brussels effect”.

“If we legislate, others tend to look and follow but we are also looking at what others are doing.

“I think anyone in legislation and regulation you have to have your eyes wide open,” the commissioner said.

The Brussels effect refers to the worldwide adherence to European standards as a result of the bloc taking a pioneering role in new policy matters. This has happened with the EU’s General Data Protection Regulation (GDPR), which created a benchmark for consumer data privacy rights all over the world.

“I think, on this particular piece of legislation, why double our efforts if we can learn from others?” the commissioner said.

“We are very happy to have engagements with those who want to see the process we went through, what we got right, what was difficult and where there might be some sensitivities.”

McGuinness noted that the EU and the US have very similar objectives when it comes to regulating the digital asset space and pointed out that her office is already in talks with their US colleagues.

US’ "ugly baby"

Meanwhile, legislators at Capitol Hill are taking their time in regulating the crypto space.

During the last couple of years, members of Congress have introduced numerous legislative proposals which have brought the industry, policymakers and other stakeholders to the table and contributed to key discussions about how the eventual legal framework could potentially look like.

One of the most significant proposals was filed by Wyoming Senator Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) in the summer. The Responsible Financial Innovation Act creates a comprehensive framework for digital assets and gives the Commodity Futures Trading Commission (CFTC), not the Securities and Exchange Commission (SEC), the authority to regulate and oversee the space.

Another long-awaited bipartisan piece of legislation is being prepared by top House Finance Committee members Maxine Waters (D-CA) and Patrick McHenry (R-NC).

Speaking on the second day of the conference, McHenry stressed that the only existing federal regulation around the movement of digital assets is the money transmission framework, which was created more than 60 years ago.

“That doesn’t look like a modern regulatory regime, doesn’t look thoughtful, doesn’t look innovative and actually looks pretty retrograde,” the Congressman said.

McHenry and the leadership in the Financial Services Committee are now working to address this gap. With the involvement of the Treasury, they have laid down the groundwork for stablecoin legislation and are getting into discussions of more complex questions.

“We agree on the asset that is a narrowly defined set of assets, 1:1 backing, no leverage. We agree on all the components of what the asset is. Then we are gonna get into more complex conversations. What is the means by which you hold it, the regulation around what is a wallet and then who is the federal regulator. That two is less science and more art,” McHenry noted.

The result of this, according to the lawmaker, is a “pretty ugly baby”.

“There are a number of tradeoffs in a bipartisan compromise so we came up with a pretty ugly baby.”

“It is a baby, nonetheless, and we are grateful and we are hopeful that this ugly baby can grow and prosper into something that is a lot more attractive.”

McHenry also underscored the importance of the bipartisan work behind the proposal.

“We have come up with something in election year in a divided Washington. I think it is a sign of hope that we could have complex difficult policymaking in the midst of all this chaos.”

The House Representative said he is optimistic they are going to come to terms on the rest of the provisions, adding that “I appreciate the tradeoffs my Democrat counterparts are willing to make so we can actually have a bipartisan piece of legislation”.

Fed governor appeals to humility

While Congress is working on a comprehensive set of rules, federal financial regulators must ensure they fulfil their mandates, including consumer protection, investor protection, financial stability and market integrity.

Appearing on the first day, Federal Reserve’s recently approved vice chair for supervision, Michael Barr, emphasised that regulators must be careful with the timing and extent of regulations.

“I would note with some humility that striking the right balance between creating an enabling environment that supports innovation and managing related risks to businesses, households, and the stability of the financial system is no easy task,” he said.

Overly prescriptive or cautious regulations may stifle innovation and lock in the market power of dominant participants, Barr noted. On the other hand, when regulation is “lax” or “behind the curve” it can facilitate risk-taking and a race to the bottom that puts consumers and businesses in danger.

“I believe everyone has a stake in getting the regulatory balance right,” Barr said.

The disguise of ‘skeuomorphism’

Another top regulator with oversight powers in the space, acting comptroller Michael Hsu, cautioned against integrating the crypto industry with traditional finance.

Hsu argued that crypto is mimicking concepts from traditional finance to market itself and help users engage, an approach known as “skeuomorphism”.

“Referencing or analogising to what is familiar can help make what is novel less scary to newcomers. Once users engage, the theory goes, they can then discover, learn, and use what is actually new,” Hsu explained.

Influential technology leaders such as Steve Jobs at Apple used skeuomorphism, according to Hsu.

For instance, Apple designed certain functions to look familiar to the old ones in order to shift iPhone users from using physical buttons to get used to touchscreens.

“In this example, skeuomorphism served as a bridge, which was positive. A catalyst for transformational change.”

“The problem, however, is that crypto is not traditional finance,” the acting comptroller argued.

“The skeuomorphic representations are, at best, facades. The real thing is quite different."

According to Hsu, in the case of crypto, “skeuomorphism is not a bridge, but a disguise.”

The problem with that is that it can “downplay or mask the risks involved and establish false expectations”.

“In time, people get hurt,” Hsu stressed.

The Office of the Comptroller of the Currency (OCC) chief argued that regulators should not allow the yet “immature” crypto industry to integrate with the “mature” traditional finance as long as the crypto industry cannot answer its key differentiators with traditional finance.

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