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Welcome everyone to the future of
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finance podcast here at the Wharton
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School. My name is Itai Goldstein. I'm a
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professor in the finance department and
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currently the chair of the finance
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department and we are focusing the
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second season of the future of finance
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uh podcast on cryptocurrencies uh
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digital assets uh decentralized finance
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and everything related to that. These
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are new innovations that are promising
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to change the world of finance, the way
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that we trade, the way that we pay uh
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and the financial system uh more
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generally. And an important part of the
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story of uh cryptocurrencies and digital
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assets is certainly regulation. Some
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people will say that we have too much uh
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regulation or regulatory uncertainty and
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that this is stifling innovation in this
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space and others will say that we need
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regulation and maybe we need even more
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regulation because there are many
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threats potential fraud uh and potential
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risk for uh the system as a whole uh
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what we think of as systemic risk. So
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those are issues that we want to discuss
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here today in uh this uh episode of the
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second uh season. Uh and we have two
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perfect guests uh to talk about uh these
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uh these issues. Uh one is uh Jessica
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Waktail who is the Dr. Bruce I Jacobs
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Professor of Quantitative Finance here
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at the Wharton School. So I've been here
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with Jessica over the last 20 years or
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so. I think she arrived one year before
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me. uh and uh she uh thought a lot about
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the regulatory aspects of uh digital
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assets and cryptocurrency
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because she just came back from serving
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as the chief economist at the SEC, the
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Securities and Exchange uh Commission.
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Uh welcome uh Jessica.
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>> Thanks so much for having me. I'm happy
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to be here. And then the second guest
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that we have is uh Tim Msad who is
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currently senior fellow at the Kennedy
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School of Government at Harvard
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University. Uh he also has a vast
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experience in uh policy and thought a
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lot about uh crypto and digital assets
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among other things. He is the former
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chairman of the US Commodity Futures
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Trading Commission, the CFTC
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and he has been participating in many of
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our events here at the Whartalon
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Initiative on Financial Policy and
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Regulation uh Wiffer where we have been
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thinking quite a bit about the
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regulatory aspects of uh crypto and
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digital assets. Hello Tim.
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>> Hi, thank you for having me.
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>> So with this introduction, let's uh dive
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right in. There's a lot uh to discuss
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and I want to start from uh the basics.
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Uh we talk a lot about regulation in the
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space of digital assets. Uh but this is
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not disconnected from broader financial
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regulation and regulation that we have
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in other markets and other financial
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institutions. So I want to take a step
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back and understand a little better what
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is potentially special about uh digital
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assets and why is regulation of digital
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assets potentially different uh than
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regulation in other areas of the
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financial system. Uh so Jessica maybe
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you can start with that.
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>> Sure. Um happy to start. Uh so I think
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there's a couple things to be
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considered. One is that the original
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vision of uh cryptocurrency uh going
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back to you know the white paper um uh
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the Bitcoin white paper is one of
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decentralization
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and that's going to create a tension
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with our regulatory system and moving
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more towards the present um
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this is a situation where securities and
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non-securities are inseparable
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and just to put it in non um digital
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asset terms. We don't normally use gold
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to say buy Apple stock on the New York
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Stock Exchange. We don't really know how
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that might work and that's the situation
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that we have with crypto platforms.
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I think another challenge is that the
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crypto ecosystem developed outside of
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the
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regulatory system and that's created a
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bit of a chicken and egg problem. So in
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the traditional financial system we have
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securities that trade on registered
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exchanges. That's a very important part.
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It's not the whole financial system by
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any means, but it's a very important
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part of how um institutions and retail
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interact with the financial system, but
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what do you do when both the tokens,
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which are kind of like the equities
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here, and the platforms are
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unregistered? You don't you need one to
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go first, but neither can operate while
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the other is still unregistered. So I so
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I think that those um decentralization
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the intertwined notion of securities and
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non-securities and the chicken and egg
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problem are three challenges uh that
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would need to be overcome.
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>> Very good. Tim, do you want to weigh in?
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>> Sure. Well, I would first say the the
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problem is that we speak of digital
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assets as if it's an asset class and it
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isn't. It's a technology. We're talking
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about blockchain and tokenization
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technologies which can be used in all
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sorts of ways. You can have tokenization
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of securities of stocks and bonds and
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potentially other real world assets or
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other financial instruments. You can
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have network tokens of blockchains which
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is what Bitcoin and ETH are. You can
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have tokens that are really for
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consumption as in games. You can have
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meme coins. you're going to have
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collectibles. So, we can't really
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regulate digital assets per se. What we
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need to do in regulation is really three
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things. One is we have to address the
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gap we have in the United States with
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respect to regulation which is that in
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so far as some tokens aren't securities
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but are financial instruments whether
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you want to call them commodities or
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something like commodities we don't have
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a federal regulator for that spot market
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and that's been something that lots of
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people have recognized but we haven't
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done anything about it. Secondly, we do
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need greater clarity in when is a token
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a security, when is it not a security.
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And as Jessica said, that's, you know,
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there's um a lot of gray areas to that
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because tokens can change over time, if
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you will. Um and the third thing we need
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to do is make sure that the rules we
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have about how to use this technology
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are neutral or that is the rules we have
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for things like recordkeeping,
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custody, clearance and settlement should
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be technologically neutral. They
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shouldn't be inhibiting use of this
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technology but I don't think they should
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be promoting it per se either uh also
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let the market decide that.
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So I think what both of you are saying
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is pointing to one friction that has
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been on the minds of many people who are
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observing this. uh I would say maybe
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more generally with financial regulation
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but in particular when it comes to uh
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digital assets and this is the potential
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uh fragmentation the fact that uh it is
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not clear who should regulate uh what
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and then you have some tensions you have
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different rules coming from different uh
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uh agencies uh and that creates even uh
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greater uncertainty. So is that a a bug
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that we can uh overcome or is that just
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a feature of the system that we are
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dealing with?
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>> It certainly has been a cause of some of
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the difficulty in addressing this. You
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know, we have two market regulators, the
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Securities and Exchange Commission and
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the Commodity Futures Trading
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Commission. And when you have a
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technology that allows for the
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development of innovative products that
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kind of cut across those agencies
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jurisdictional lines that becomes very
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challenging. If for example we had a
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unitary regulator as some jurisdictions
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do it be it is easier to address
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financial innovations because you say
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all right my my jurisdiction covers all
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financial instruments. I see kind of
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this new technology I'm going to address
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that. So we have been saddled with that.
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I do think that that's one of the
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reasons when we think about the solution
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about how to regulate we actually need
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to bring the agencies closer together. A
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lot of people say well what we need is
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very clear lines of jurisdiction. What
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the CFTC regulates and what the SEC
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regulates and that all sounds good but
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in fact there are gray areas here. You
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can have tokens which kind of seem to be
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securities at first but then can become
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commodities effectively because they are
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decentralized. So and again you want
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rules on how to use this technology
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which are reasonably consistent between
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the two agencies. So I think the
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solution lies in
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bringing the agencies closer together in
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various ways. You don't have to merge
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them. uh that's been suggested many
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times before and we've never wanted to
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take that step, but we do have to create
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ways that they're going to work together
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on on these issues.
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>> So Jessica, what is your take on
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fragmentation? Uh obviously you just
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experienced some of it in DC. I don't
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know how much you want to
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>> Sure. Well, I I'm I I'll I'll say a
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couple things and I'll um I think uh um
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Tim uh said it well, which is um I I've
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I don't believe that bringing that
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creating one financial regulator
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actually is the answer here, but this is
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clearly something that the CFTC and the
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SEC uh would will have to and actually
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do currently work together on. Um and
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that's something that both agencies know
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how to do. And it does it does you know
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at the margin create some frictions and
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perhaps slows them things down a little
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bit. But I I believe in my experience
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the extent to which that happens is
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somewhat overstated.
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And I think that fragmentation itself is
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not really the problem that we have. Um
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I mean I think the the issue is that
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some of these problems are difficult
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problems and it's not obvious what the
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solutions are. uh but I think that the
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many issues actually are similar to the
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types of questions that the SEC has
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worked on for many decades. Um so I I
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generally think both here and in other
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settings that the you know fragmentation
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of the US financial market story is a
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little overstated. I think that there's
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strengths to our system visav other
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jurisdictions. You know, for one thing,
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we have a strong and experienced market
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regulator and not all jurisdictions have
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that. Um, and I think that's been very
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helpful for the development of financial
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markets. And I think having the CFTC and
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the SEC separate has allowed for
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experimentation also. So in some cases
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um you know for some sets of rules and
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this is outside of crypto uh the CFTC
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has gone first and the SEC has been able
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to see how things have worked out and
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learn from that and vice versa. So so I
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think that there's actually some real
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benefits to our system.
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>> Yeah, I you know I I would agree with a
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lot of that. I don't mean to suggest
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that fragmentation is the main problem
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here. Um and you know I do think there
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are benefits to the fact that we've had
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two regulators. Um,
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but I do think when Congress thinks
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about what to do here, um, it's not just
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going to be a simple process of writing
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legislation that says, "Okay, this is a
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digital commodity. Uh, CFTC go regulate
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that because um those are, you know,
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those are difficult questions and I just
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think we want the two agencies working
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together and I agree they're they're
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capable of that um particularly when
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they're led by chairs who have that
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mentality. So one of the biggest
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questions when it comes to regulation
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and it's not directly what we talked
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about but follows up on that is uh the
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idea that because of regulation and
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because of regulatory uncertainty we
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don't see uh as much innovation in the
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space of digital assets and
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decentralized finance as we would have
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hoped. And uh proponents of this theory
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would say that here we have a set of new
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technologies that uh promise to
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revolutionize the the way we do finance
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and monetary economics. Um but then
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because of all these uh uh regulations
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and regulatory uncertainty and all
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potential political issues um there is
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just not enough uh innovation and we are
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uh falling behind. Uh so what what is
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your take on that? I think it's
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overblown. Uh I, you know, the industry
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loves to say this. Uh and sure, you
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know, you could certainly make the
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argument that gee, if we had regulatory
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clarity, uh people could, you know, more
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easily launch products, raise money,
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they wouldn't even consider doing
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something abroad and so forth. But in
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the grand scheme of things, I think it's
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an overblown argument. Um I don't think
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uh you know that's what's preventing um
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this technology from displacing JP
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Morgan or something like that you know
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which sometimes uh crypto enthusiasts
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love to say oh this is really going to
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transform finance. I think it's an
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important technology. I think we will
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see it used in a lot of ways. I think
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we're getting there. I don't think we're
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as far behind other jurisdictions as uh
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some would have.
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>> Jessica, do you agree with that? Uh yes,
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I do. Um I I'll add a couple points. One
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is that
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um the sort of broad crypto space
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developed for years uh really without
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this it developed to be actually quite
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large and significant I would say um
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relative to where it started without the
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regulatory certainty. Um I I think it's
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possible that the regulatory uncertainty
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has impeded some of the traditional
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financial players from having as large a
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role in crypto as they might otherwise.
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But the fact is crypto has generally
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been a retail and sort of decentralized
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driven business anyways. So um I I do
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agree that this is a overblown argument.
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That said, I mean, I think regulatory
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clarity would be quite helpful.
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>> So, going a little deeper into why we
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need regulation to begin with, I would
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say one issue that is general in in
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finance uh but seems to be particularly
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prevalent when it comes to uh digital
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assets is fraud. And we have seen uh I
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would say a fair share of of fraud uh
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probably more than uh was anticipated uh
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initially and and this has uh caused a
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lot of concern and and led to a call for
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more uh regulation. Um what what do you
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think about that? So why do we see so
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much fraud in this uh space and is there
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a clear way forward when we can uh avoid
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it or is that just going to be part of
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the system? Well, I think we've seen a
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lot of fraud and manipulation for and
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other problems for two reasons. Um, one
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is it is an unregulated sector largely
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at least the um what we what we often
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call the spot market in tokens that are
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not securities and of course the crypto
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industry is has argued that basically
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most security most tokens are not
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securities. Um that's unregulated number
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one and it's also um easy to enter. uh
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you can be you know 18 or 20 year years
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old and in college and create a token or
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create an app and launch that and who
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knows you know you might make a lot of
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money at it. Um but you also therefore
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have a lot of people uh as you do in any
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kind of um area of financial activity
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who are looking to make a quick buck and
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often not through the most uh ethical
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means. And so you have pump and dump
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schemes. You have a lot of wash trading
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on platforms. Wash trading is where
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people essentially trade with themselves
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to push up the price uh of something or
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to make it appear there's more interest
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than there is. We saw with the whole ICO
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phenomenon of people selling tokens
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without good disclosure. Um so you know
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it's not surprising uh that we've had
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all this. Um and again it's the reason
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why we need a comprehensive sort of
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regulatory approach to it.
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>> Yeah, I would say that it's surprising
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from the point of view of
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you know our current markets some of the
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most visible parts do not appear to be
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rife with with fraud. Now, that's I
00:17:56
think in part, you know, we've never
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done the experiment, but I think in
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large part because of our um securities
00:18:03
regime going back to the 30s. Um but the
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point is people forget that we've got
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that. It becomes in the background. It's
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like, you know, part of the air we
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breathe. It's like, you know, the fish
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in the water. And so we forget that
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that's protecting us from what would
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otherwise be probably rampant fraud in
00:18:20
traditional securities as well. So
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crypto developed and it didn't really
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have this this backing. Um so I'm
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actually not sure it's more prevalent.
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Um maybe it is. We don't have the data.
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Um part of the data is that we don't
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have the part of the issue is that we
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don't have the regulations. Um but you
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know there's plenty of fraud in the um
00:18:43
sort of dark corners of the equity
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markets too with very small um equity
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securities that don't trade on
00:18:49
exchanges.
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And the other side of uh regulation, the
00:18:53
other reason why we have regulation in
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financial markets more generally is the
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concern about systemic risk. Uh and the
00:19:01
idea that if there is a problem in one
00:19:04
type of asset, one type of institution,
00:19:06
this is going to spill over affecting
00:19:08
the rest of the financial system and uh
00:19:10
ultimately also the real economy. uh
00:19:13
this has been mentioned uh in the
00:19:15
context of uh cryptocurrencies and
00:19:17
digital assets but it's not clear that
00:19:20
this is at this point big enough uh to
00:19:22
worry us. Uh what is your take on that?
00:19:26
>> I'll just quickly jump in and say I I
00:19:29
don't think crypto at the present time
00:19:30
is large enough to to pose a systemic
00:19:34
risk. I tend to think that the nature of
00:19:37
some of these contracts is not such that
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it would normally tend itself to
00:19:42
systemic risk because they're more
00:19:44
equity type contracts. Um but of course
00:19:47
stable coins which perhaps we'll talk
00:19:49
about are big exception because those
00:19:52
are demand deposit contracts like like a
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deposit in a bank account and so um in
00:19:58
some sense you could say are asking for
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trouble.
00:20:01
>> Yeah, I I I would agree with that. Um
00:20:03
the only thing I would add though is
00:20:05
that you know when we talk about
00:20:07
systemic risk it's um it's hard to
00:20:10
identify where that's going to come
00:20:12
from. Uh you know and and you can
00:20:15
imagine scenarios where because of the
00:20:18
overall context something happens in
00:20:20
crypto it's gotten a little bigger and
00:20:22
maybe the overall environment uh has
00:20:25
some other factors that are contributing
00:20:27
to to anxiety or to to uh concern
00:20:31
you know. So it's it's the proverbial uh
00:20:34
you know thing of the butterfly flapping
00:20:36
its wings in Brazil or whatever. Um but
00:20:39
I would agree that today the sector is
00:20:42
is not so large that it would be my top
00:20:44
concern for systemic risk. That's for
00:20:47
sure.
00:20:48
>> Right. But you did mention uh stable
00:20:51
coin uh Jessica and uh I would say this
00:20:54
is potentially an area where we might
00:20:56
see it because the whole point of stable
00:20:58
coin is to offer stability and then you
00:21:01
have the usual problem where uh you
00:21:03
commit to certain payments but uh the
00:21:06
underlying assets might not support it
00:21:08
and this might generate a run. I should
00:21:10
say we have another episode where we
00:21:11
talk in detail about uh stable coin and
00:21:14
go into some of these uh issues. Uh so
00:21:17
that that might be one place where we
00:21:19
might uh fear about uh systemic risk and
00:21:23
and that is a good segment to thinking a
00:21:26
bit more about uh stable coin because if
00:21:29
we are focusing on regulation I would
00:21:31
say stable coin is one area where uh
00:21:35
there is a clearer path for uh
00:21:37
regulation and as we speak the there is
00:21:39
a bill that is making its way through uh
00:21:42
congress. Um so what is your take on uh
00:21:46
stable coin uh the the regulatory
00:21:48
aspects of it where we are and are we
00:21:51
headed in the right direction?
00:21:53
>> Um happy to take that one first. I think
00:21:56
we're headed in the right direction. Uh
00:21:58
as you mentioned while the at the time
00:22:01
we're recording this the Genius Act is
00:22:04
uh coming up uh soon for a vote in the
00:22:08
House. it may very well uh have gone to
00:22:10
the president by the time this is aired.
00:22:13
The Genius Act creates a basic framework
00:22:16
for the regulation of stable coins and I
00:22:19
think it gets um some things right. Uh
00:22:21
it's good on uh some of the basic
00:22:24
credential requirements that we would
00:22:26
want to see. I mean a stable coin is a
00:22:28
token whose value is pegged uh to the
00:22:32
dollar to another fiat currency or or to
00:22:36
another sort of asset. Of course, there
00:22:38
can be stable coins that are tied to
00:22:40
other crypto tokens. I'm just talking
00:22:42
about the ones that are tied to uh fiat
00:22:44
currencies.
00:22:45
And so, the legislation that is
00:22:48
currently being considered, a stable
00:22:50
coin issuer, you know, would be required
00:22:52
to have full reserves backing the stable
00:22:55
coins that it's issued, meaning for
00:22:57
every token, you have to hold that
00:22:59
dollar. You have to conservatively
00:23:00
invest it. There are limitations on the
00:23:03
activities of stable coin issuers, and
00:23:05
that's all good. Um, I do think there
00:23:07
are some weaknesses in the legislation.
00:23:09
We can get into those if you want. Um,
00:23:12
but you know, the real question is will
00:23:15
this market grow significantly and we'll
00:23:18
have to see. Um, there are a lot of
00:23:21
elements to payments and why people
00:23:22
choose certain payment instruments and
00:23:24
the big volume of payments of course is
00:23:26
not retail, it's businessto business.
00:23:30
And will we see uh large use of stable
00:23:34
coins among businesses? Um that's not
00:23:37
clear. We can get into that uh if you
00:23:39
like.
00:23:41
>> Yeah. So Jessica, I I'll give you an
00:23:43
opportunity to uh weigh in.
00:23:46
>> Sure. And I I would agree. I think this
00:23:48
is directionally right. Um I think
00:23:52
anything and uh it you described it
00:23:54
well. anything with a structure like a
00:23:56
stable coin is uh is going to have some
00:24:01
kind of run risk and I I think that can
00:24:03
be mitigated by the certain safeguards
00:24:05
that um you know Congress is putting in
00:24:07
about restrictions about what they can
00:24:09
hold and the the requirements for
00:24:12
audits. I'll add that there is this
00:24:15
question here about how stable coins
00:24:18
relate to the vast money market fund
00:24:22
industry. Um, there's this question
00:24:25
about whether stable coins pay interest.
00:24:27
Um, I'm not an attorney. My
00:24:29
understanding is that this this is still
00:24:31
a little bit of a gray area. Um,
00:24:34
people might want a stable coin that
00:24:36
pays interest. Um, but currently it's,
00:24:40
you know, money market funds. This is
00:24:42
how they differentiate themselves. And
00:24:44
the more stable coins come to look like
00:24:47
money market funds, the more we might
00:24:49
start to see the tendency for regulatory
00:24:51
arbitrage versus the money market fund
00:24:53
regime. And that's probably an area
00:24:55
where we don't want a race to the
00:24:57
bottom.
00:24:58
>> Yeah. And we're already seeing tokenized
00:25:00
money market funds. And I agree there
00:25:03
are going to be a lot of um participants
00:25:07
who want an interestbearing um tokenized
00:25:10
instrument. I think, you know, for where
00:25:13
we are, I think it made sense to stay in
00:25:16
the legislation as it currently does
00:25:18
that stable coins can't pay interest,
00:25:20
but there's clearly going to be the
00:25:22
development of tokenized products that
00:25:25
pay interest. Now, whether those are
00:25:27
more accountbased in some way, you know,
00:25:30
tokenized deposits or deposit tokens um
00:25:33
by banks, uh that's another uh
00:25:36
innovation that we may very well see and
00:25:39
not in in the not too distant future.
00:25:42
So, how big do you think this sector is
00:25:44
going to be going forward? You started
00:25:46
talking about that.
00:25:49
>> I'll let Jessica make the prediction.
00:25:51
>> I I really think this is just this is
00:25:53
just impossible to say. Um I I really
00:25:56
think it just depends on on too many
00:25:58
things. um and in part on whether some
00:26:02
of the more optimistic claims for the
00:26:06
crypto sector as a whole bear out
00:26:08
because that's obviously one of the
00:26:10
possible uses for stable coins.
00:26:12
>> Yeah. And when you when you think about
00:26:14
the use cases, I mean, clearly people
00:26:17
who are in countries with weak
00:26:20
currencies or high inflation, who want
00:26:23
access to the dollar and who can't get a
00:26:26
US dollar bank account might turn to
00:26:28
stable coins, and they are um clearly to
00:26:31
the extent we're talking about trading
00:26:34
tokenized assets on chain, you need
00:26:37
onchain cash. That's what a stable coin
00:26:40
is. Though again you might see tokenized
00:26:43
money market funds used for that as
00:26:44
well. So if you see tokenization of
00:26:46
other products and trading on chain that
00:26:49
use case could grow. But again when you
00:26:52
look at sort of businessto business
00:26:54
payments that now use you know chips or
00:26:57
the fed wire are they going to suddenly
00:26:59
move to stable coins? There's a lot of
00:27:01
issues there and uh that's why it's so
00:27:04
hard to predict this market.
00:27:06
>> Right. So going back to the uh topic of
00:27:10
uh regulation uh I think we had a good
00:27:12
discussion on what are the reasons for
00:27:15
regulation what's good about the current
00:27:17
framework what's not so good what could
00:27:19
be improved uh one argument that often
00:27:22
comes up is that the US is falling
00:27:24
behind other jurisdictions and Europe is
00:27:27
often mentioned as uh you know a system
00:27:30
where uh they acted uh faster and they
00:27:34
have a more uniform approach there is
00:27:37
uh Mika uh framework uh that that is uh
00:27:41
supposed to uh capture the the whole
00:27:44
system of uh digital assets and stable
00:27:47
coins and so on. Um so what what is your
00:27:50
take on uh the issue of uh the US versus
00:27:53
other places and what might explain why
00:27:57
the US has not done so well on this? I
00:28:00
don't think we're as far behind as uh
00:28:02
some crypto enthusiasts might uh lead
00:28:05
you to believe. Yes, Europe has imple
00:28:08
has passed ma but they still have to
00:28:10
implement ma and implementation of ma
00:28:13
involves the 27 member countries in many
00:28:16
cases writing rules. Uh that is a
00:28:20
challenging process. I just held a 4-day
00:28:23
training session at Harvard for
00:28:25
regulators around the world on digital
00:28:26
assets and a lot of them were saying no
00:28:29
we still face a lot of the challenges
00:28:31
that the US faces and even with Mika for
00:28:33
example it regulates
00:28:37
things that aren't financial
00:28:38
instruments. Uh so they actually have
00:28:42
even in their law the similar challenges
00:28:45
that we have on when is something a
00:28:47
security, when is it not a security, if
00:28:49
it's not a security, what is it? Um so
00:28:53
you know we're getting there. Um it may
00:28:56
not be as fast as uh as we'd like. Uh
00:28:59
clearly the Trump administration wants
00:29:01
to move forward. Uh Congress uh wants to
00:29:04
move forward. Um so I don't think this
00:29:07
is uh you know as big a problem as the
00:29:11
industry might like you to believe but I
00:29:14
do want to see us you know develop a
00:29:16
regulatory framework so that we can see
00:29:19
how this tech how this technology can be
00:29:21
used.
00:29:22
>> Uh Jessica
00:29:24
>> I mean I'll I'll say that the the
00:29:26
commission has indicated um that people
00:29:29
should come in and discuss their
00:29:31
product. So I I I think that the case
00:29:35
that we are currently impeding
00:29:38
innovation is is pretty weak. Um and the
00:29:43
US just has an enormous financial market
00:29:45
just in absolute as well as in relative
00:29:47
terms. So I don't I don't see evidence
00:29:49
that we've fallen behind here. Um though
00:29:54
I do think that it's going to be
00:29:56
valuable to solve some of the problems
00:29:59
that we've been discussing. uh that's
00:30:01
that's going to be helpful but um I I
00:30:05
think that there's there's a commitment
00:30:07
to doing so and so that's that's really
00:30:10
I think what people need in terms of you
00:30:12
know putting these ideas forward again I
00:30:14
don't think that the barrier at this
00:30:17
point is not a regulatory one
00:30:19
>> okay so as we are coming close to the
00:30:22
end of this episode I would like to
00:30:25
maybe offer you a chance to kind of
00:30:27
summarize your uh view on future
00:30:30
regulation and what you would like to to
00:30:32
see going forward. So maybe in in you
00:30:34
know 30 seconds or so uh if you were to
00:30:38
envision a regulatory framework that uh
00:30:41
will uh take care of this uh space of
00:30:44
digital assets and have us go into a
00:30:47
world of innovation and the future of
00:30:50
finance if you want. Uh what do you
00:30:53
think it should include and how do you
00:30:54
think it should look like?
00:30:57
Tim maybe you can start.
00:30:58
>> Sure. Well, um, the first thing I would
00:31:01
say is while this is a very important
00:31:03
technology, might be used in lots of
00:31:05
ways,
00:31:07
we want to be sure that the regulation
00:31:11
we develop does not undermine our
00:31:13
existing markets. The securities and
00:31:18
derivatives markets that we have and and
00:31:20
the uh equity and debt markets that we
00:31:23
have are so important to the to the
00:31:26
world, not just to the US economy.
00:31:28
They're very very large $120 trillion
00:31:31
market cap uh securities alone. Um and
00:31:36
when I say undermine, what I mean is we
00:31:38
don't want to
00:31:40
rewrite the securities laws in ways that
00:31:43
undermine a framework that's been
00:31:45
developed very thoughtfully and
00:31:46
carefully over a hundred years. Uh we
00:31:49
don't need to create, you know, a lot of
00:31:52
exceptions uh to promote the technology.
00:31:54
We want techn technologically neutral
00:31:57
rules but you know again uh we need to
00:32:00
be careful. So the three things we need
00:32:02
to do are I think one create a framework
00:32:07
for regulation for what we typically
00:32:10
call the spot market in digital tokens
00:32:15
that are not securities to the extent
00:32:17
they're financial instruments. Number
00:32:20
two, provide greater clarity as to how
00:32:24
we regulate tokens, whether they should
00:32:26
be regulated as securities or not. And
00:32:29
you know, the SEC is working on that
00:32:31
today. And that's not a something that
00:32:34
can be easily defined in a statute in a
00:32:36
couple of paragraphs because it depends
00:32:39
on does the token represent an interest
00:32:41
in the business, is there a capital
00:32:43
raising going on, how might the token
00:32:46
change over time, things like that. And
00:32:49
the third thing we need to do is again
00:32:52
make sure our rules on things like how
00:32:55
you tokenize assets and how you keep
00:32:58
records and how you custody uh tokens
00:33:02
and how clearance and settlement works.
00:33:04
We want to make sure our rules work for
00:33:06
this technology. Again, they shouldn't
00:33:09
be promoting it excessively, but they
00:33:12
shouldn't be inhibiting it either.
00:33:15
Jessica.
00:33:17
>> Um yeah, I I agree that is a that is a
00:33:19
great vision and that that is absolutely
00:33:21
where where we want to get. Um uh I will
00:33:25
just bring up the um the case of the
00:33:29
exchange traded fund. So that was a case
00:33:31
where there was an innovation and it it
00:33:32
solved a very real problem and now these
00:33:35
are very a very important part of our
00:33:38
financial system and this is a
00:33:40
completely different situation but I
00:33:42
think it's it is similar in the sense
00:33:44
that we've seen an innovation and it
00:33:46
exists to solve problems that actually
00:33:49
people have and they like it for that
00:33:51
reason. So a path towards bringing this
00:33:55
into the regulatory system I think is
00:33:57
key and um I think that the the three
00:34:01
elements which probably will involve
00:34:04
some kind of temporary relief as is
00:34:06
what's happened with ETFs um that that
00:34:10
will probably be part of it. Um also you
00:34:12
know the the sort of chicken and egg
00:34:13
problem. Um and I think if if these
00:34:17
three elements are solved I think we'll
00:34:19
be on our way. One of them is
00:34:20
decentralization. Um, one is uh the the
00:34:24
the fact that non-securities and
00:34:27
securities are going to be traded
00:34:28
together. That ties very intimately into
00:34:30
this question of the fact that um the
00:34:33
CFTC currently does not have the
00:34:34
authority to act as a regulator in the
00:34:37
same sense as the SEC over um
00:34:40
nonsecurity markets. Um and uh lastly,
00:34:45
you know, what do you do about the fact
00:34:46
that these are um you know, the
00:34:48
unregistered trading on nonregistered
00:34:52
ex platforms? Um so I think solving
00:34:55
those three pieces which will involve
00:34:57
some tricky line drawing at least in the
00:35:00
short run. Um that's what I would like
00:35:03
to see.
00:35:04
>> Yeah. Yeah, and if I could just add
00:35:05
maybe a word on the decentralization
00:35:08
point um because I agree that is one of
00:35:11
the aspects of the technology that is
00:35:14
quite novel quite interesting and the
00:35:17
question though is what do we really
00:35:18
mean by decentralization and what is
00:35:21
truly decentralized finance? Um clearly
00:35:25
if you have software protocol that
00:35:28
operates autonomously that people can
00:35:30
use on their own without going through
00:35:32
an intermediary you would call that
00:35:34
decentralized.
00:35:36
But what we actually see in the world is
00:35:40
a lot of what even commissioner Hester
00:35:42
Pur who's quite sympathetic to the
00:35:43
crypto industry recently called Dino
00:35:46
decentralized and name only. uh because
00:35:49
you have that protocol but then you have
00:35:51
a business that's facilitating how
00:35:53
people use it or a business that's
00:35:55
administering or maintaining that and
00:35:58
and that's where it's important to I
00:36:01
think take the position that look
00:36:04
decentralization doesn't equate to a
00:36:06
regulatory pass. We have to think about
00:36:09
what is the activity that's taking place
00:36:12
and how do we achieve the same
00:36:14
regulatory objectives. Now, maybe some
00:36:16
of those objectives we don't worry
00:36:18
about. If I'm custodying my own assets,
00:36:20
then maybe I don't worry about, you
00:36:23
know, what someone might do with them
00:36:25
because I'm holding on to them. But, you
00:36:29
know, we still want market integrity. We
00:36:31
still want to prevent fraud and
00:36:32
manipulation. And it's not the case that
00:36:36
just because it involves some kind of
00:36:38
autonomous software that we should say,
00:36:41
okay, no regulation. We just have to
00:36:43
figure out who are the actors who are in
00:36:46
a position to meet some of our
00:36:48
regulatory objectives and how do we meet
00:36:50
those.
00:36:52
>> Yeah, those are great points and uh
00:36:54
certainly the issue of decentralization
00:36:56
is central uh to this uh fintech
00:37:00
revolution and digital assets uh more
00:37:03
generally. Uh and this is certainly
00:37:06
something to to think about how the
00:37:07
financial system is going to look like
00:37:09
going forward and how decentralized it's
00:37:11
going to be. But yeah, I think we have
00:37:13
to to stop here. So, thank you very much
00:37:15
Tim and Jessica for this very thoughtful
00:37:18
conversation on regulation and
00:37:20
decentralized finance, digital assets,
00:37:22
how regulation is affecting the
00:37:24
innovation and what we should expect
00:37:26
from regulation uh going forward. As I
00:37:29
mentioned, we have been discussing these
00:37:30
issues in the Walton initiative on
00:37:33
financial policy and regulation whiffer
00:37:35
and we have a few white papers that have
00:37:37
been commissioned to talk about
00:37:39
regulation uh in this uh space and
00:37:41
there's certainly a lot uh to think
00:37:43
about here and we will continue the
00:37:46
discussion of uh digital assets in uh
00:37:49
other episodes uh of this uh future
00:37:52
finance uh podcast. So uh thank you
00:37:54
everyone for listening.
00:37:57
>> Thank you. Thank you.
