The regulatory holding pattern
Let’s talk about regulators in the U.S. and what they’re saying about crypto.
A week and a half ago, CFTC Chairman Heath Tarbert praised Ethereum, said he could see the financial system ending up relying on it in large part, and called Bitcoin a “one-trick pony” (though I’m not sure he was necessarily saying that’s a bad thing?). Twitter went wild.
Jerome Powell said the U.S. is considering a central bank digital currency (ie a digital dollar) but research is happening at its own pace, there’s still work to be done, and the Federal Reserve isn’t likely to issue its own CBDC anytime soon.
What kind of strikes me about both of these statements is they’re not saying anything new. I think I alluded to the other week during a CoinDesk Live session but Tarbert’s comments are basically just building on what he said to me in a July interview. He’s big on crypto, and he sees a lot of potential for the technology in the global financial system. He didn’t explicitly say it might be built on Ethereum before but that’s a detail. Likewise, Powell just kind of reiterated the same talking points he’s had for a year now (as I even tweeted while watching him speak on Monday).
Even the U.S. Attorney General’s new report on crypto wasn’t exactly saying a lot that was surprising: the Department of Justice isn’t wild about encryption, it hasn’t been for a while (if ever?) and cryptocurrencies are totally only used for crimes.
Heck, even SEC Chair Jay Clayton saying he can see exchange-traded funds being tokenized isn’t like...a major shock to me. It doesn’t look like he’s said anything about ETFs based on a cryptocurrency like bitcoin, so what he’s saying in essence here is “if you have a regulated financial product and you’re working with us we will consider your effort to use tokens to stand in for the shares.” I don’t think this is a new stance, just maybe an existing stance more explicitly stated.
WisdomTree has found the SEC “very happy to engage, particularly if you are embracing those foundational first principles” of investor protection and maintaining fair and efficient markets, [WisdomTree CEO Jonathan Steinberg] noted.
Tl;dr talk to the SEC before you launch something and they might not sic the enforcement division on you in three years.
Basically what I’m trying to say is it almost feels like we’re in a holding pattern. Regulators are saying things but they’re not saying new things. Is this feeding a hype cycle while they continue researching and observing this space? Possibly. I don’t think it’s necessarily intentional just they’re choosing to say something while waiting for actual things of substance to happen.
Not to mention there’s an election happening and while crypto is definitely the most important thing going on in their lives* I’m sure the U.S. regulators are probably busy right now.
*Ed. note: Crypto is not the most important thing happening in regulators’ lives right now, in all likelihood.
Reminder: The regulators know
Somewhat related, I’d like to just reiterate my view that I think regulators know a lot more about the crypto space and the tech they’re looking at than even they let on.
If you’ve followed my work for the last year you know I’ve been covering the regulatory agencies with some dedication. To a large part, they do actually ‘get’ crypto and the broad themes of what people are trying to build. Sure, certain DeFi products might be a bit novel and difficult to understand, whatever. By and large, the major U.S. regulatory agencies have people who understand crypto. That’s different from liking it (and to be sure, a lot of regulators like it! We even have nicknames like “Crypto Mom” for those who advocate for the space). So if and when I see comments about regulators who don’t get it, my first thought is ‘maybe they do but they’re not convinced yet’.
I don’t have a point with this last bit. Just a thought that’s been in my head for a little bit.
The big story this week was probably that PayPal is indeed getting back into crypto. A storyline that my colleague Ian Allison first reported in June was confirmed by the payments firm, which secured a conditional virtual currency license through the New York Department of Financial Services.
Everyone’s talking about the significance (and limitations) of PayPal offering crypto buy/sell services. It’s cool I’m sure. I kind of want to talk a bit more about the regulatory side of things. NYDFS granted PayPal a conditional BitLicense, which I believe is a first for the revamped version of New York’s crypto license that Superintendent Linda Lacewell first revealed in June (coincidentally, the same month Ian reported PayPal was looking into crypto). I honestly haven’t looked into the details here largely due to being busy with things like CoinDesk’s election coverage (obligatory link) so this is largely some speculation, but if I’m reading this right NYDFS has just positioned itself as the regulator overseeing a pretty massive payment firm’s foray into crypto. I mean I’m sure PayPal had to secure 47 crypto-related extensions or approvals for its money transmission licenses in states* not called New York, Montana or Hawaii but none of those states published press releases or made public announcements that I’ve seen.
So maybe New York has an interesting position here, or maybe it’s a press play I’m falling for hook, line and sinker. Either way, I get the sense that this is just a first step for the regulator, with more to come.
*Tell me if I’m wrong because honestly I did almost no research into that statement which isn’t up to my usual standards of fact-checking but I’m writing this late on a Friday and my broader point about who’s getting the attention still stands.
If you made it this far, thanks. On a housekeeping note, while I’m currently writing a regularly-scheduled limited-run actual newsletter for CoinDesk on the election, I don’t yet know what I want to do with this personal newsletter. I might have something next week, I might not. I’m of course open to feedback too - hit me up on Twitter @nikhileshde if you have thoughts or questions or just really want me to stop. Otherwise, till the next time.