The events of the last few weeks are a cautionary tale for anyone who follows the crypto space. Blockchain technology and the crypto assets resulting from it were built on the promise of a revolution in finance, but against the background of recent market turmoil, it's time to reboot and reconsider this possibility.
Cryptocurrencies have dominated the headlines, but they are a small part of the digital asset world. In order to fully realize the untapped potential of the emerging digital asset ecosystem, public and private sector leaders need to work together to accelerate the creation of an intelligent regulatory framework combining traditional and digital asset systems based on two fundamental principles.
The first is the recognition that regulation should allow the financial industry to innovate wisely.
Over the past two centuries, the world has witnessed the emergence of many generations of financial technologies. The digital representation of traditional assets, such as cash, bonds and stocks, can be an important step forward, since before them there were original computer ledgers and real-time payments from paper. This can lead to more accurate accounting, easier processing of certain types of assets, such as real estate and loans, as well as faster and more efficient calculations.
The distributed ledger technology underlying crypto assets can be used to support a new market infrastructure that benefits the financial system. Central bank digital currencies and tokenized bonds being studied by major jurisdictions are just a few examples of efforts to take advantage of this new technology.
Just last month, the Federal Reserve Bank of New York and the Monetary Authority of Singapore announced a joint effort to investigate how the central bank's wholesale digital currencies can improve the efficiency of cross-border wholesale payments using multiple currencies. Thus, research and innovation related to digital registry technology should be encouraged, not penalized, in a future regulatory framework.
The second principle is to preserve the basic principles of customer protection, regulated markets and clear regulatory guidelines — regardless of the new technology, asset class or type of organization serving them.
Our well-established fundamentals of occupational health and safety in the United States market have emerged as a result of a series of downturns. Although the development of banking and securities regulation has not always been linear, it has remained based on these principles. Digital assets that operate outside of these principles risk undermining the broader financial system.
The consequences of mixed customer assets, poor disclosure, and lack of internal controls should remind us that while the set of personalities and products may change, the scenario of financial market turmoil is still painfully familiar.
Despite the development of technology, some well-established concepts should be applied to all market participants and assets, regardless of their technological coverage. This includes proper management, separation of client assets, clear documentation, security standards and technologies, capital and liquidity requirements, maximum leverage limits, protection against money laundering, reliable risk management and regulatory barriers.
Today, banking institutions are already operating within the perimeter of regulation. And while this ocean provides both privileges and obligations, it breathes what is arguably the most important currency in the global financial system: trust. The confidence of investors and the public sector stems from the knowledge that there are rules in the game.
Without trust in our financial system, we would have nothing useful. Worse, without the resulting trust in the system, we may miss the opportunity to use exciting technologies that can help move the industry forward.
Since most institutional investors are interested in the token, distributed ledger technology may become the next financial frontier. Some elements of the digital asset space confuse disruptive innovation with disruptive behavior in general, but they should not be allowed to spoil opportunities for anyone else.
A comprehensive regulatory framework is needed, but most of the foundation already exists and can be expanded by regulating traditional assets.
There is a way that needs to be found. We must innovate in the field of digital assets, bring them into line with established rules and balanced regulatory principles in order to protect customers and increase flexibility. By doing so, we are also protecting the most valuable asset of all - trust in our financial system.
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