Regulators need to embrace regulation, not stifle it, former CFTC Chair says
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The current US administration holds back the rapid development of the digital asset universe in the US, a counter-productive behavior, says Christopher Giancarlo, the former Chair of the Commodity Futures Trading Commission (CFTC) who now practices as a lawyer at Willkie Farr & Gallagher and chairs the Digital Dollar Project. “Change will eventually happen; I just don’t know when.”
Revenues generated by the global digital asset market are projected to exceed 56 billion US dollars in 2023 and exceed 100 billion dollars by 2027, forecasts from Statista Markets Insights show. So, the stakes are high. “But a group of (US) policymakers, primarily octogenarians, septuagenarians and a few sexagenarians, who grew up in an analogue world and who are very uncomfortable with this fast development of digital assets hold it back, Giancarlo says in an interview with Lykke. Digital assets is an umbrella term that includes cryptocurrencies such as Bitcoin, decentralized finance (DeFi) and non-fungible tokens (NFT) like virtual art galleries or avatars used online.
The advantages and challenges of digital assets are many according to Giancarlo, as they are “more directly accessible and transferable, at lower cost (as financial institutions can be circumvented), with greater inclusion and a greater certainty… We went from a world where information was owned, to one where it is available seamlessly online, 24/7. The same thing will happen with value.”
Regulations lag the ongoing blockchain revolution
Almost 1 billion people around the globe already use digital assets, but regulators seem to have been caught off guard by this rapid interest and uptake. The lack of regulation is a real problem worldwide.
“It is the job of regulators to embrace innovation, not to attempt stifling it. Resisting technological innovation will never work in the long run though it may give regulators short-term satisfaction. A regulatory infrastructure needs to be put into place, tested, enhanced and developed. The current situation reminds me a lot of the dot-com bubble in 2000. E-commerce made a lot of sense but wasn’t commercially viable back then. The infrastructure wasn't there. There was a lack of 4G technology. PayPal, Amazon, … did not exist yet. We’re in a similar situation regarding digital assets now. The infrastructure in currently being built, but the regulatory uncertainty holds back the pace of innovation,” Giancarlo underlines.
Great strides are being made, particularly in Asia and the European Union (EU). Giancarlo believes Asia is embracing digital assets thanks to a younger generation being in charge, while the EU chugs along given clear rules providing the trading bloc with a competitive advantage. The EU recently implemented the Markets in Crypto-Assets Regulation (MiCA) which establishes clear rules for its crypto firms and classifies crypto as a new asset class.
Regulatory developments are “part of the maturization of an asset class. These different regulations will compete globally for adherence. Regulations can’t be measured quantitatively but should be measured qualitatively: Do they fit their actual purpose? Do they achieve public policy by the most direct and efficient means possible,” he says.
In the US, there is currently a policy vacuum regarding authority over digital assets, which has led to various federal agencies to lay claim on them. Ultimately, however, it is up to Congress to step in, clarify and decide. Several bills are currently grinding through the legislative process, including the Financial Innovation and Technology for the 21st Century Act, the Blockchain Regulatory Certainty Act, and the Clarity for Payment Stablecoins Act.
Stablecoins – an important future means of payment
The largest asset class in the crypto universe behind Bitcoin and Ether is stablecoins – cryptocurrencies pegged to fiat currencies – with their total market share oscillating around 10 percent. Last year, stablecoins settled over 11 trillion US dollar on-chain transactions, dwarfing the volumes process by PayPal (1.4 trillion dollars) and almost surpassing the payment volume of Visa (11.6 trillion dollars) and reaching 14 percent of the volume settled by ACH and 1 percent settled by FedWire, the report “The Relentless Rise of Stablecoins” from Breven Howard Capital Management shows. The outstanding supply of stablecoins has grown from less than 3 billion dollars five years ago to more than 125 billion dollars today.
“I think stablecoins will play an important role as a means of payment and, to some degree as a store of value. It is likely inevitable that governments will move forward with their own central bank digital currencies (CBDCs)… I would hope that we will see both stablecoins and CBDCs that are operationally and transparently resistant to commercial, political surveillance and censorship operating side by side.
In fact, the future success of stablecoins may be dependent on the success of CBDCs. In the traditional economy, access to central bank-backed public money – the most risk-free form of money – has always been necessary to support and stabilize bank deposits and all other forms of private money. Individuals have confidence in the safety of their commercial bank deposits, in part, because they know that in a crisis, they can withdraw physical cash from an ATM that is backed by a government and its central bank. It is likely that the success of non-public forms of digital money, whether stablecoins, commercial bank deposits, or other private forms of payment, will similarly depend on the ready online availability of sovereign digital currency. More broadly, free citizens should have a multiplicity of choice of digital forms of holding value, be they CBDCs, stablecoins, or digital commodities like Bitcoin or digital gold. I hope governments won’t prohibit stablecoins in a way that China and Canada appear to be doing,” Giancarlo says.
Canada in August banned three stablecoins, including Tether (USDT), which is the world’s largest stablecoin in terms of market capitalization. “It sounds totally bizarre and somewhat disappointing for a democratic government to act this way. I think it is a bad omen. You can't stop technology. We need to disciple it and find our way because it won’t go away. What bad legislation will do, is to push digital assets into the corners of the globe where there is little or no proper supervision. It won’t go away. It will just find other avenues to proceed forward,” he adds.
Bitcoin spot ETFs, a welcome new financial instrument on the crypto market
The trading of both spot and futures-based exchange-traded funds (ETFs) creates a healthy marketplace, Giancarlo stresses. In the US, the Securities and Exchange Commission (SEC) is currently reviewing the applications for Bitcoin spot ETFs filed by nine leading asset managers.
“It would be healthy for investors, if they had a greater degree of choice,” Giancarlo says. Analysts expect these ETFs to garner massive interest from investors, with inflows estimated up to 50 billion US dollars, conditional on the SEC’s approval.
Blockchain technology isn’t a panacea but will bring along tremendous progress
The adoption of blockchain technology, digital assets is not a panacea for all the world’s troubles, as there will always be greed, scams, crooks and manipulators around, Giancarlo underlines. “But the technology evolves and improves. It's certainly going to reveal shortcomings and present unique challenges, but it is also going to bring enormous benefits including programmable, instantaneous round-the-clock payments at much lower cost, and greater access to financial services for both retail and wholesale participants. Digital currencies may also strengthen the ability of governments to implement benefits policy, allowing direct infusions of money across economies and communities,” he notes.
“Countries that embrace innovation with smart and sound regulatory structures will enhance their economies, that in turn will enhance the lives of their citizens by giving them opportunities to make financial choices, hopefully free of unnecessary surveillance and censorship. I'm certain that the future will be one of tokenized instruments of value,” Giancarlo adds.
“The question is whether these new forms of digital currency and the digital network economies they power will make societies more open, prosperous, and free. Digital currencies – whether sovereign or commercial - that effectively protect financial privacy in lawful transactions will garner the trust and consent of free people and those around the world who aspire to live free. The nation that fosters such digital currencies will win the economic power prize and the enduring confidence of its citizenry,” he concludes.
Christopher Giancarlo does not hold any digital assets. He is the author of the book “CryptoDad: The Fight for the Future of Money