Regulatory Landscape from US to Asia | KBW2023

all right hey everybody Welcome to the outside stage thanks for being here we're the last session before lunch which is a good spot so we're going to have a fun time with this one we're going to bring a little bit of spice to the regulatory conversation people think regulatory is boring but actually it's one of the more interesting stories to cover in crypto and I think especially now this moment is really fascinating so hey I'm Zach Seward um I'm joined by some great guest guests we're going to do sort of a globe trotting tour of the crypto regulatory landscape but first let's get some intros Carol tell us about yourself what are you doing great I'm Carol house um most people know me from when I was a regulator covering crypto at finsen the US anti-money laundering regulator and then also at the White House working on President Biden's executive order on digital assets but now I'm over at teranet ventures where we're investing in security Technologies um and Advising and Consulting on on digital assets and cyber security Emily hi um I'm Emily Parker executive director of global content at coindesk um but before Co coindesk I actually a long time ago I was at the state department um in the policy PL planning staff advising on internet freedom and and technology and I've spent actually most of my career in Asia specifically in China and Japan all right so we're in Korea and I think we should start this conversation in Asia obviously there's a lot of excitement around crypto in Asia a lot of headlines obviously a lot of Doom and Gloom in the US but I think certainly uh among some of the bigger Capitals in Asia there's a race to really Embrace this industry uh potentially they see opportunity where people in the US see red flags so Emily before we get going I kind of want to just you to sort of provide a high level overview of the key players namely you know Hong Kong Korea Japan maybe even Singapore just break down what they're doing and how their approaches are different sure so um and Carol I'd love to hear your thoughts on this as well I think it's fair to say that Asia is poised to be the center of crypto I mean I think this is the region where it it's the most dynamic in crypto and I think especially compared to the United States let's just start with Korea for a moment for obvious reasons since we're here um Korea I think is probably one of the most undercovered and least understood crypto Powers at least in the English language media because Korea is so important especially if you look at the retail Market um you look at upbit for example um I believe upit just became the second largest Exchange in the world um Korea just has massive retail power in crypto so I think it's something that is not as understood once in a while you'll see for example a token just Spike kind of inexplicably and then you look and you realize it's because of Korean retail Traders so just to sort of start with that but you know Japan and Hong Kong are also becoming increasingly talked about um Japan is becoming actually kind of a leader in global crypto regulation for example Japan just passed a stable coin law the US has not managed to do the US is still fighting about stable coins Japan actually passed a law Hong Kong um just unveiled a licensing regime for crypto exchanges but I think what's most important about Hong Kong and Japan again compared to the US is that they're sending a welcoming signal to the crypto industry they're basically saying we're open for business and I think that's very different from some of the message that we're getting from Washington um so yeah and of course obviously Singapore has been a player for a long time China even though crypto trading is heavily restricted there's still a lot of Chinese trade um so yeah this is a critically important region for crypto all right so Cara let's get to the critical question like why why is Gary gendler being such a punk when it comes to crypto what like what what is animating this uh this recent sort of barrage of attacks and enforcement actions against some big players in the space well first I'll I'll underscore um a key theme I think really from Emily's comments which is that um all the countries that you mentioned that are absolutely economic and technology powerhouses in web 3 and cryptocurrency are also Nations that have been regulating the cryptocurrency ecosystem so I actually think that the US has been a Powerhouse Nation driving a lot of innovation in the space um so first I'll say that I that generally the regulatory framework is one that's been in place for a long time a lot of the the critiques that come towards the US framework are driven by enforcement actions that people think are um are new and generated because of a specific vitriol towards crypto across the whole US Government first I'll say that that enforcement actions actually take many years to come to fruition so a lot of this effort that's under that that um that you're seeing now culminate inside of enforcement actions is because of something that's been a priority for many years and the fact that the US regulatory framework has been in place for for a long time for Securities Commodities and anti-money laundering for all of these uh for all of these companies um but I do hear you on um the fact that industry and others have been calling for clarity that the SEC for the most part has stated the clarity that we're going to provide has been provided um so then we're bringing these enforcement actions um I do think that there are opportunities for looking at other nations approaches uh like for example M um and the ma framework in the EU that really provides a clear pathway to registration which has not been answered in a call in the US um but I I do think that the US government on the whole so not looking at independent regulators and Gary kensler and the SEC but on the whole you have an Administration that's trying to drive competitiveness in the technology we have a framework driven by Commerce we have um you know the most comprehensive framework in place for anti-money laundering so there are a lot of building blocks for creating a good framework in the US nice the the Mika shout out we definitely want to talk about that a little bit but I I want to zoom in on a comment you made this multi-year sort of consideration right and I think um you know November this November will be the Oney year anniversary of the famous FTX implosion that seem to sort of catalyze or at least accelerate a lot of the efforts in the US so you're saying that this is a more reasoned approach that isn't necessarily reactive to some of those major implosions I I definitely think that most of the enforcement actions that you're seeing are things that have been underway since long before a lot of the major the major implosions but we've seen massive and pervasive fraud Market manipulation and illicit Finance in crypto for many years as well as lots of really good actors part of how you reward good actors is by holding accountable the bad ones so that the good ones can continue to flourish and the bad ones get weeded out and consumers will build trust in the ecosystem but I do think that it's fair that that there are some folks on the hill and otherwise that had built some closeness to certain players in the ecosystem um so with some embarrassment uh that you're seeing across some of the political um ecosystem there are some folks that uh especially I think um in political circles like in Congress that really now have a particular agenda related to crypto yeah just to respond to a couple things I agree with what you said I think it's an important Point too that it's true the US government response is not monolithic which is important like it's not like everybody in the US government agrees and but this is also part of the confusion right and this is where some places like Hong Kong and Japan have an advantage because in the US you have so many chefs in the kitchen right there's just like so many different people regulating crypto and who have opinions on crypto in Japan it's the FSA you know and in you know so like it's it's kind of a little bit simpler or in Singapore it's you know MOS like you have one sole regulator also Al for the FTX thing I think another this is another important point is that part of it you know as Carol just said were like the political donations and the fact that Sam became this kind of like unofficial representative of crypto in Washington right but the other problem is that you know the US didn't really have regulatory safeguards in place again this is another really Stark comparison to Japan Japan was one of the only countries where FTX Japan users got their money back because they had a regulatory framework that protected investors specifically separating customer assets from corporate assets so when like FTX blew up Japan was very calm because FTX Japan users were able to get their money back thanks to regulations so the US like doesn't have that kind of national segregation of assets framework that Japan had yeah um I I really love the Japanese framework and I and that they were lead voices in passing the anti-money laundering standards um I I really do think that the asia-pacific whole region has been a Powerhouse driver here um and you're right that like I um people talk about how fragmented the crypto regulatory framework is in the US um so it is fragmented but only exactly as fragmented as trafi is also regulated in the US um so there's like pros and cons to that issue but the at least we've been taking an activity based approach for a long time but I agree that Clarity and imposing that obligation and the critical controls that you just pointed to are what's needed to be able to protect consumers I want to zoom out even a little bit further actually because I think like you know we have this conversation often with kind of glossing over what's at state and I think like especially as it relates to like conversations with policy makers Regulators uh you know people who are trying to figure out this technology Carol and then Emily when you're talking to these folks like how are you communicating sort of the pro-social value of what crypto and blockchain tech technology enables and what like what's resonating and what is just you know falling on deaf ears I'll start with Carol yeah that's fair and and when you said what's at stake I thought you were making a pun so if it was pun intended I like like proof of stake yeah like I was anyway I thought it was a proof of stake joke um but I um I I think that what's at stake for taking an overly harsh framework and approach um like Emily is warning against in the US is taking one that does stifle critical Innovation that can provide some of the foundational building blocks for the future of smart cities um like I see a lot of great potential for things like digital identity and supply chain transparency like blockchain was made for auditability and data Integrity so while there are some voices that want to that all that they see is pervasive fraud and Market manipulation and absence of Consumer Protections being implemented at scale so then they feel that that is a fault of the technology that is not a fault of the tech that is a fault of people and businesses um so those are the controls that we need to put in place when what's happening is financial and also recognizing that a lot of the activity that's occurring is not financial and should be treated similarly to how we treat like internet infrastructure um so basically I think that that was certainly a message that I fought hard to communicate inside of the administration there's still messaging that I'm doing with that and others are um as well inside of Washington I think the real issue is when you look at Arguments for things like Financial inclusion right like that is kind of an obvious benefit that that democratized and decentralized systems should be able to bring um the issue that I see from progressives is that they see well inclusion in a system that doesn't have critical protections um and mechanisms for victims to you know be able to get their their information or their um sorry their their financial assets back when they've been stolen that is not in fact a financial inclusion outcome when it's inclusion in a system that doesn't have critical protections um of course you can create those protections so again it's not a fault of the tech it's a fault of businesses and people and that's who we need to be holding accountable yeah Zach I love that question it's such a good question so yeah like how do you this is the this is kind of the core problem right like how do you communicate to governments specifically in the US that crypto is important because I think there are people in Washington who are totally fine with it leaving the US not everybody but at least some right so you know and again you look at like Hong Kong like I think Hong Kong regulators and government clearly see crypto as a source of Economic Opportunity like bringing business and investment to Hong Kong so they see it you know they see the risk but they also see the opportunity um in the US I think there's definitely people who see more of a risk um I think there's you know I think all everything you said those are all really good arguments I would just sort of add there's an additional problem here though that's that's that's proba kind of a crypto industry problem which is that the use cases are still not clear enough this is just like a fundamental problem like I feel like if more people in Washington and more mainstream just people in general saw why crypto was necessary and why they need it we wouldn't be having to explain it all the time right and I think like I mean you just look at the chat GPT for example right like chat GPT appeared and everybody just knew how to use it and everybody saw its use value immediately you didn't have to explain like how it works and create explainer videos about what the technology was right like people just got it so crypto is like not totally there yet and that's that's a little bit part of the problem is that like I think more people just need to see it as like fundamentally useful and then I think we'd have to explain it a little bit less I I really love those comments incisive as always uh Emily and I um I also wanted to foot stomp your you're mentioning the national security issue since I was on the National Security Council I that's really a core one um in the US that I I still find frustrating for those who want to drive this technology overseas or don't care when it goes elsewhere because um ultimately drive driving the activity outside of the reach of our sanctions policy and also driving things like us competitiveness um all the economic benefits that you get from being a Powerhouse for it is um it's a huge cost and that's definitely at stake for um an overly um burdensome approach in the US actually just to add one thing because I for yeah totally the National Security things because I think like right if you have people in Washington who fundamentally just see crypto as like scammy right it's going to be hard to convince them like we really need this and this is good for the us but I think the argument that you just made about National Security be more likely to resonate and I think like another part of that argument is about us investor protection and that argument is basically that crypto is not going anywhere it's here and if you just Chase it outside of the US it doesn't mean that us investors won't find ways to access it it just means they're going to go to Offshore exchanges that do not protect us investors and I feel like that argument might get a little bit more traction because it's like if the SEC is really serious about us investor protection there should be Frameworks in place that actually protect us investors and don't send them all to Finance or FTX or or or whatever let's fly over to Europe shall we let's talk about M you mentioned it um that passed early this year and was seen I think largely by the industry as a positive step forward for again establishing those clear guidelines that businesses love to have in place um they focused again on sort of the centralized intermediary layer the stuff that kind of comports with the existing Frameworks for regulating this stuff and they kind of Punt it on the defi stuff the onchain stuff that uh doesn't fit as nicely in that box so I wanted to ask you Carol about that approach your general views on MAA and also the prospects for some of the more onchain related things that are still to come as it relates to that Suite of regulations yeah thank you um I uh the the the ma framework is something I'm very excited about certainly because anything that involves um the rest of the world implementing proper Frameworks to regulate Financial activity we need that when this technology inherently operates cross border um these transfers are moving from uh from companies that are headquartered in one location have operations located elsewhere and users in another jurisdiction um we need International regulatory Frameworks to be put in place because the US playing Global police on this is not benefiting the US um it's also not benefiting the ecosystem um when we're not scaling proper early and often enforcement I know enforcement is not everyone's favorite term in this space but I I actually think that the way to be sector shaping and not sector breaking is by early and often and smaller more iterative enforcement actions to help shape a sector into the right bounds with the right controls rather than waiting until they're huge and you're citing activity from 5 years ago saying well that business operation that you've been doing for six years actually um is not working or protecting consumers um so I think it's critical um I I know that the US framework is often criticized in relation to M to a certain extent I think that a lot of M is actually just getting Europe to where the US has been um in imposing certain requirements for those who deal in Commodities Securities um and money transmission that have been regulated in the US for a long time um since at least 2011 they've been regulated um the benefits though that Ma really gets right it puts in place those credential standards like Emily mentioned earlier related to stable coins that are so critical and it creates a very clear pathway to registration uh something that the US has not gotten right in capital markets activities so um I'm excited for that related to M um as you mentioned it focuses on more Ci or cdy um I know in in this audience um really defi is really talking about applications that don't have much centralization at all but I will say that in the context of many Regulators in trafi all of you are defi coinbase is defi so understanding that Defi and centralization is a spectrum it's not a zero or a one it operates somewhere across the whole spectrum of of of operations and different levels of centralization in technology and economic activity um M has not attempted to go after that uh which is fair um it's appropriate in a risk-based approach to focus on CI most activity and most Financial activity is going through application layer um centralized exchanges so I think that that's the right approach for a risk-based strategy however there's a lot that needs to be done on defi as more and more activity gets used in the decentralized ecosystem we're seeing that in elicit Finance reports published by blockchain analytics firms have highlight have highlighted the greater use of privacy wallets and defi applications for destination of ilicit proceeds as the risk evolves then so do the regulatory um Frameworks to be able to cover decentralized activity yeah so you have sort of Europe viav the us but also Europe Vis Asia do you have perspective Emily on where Europe fits in fits into the picture given again some more progress on the regulatory front in recent months so I'd say that Europe um is so Japan is ahead of Europe actually I mean just in terms of you know actually passing a stable coin law but yeah I mean I think that you know we're going to see increased I don't know if I'd say competition but increased increased appeal of the you know Hong Kong Japan and Europe I just I guess the one thing that I would just highlight that's really all these places have in common is that they're actually incredibly strict right I think like when people talk about crypto-friendly like that does not mean at all that it's easy to do business in these jurisdictions so I feel like that's really important to underscore like ma Hong Kong Japan these are really really strict jurisdictions and in fact like some of the criticism of these jurisdictions is that it actually could be difficult to do business there or difficult for an exchange to be profitable there and I think Europe in some areas is uniquely strict in some areas Hong Kong is uniquely strict some areas Japan is uniquely strict so I think that's just a really important thing you know when we say crypto-friendly it does not mean like you can just go there and do whatever you want So yeah so I guess the question also in the background uh here is like the looming Prospect of cbdcs right so uh you know various countries are trying to figure out how to regulate private stable coins issued by players like Circle tether Etc and then in the background you have sort of the prospect of Central Bank digital currencies obviously in China it's probably where it's most advanced you see a lot of conversation in the US around a digital dollar and a lot of that conversation is pretty pretty basic right now how does the cbdc conversation uh Loom over this or inflect the conversations that we're having uh as it relates to regulating more traditional crypto assets Carol it's a up to you first great um and I appreciate you you bringing this up because it was such a critical issue uh certainly for the administration in the executive order from the president President Biden told uh the FED that it is with that it it is with utmost urgency a priority that the US government needs to do research and development related to a US Central Bank digital currency and also an assessment to determine whether or not it's in our national interest that's important because right now in the United States there is a lot of misunderstanding and conflation of issues around cbdcs that's going on um we have people thinking that oh well the administration only wants a cbdc and wants to ban and prohibit stable coins and crypto and wants to use this as a state surveillance tool and wants to um I mean I think even rep emmer has stated like wants to out China China and Implement a framework like the ecny um I don't believe that's AC an accurate understanding of the US framework at all it is not at all a given that the US will issue a cbdc and certainly not a retail cbdc um I can't even convince Americans that a national physical ID card is a good idea I truly don't know in the US given the political ecosystem how to convince Americans to use a digital dollar and convince them that there isn't a government back door built into it even if I can technologically prove it um there's just a lack there's just a kind of trust and marketing that will have to be done um but that's why there needs to be research and development around it um and ultimately the population may change um on thinking around that and wholesale is definitely ripe for experimentation there's a lot of work being done and driven by a lot of Asia Pacific Nations actually related to cbdc experiments that are going on um in the bis Innovation Hub um and and also some bilateral uh Partnerships that are occurring so in the US there's some experimentation that's happening unfortunately there's this polarization um on on the hill especially uh across both parties that I'm seeing where on one extreme side you have some people who have forgotten that industry is who drives Innovation um and thinks Americans will open up an account with their friendly neighborhood Central Bank um and on the other side people think the government shouldn't do money cbdcs are evil and will be used for unlawful surveillance and don't have faith in in our structures of government and our elected officials um and also think that that poor regulatory Frameworks without necessary controls are what's needed and that we can trust giant corporations that have not always been able to be trusted um so far in use of customer data as well as management of their assets so those are extreme views there's many in the middle again it's a spectrum but basically like the CBD conversation is not one that has a lot of nuance to it at the moment um except in like some Think Tank discussions and others so we need more we need brilliant developers to come help the government figure out how to build it in the US whoa whoa whoa Carol you're saying The Joe Rogan post Malone conversation about cbdcs was lacking nuan come on dude thank you for sending me that video I had missed it until you good video anyway check that out some good discourse anyway Emily I think especially in China the cbdcs versus you know an outright crypto ban is a really interesting sort Dynamic curious for your thoughts on that yeah so I mean I feel like not to State the obvious but China and the US are very different countries and have very different systems of government so I think this idea that a us cbdc would look exactly like a Chinese cbdc does not seem very realistic to me I mean I you know Carol used the words lacking Nuance I mean that's very diplomatic like the the the I would say that the conversation of the US it's it's it's I don't even know how to describe it because basically it's it's you know cbdcs even though they are nowhere near happening right um they they've it's basically risen to the level of a presidential election issue where you have presidential candidates talking about banning them now on the one hand I think it's I think it's good that people are really worked up about privacy because obviously there are privacy concerns with cbdcs and like if the US were ever to consider it privacy would have to be first and foremost but I also think yes the way that cbdcs are being portrayed are probably very unlikely to exist in the United States like this sort of idea that the government will know every time you buy a cup of coffee and it will be the only form of money and you know I I don't I don't really think that's that's in the card so it's not a particularly nuanced conversation in the United States how how did that become like a presidential talking point you have Ronda santz saying I'm Banning cbdcs you know again this is a very prospective development that happens in the US does anyone on stage of opinions for how this has become such a hot button issue because because it fit I in my opinion I love to hear yours but I just think it fits into a lot of campaign rhetoric I mean the first one is fear of China right so it's just a really easy kind of like okay we don't want to become like China so that's just a fits in really nicely and also just kind of like anti-fed uh sentiment you know there's just like a lot of negativity towards sort of like the Federal Reserve so it's like the FED is going to control everything and um and then yeah there's I so I think those two things in particular um are are just kind of fit very nicely into sort of campaign rhetoric for some uh for some uh candidates yeah I I I think that that's an accurate backdrop and really just it it's an exacerbation of these issues that we're seeing where for for some reason most progress and especially very senior progressives um like on the Senate side for example um as well as on on the house side have just not embraced at all some of the progressive narratives around crypto and then the few of them that did felt embarrassed when then they saw like someone that they were close to that entire you know FTX the FTX collapse was not helpful um I think it was um it was representative heimes uh who mentioned on an Atlantic Council um session that like the basically the introduction for crypto to Congress and especially to Democratic Congress was exactly the wrong way to do it um including Facebook um at the time now meta and Mark Zuckerberg being involved in the Libra project and the vitriol that was either fairly or unfairly pointed towards them on that project um and then with the FTX issue like it just it created this horrible opportunity for polarization on the Republican side feeling that the that the the Democrats are trying to crush this entire sector and technology and by doing that promote only the government only um surveillance tool for money um and then on the other side feeling that that the Republicans are just in the pocket of all of these companies um I'm actually hopeful that a few Democrats did support the market structure bill that made it out of house Financial Services committee Ju Just to add one thing on the cbdcs too like it shares the same problem that crypto has which is that there just isn't a clear enough use case argument in the US like it's so the risks it's like oh this could be a government surveillance tool that's something people can understand whereas I don't think people can really understand like why we would need one other than basically fomo like a lot of other countries have it which I just I don't know if that's compelling enough to get it through all you mentioned a lot of the bills that are in Congress right now uh you know you have the market structure bill I think like stable coin Bill like let's gaze into the crystal ball and read the tea leaves do any of those bills stand a chance of Passage anytime soon Carol I'll toss that to you depends on your definition of soon um by but but I but I think anyone who's here um you're probably what is likely a reasonable definition of soon is likely not going to be met um it's it's a personal perspective that I just don't see feasibly how to get any of this legislation through Congress in a split Congress and with this election cycle that's coming up next year I just don't think there's a lot of incentives on either side and not not enough good nuanced dialogue and conversation to get the support on the Senate side from Senate Dems that you need for the bills that you did get from some house Dems out of the the market structure bill um I do think that the next Congress will be able to pick up both of these issues and and will deliver on this legislation um they'll have to pick it up I I I have every hope that that's going to happen I I'm just not terribly optimistic that legislation is what's going to move in the next two years so instead I'm hoping that the executive branch might be able to Levy some opportunities for clarity and Frameworks for registration that could help the US uh regulatory framework yeah I'd agree with that I mean we were just talking about this last night like for a while a stable coin Bill looked like the lowest hanging fruit in the US like oh this everyone was saying like oh yeah this will certainly get passed soon and then even that has gotten admired in political debate so that was supposed to be the easy one and we're still not we haven't still been still haven't been able to pass that all right so Global industry global technology let's let's play this out a couple years right let's say there's another Bull Run let's say there's more interest in these Technologies and these assets is this going to be like one framework wins all to regulate this global system or will there be sort of a multitude of approaches that work for different slices of the crypto economy say like zoom zoom out two three years how do you see this uh this jurisdictional race playing out in Asia in Europe in the US what are your thoughts Emily yeah so I would say that there's never going to be kind of like a universal framework as long as both the US and China exist because if you look at the internet for example it's like these are two totally different Frameworks right so China I think it's pretty unlikely that China's ever going to fully allow you know full retail crypto trading so as long as like the US and China remain major players we're going to have different approaches to crypto um but I do think that the jurisdictions that will win will be the ones with clearer regulations because you know as we're I think like maybe in the past there was some Romance of like a gray area but as we're seeing now in the US with all the SEC lawsuits like there's no romance there because just because like it's gray doesn't mean that it's okay right so basically what happens is you could end up spending years and millions of dollars fighting in court which we've seen with ripple and we're seeing with coin base so I do think that like the countries that sort of win or the countries that attract Talent will be the clearer jurisdictions yeah I I I'll Echo Emily's comments um I totally agree that the ones that win are going to be the ones that have clear good strong Frameworks that the idea that crypto friendly does not mean failing to mitigate money laundering and terrorism financing risk but that friendly means providing like what those proper controls are that make you a safe and sound business provide necessary consumer and investor protections to build their trust in your ecosystem um and then impose through enforcement of those against PRI and prioritizing that enforcement against the most egregious actors so I actually and in my hopeful view we will see more enforcement um not just in the US but with other countries that Implement Frameworks again I know enforcement is not everyone's favorite word but I think it's needed critically in this ecosystem um against the Bad actors who give your sector a bad name you deserve to be rewarded by The Bad actors being taken out of your ecosystem and penalized for it and it will also help send a good message about expectations for compliance um I also think that over the next few years uh the critical points of nuance that are going to be really recognized in this space are going to be around Defi and where Regulators having to having to figure out how to deal with okay if activity is not happening at the application layer and we continue to move away from application dependent uses then do you move accountability via self-regulation and imposed controls at the network layer and us or protocol layer I think that self-regulation and industry-driven standards are going to be critical also looking at where activity that is Financial in one use case and non-financial in another we demand a greater level of privacy and information and internet activity than we do in financial activity that's an example of where we're going to have to figure out as Regulators how to balance those two issues of Financial and non yeah Tech crypto and financial crypto that's a whole another discussion that we could have well I really love this carol Emily thank you so much join me in thanking our great speakers we're hope you're having a great day here at KBW and we will see you later thanks so much bye