Crypto - Reputation, Trust & Safety in Digital Assets

foreign [Music] nice to have it uh an obscure topic like this one today uh well trust is just a slight issue at the moment unfortunately we have the CEO of elliptic Simone Manny and the CCO of bitco up here Jeff Horowitz so thank you for thank you for your time here uh you know first first question here you know sort of the obvious one you know you know you know clearly uh trust and safety and digital assets well you know what are the key lessons here to take away from uh the FTX uh you know I guess slight issue or debacle whatever you want to call it uh anybody want to speak on that sure um you know so one thing front and center is we need to have a better regulatory framework in which to operate you know one of the things that was apparent in the FTX collapse this week is that there's not an independent regulated custodian that's in charge of those assets right those assets were live on an exchange with an Affiliated company and that leaves the opportunity for fraud or poor risk management um and you know in the United States we do have some trust companies and banks that are regulated custodians have a full obligation to segregate those assets make sure they're fully accounted for and that's a model we need to start to uh Embrace and pursue and make that part of the regulatory framework just like it is in the traditional markets and I think you mentioned the word trust I can't count the number of times I've heard the word trust and the word transparency in the last few days clearly we have a job as an industry to restore Trust and Jeff talked a little bit there about regulation and we're going to hear an awful lot more about that you know I thought we're on a panel talking about reputation trust and Regulation and we would probably have standing room only like cesida had this morning because this is really the topic that the crypto industry needs to lean into at this point we are going to have to meet The Regulators where they are they're going to have to move towards us a little bit as well but the crypto industry needs to do a little bit of introspection now and really think about how we uh how we want to embrace regulation how we speak with one voice as an industry it's no good for us to be sort of taking different approaches and putting companies above the industry we have to take an industry first response and Let The Regulators here with one voice from crypto what we think is needed now now CZ is spoken of the need for proof of reserves is that in itself something you advise for is that sufficient is there more what what what's your take yeah we've been doing proof reserves I think since 2014 2015. it's a good start right but I think you also need credible regulators Auditors to come in and actually examine those books you know uh you know coinbase is a publicly traded company their financials are out there every quarter right we need that transparency in the market and I think that's what's lacking and proof of reserves is a good first step it's probably going to be more than just that because some of this activity still happens you know off balance sheet right there's stuff that you can do on the blockchain and review but we need a totality of transparency again happening in the traditional banking industry for some time you know companies like coinbase publicly traded company you know their balance sheet is out there for everybody to see as Jeff said bitco have been doing this kind of thing for a long time proof of reserves is a great step forward and also highlights how transparent blockchain enabled assets can be we can see all the movements we can see what's happening so let's you know really use that feature to our advantage but you know we are going to have to go much further than that as well such as well as I said we're going to have to really look at what the regulatory options are going to be I mean there's already a lot of talk around stable coins um be interesting to see what comes out of the U.S Congress in particular around that D5 is another area where we can't resist having regulation of financial Innovations we have to collaborate and be creative with that uh you spoke about you spoke about the need for a common voice and and sort of getting ahead of the regulatory curve that's sort of like in in the wake of the you know financial crisis 2008 you know the industry sort of traged by they're members of the chat by Community who sort of fought that regulatory uh you know and and you know sort of you know pushed back on things that would prevent a follow uh uh you know a succeeding crisis I would argue that the Trad fire is still ripe for that type of Crisis again because of those efforts you're saying you're saying you should take a different take where the industry actually sort of Embraces you know regular regulatory uh the proper regulatory response before it's forced on you is that yeah I think the industry could do a better job ourselves you know we have a number of lobbyist organizations in the U.S like blockchain Association a blockchain Alliance but we don't have is a sifma which is a very powerful force uh in the traditional Finance industry you know before a new rule comes out by the SEC or finra they meet with sifma sifma gives them comments and helps shape that regulation we need to do a better job at informing Regulators what are the risks what are the opportunities how do we move forward in a sensible way and I think we have too many factions focusing on what's their business model versus what's the best business model for the crypto ecosystem yeah we do have an opportunity here I think if we can see it as an opportunity then we're going to come out of the other side of this stronger we're probably going to take a step back now while everyone retrenches while The Regulators look really carefully at what needs to happen but I think that puts us in a position to actually take two bigger leaps forward in the long run which is net going to be better for everybody that has been in the crypto ecosystem building it for so long Jeff you were going to say something oh okay uh now you're talking about the industry coming forward to you know basically embracing a proper regulatory stance but right now sort of you know it's being done oh sorry oh sorry I'm sorry about that uh not being is the regulatory right now it's sort of uh different phytems around the world the regulatory system so if you want you know you're talking about the industry speaking with one voice you know it can't just be CZ uh or whomever it's got to be the industry but at the same time it's like right now you've got you know the chance for regulatory peace piecemeal around the world so are you arguing for Global regulation is that what you'd like to see or so the the Holy Grail here would be a consistent Global regulatory framework and certainly part of why we're here talking about this is because of this balkanization of Regulation your regulatory Arbitrage we hear people talking about it all the time and you know one of the the main ways that we can address that is having a global consistent regulatory framework we have to challenge ourselves though on whether that's realistic you know we we can aspire to it certainly and we should aspire to it you know the fat F has already done a great job of that on AML risk but we don't necessarily have someone looking at the risks in crypto outside of AML at a global supranational level I think we need to um well the hope would certainly be that we can see that development I think it's going to be a long time coming though to get that level of coordination and so in the meantime what we need to hope for is on a national level The Regulators now move fast because if they don't move fast we will continue to see good businesses look at jurisdictions where they can where there is a clear regulatory framework and go there to to establish themselves yeah I agree with Simone fataf is a great start to set the global AML standards but it's just a guideline it's a standard countries that need to adopt their own regions and rules but we've been looking at the fataf uh in traditional finance and crypto for years that's a good first start but uh you know I met with the the chairman of adgm yesterday and we talked about what's the right regulatory framework and had a great perspective he's looking at is what are the risks and let me write the regulations and the framework to address those risks rather than spend another year or two years defining what crypto is like we're doing in the U.S is it a security is it a commodity who's going to regulate it and fighting over it and we've had a number of bankruptcies while we're waiting for regulation so if the time wasn't yesterday it's now right to fix this because in the U.

S we're focused on enforcement actions to give regulatory guidance but that's a little too little a little too late right the investors are harmed the consumers are harmed maybe somebody will go to jail but that doesn't help the guy who had their funds locked up at FTX so this is the time that I think as a global ecosystem we need to come up with what are the five key principles how do we adopt that they may be a little different in in different jurisdictions but the concept should be the same about safety about trust in digital assets and in the ecosystem strong regulation breeds success we seen that in the traditional financial markets I'm not saying that we should have exactly the same regulatory framework that doesn't necessarily apply to crypto but the fact of the matter is that having strong regulatory Frameworks leads to trust trust leads to to success and and that's what we should be talking about as an industry as an industry that's that's sort of the key point because probably the most visible person in in in crypto in in Washington up until recently actually still the most visible person in Washington in crypto was a gentleman by the name of Sam bankman freed uh some of you may have heard of uh so that's sort of the danger of just having one one person out there as the face of crypto so are there is there any move that you're aware of sort of to to create that Glo that that unified voice there have been fits and starts you know in the U.S and a number of the low uh Global exchanges and the leaders in the US have been trying to get that voice heard um unsuccessful right you know the regulator some come in and meet with us let's have those discussions they really haven't come to fruition of a good way forward um but I think there's an Oedipus now that we need to come together and whether those are you know uh bit goes and coinbases and CZ and binance to come up with something for the institutions to get excited about this space right I think they're only really going to come when there's an equivalency a regulation they're used to uh Federal Regulation or national regulation not quasi-regulation so I think it's really up to us as the major um players either as exchanges or custodians or on the surveillance side to come together and and work with global Regulators right we're regulating the U.S and Switzerland and Germany and and maybe here in adgm because there was a forward framework but we need to make that a reality rather than discussion uh changing gears a little bit uh so you know the major a lot of the major takedowns in crypto have been you know uh you know Celsius Voyager uh you know and of course uh uh uh you know the SPF so the question is is that you know those are sometimes labeled as C5 centralized Finance as opposed to you know uh decentralized you know and does do does the regulatory world you know particularly the US like have the sophistication to to differentiate between the two not yet um I I think some of the D5 protocols actually worked right the smart contracts executed when they were supposed to but I think it's very hard to require good risk management when you have bad actors right so when we're concentrating some of these uh assets under a few centralized exchanges that don't have a regulatory framework and are not accountable we're going to run into these crises um so uh I think there's room for both CFI and defy but we need to put a framework around it to protect the investors and the consumers and the industry can do it themselves we can have the right risk disclaimers and disclosures we don't need to call everything a security to file a rule map but there will be good actors there'll be bad actors and we need to figure out who's who so oh sorry to your question Kevin defy has got a great opportunity now given what obviously the the focus on C5 and maybe some of the failings around that and in just in the recent weeks you know we're talking a lot about the negatives but there's been a huge amount of positive uh particularly around D5 in the last few weeks you know DBS Bank JP Morgan all X have both executed um trades on defy I mean that's huge you know that's to Leading National you know well-regulated financial institutions innovating and experimenting with this technology so I think defy has got a really bright future but again you know we either collaborate and uh you know work together on developing proper oversight for things like those financial Innovations or we wait for inappropriate regulation to come down and sort of squash that potential like like I said in the wake of the financial crisis you had industry which should basically you know you know had almost destroyed the US economy thank you very much uh you know basically fighting against regular regulations that would have prevent it from reoccurring so you're basically saying that crypto the crypto people have to be sort of more mature and forward-looking uh and actually just a you know take for for the good of the industry uh you know be more mature than than Trad fire is that How likely is that I think maturity is a great word for it and you know for those of us that have been in this industry for a really long time we have to go back to you know the original vision of all of this why are we even here why do we think that crypto assets why do we think that blockchains are so powerful we have to really go back to that vision and think about what our mission is in this space and if we want to protect that if we want it to achieve its potential then we have to we have to step up and demonstrate that maturity I don't know that there's anyone in in here that would um disagree with with the fact that as a as a community it's our responsibility now to to put ourselves in the Limelight and say you know we can do this there are no shortcuts to to creating a serious Financial ecosystem so that's what we have to do you talked about you talked about D5 to get to defy it back again you talked about how you know it has a moment to shine but same time as you better than than anyone knows uh the amount of hacks uh you know you know just you know you know sort of overshadowed by everything that's that's been going on the amount of hacks hit I think an all-time high in uh in October uh you know what what does that mean certainly the case that excuse me certainly the case that defy protocols dexes have had their fair share of bad news coverage in the last couple of months with the Advent of things like cross-chain Bridges and bridges facilitate interoperability between different blockchains you know that's something that's incredibly positive for crypto it makes usability that much better but we're they're in their infancy we should expect that there's going to be some level of vulnerabilities that are discovered and that are taken advantage of that's the case in any emerging Innovation emerging technology what I think we should really focus on is the fact that we can see them we can report on them we can track where the funds are going that those are our characteristics of the blockchain which are part of what makes it so powerful at ellipset you know we have been tracing the fact that the Lazarus Group which is associated with North Korea has been laundering proceeds of things like ransomware attacks through the ren Bridge the very fact that we can see that we can label and identify that that criminal activity put it in our tooling so the likes of bitco and other highly compliant players in the space can immediately make sure that there's no off-ramp for that crypto is something that we should be celebrating we should be shouting it from the rooftops because you can't do that in in uh in traditional Finance understood that you're able to identify Bad actors very much quicker than you can in in Chad fi but that doesn't that small Comfort to the investor who who winds up losing money due to a uh due to a hack due to an exploit so you know I mean you know when you're talking about bringing Trad Phi stuff into here is something like you know you need to you know believe it or not my dry cleaner when I was picking up this jacket uh on on last Friday was telling me how her her sisters is in a fight with her husband because he insisted they put all their money in crypto and there's 250 000 and it's gone and they're fighting all the time now okay the fact that you can track the actors and things like that really doesn't do much I mean do you need something like you know the do you need something like in insurance for deposits do you need things like that to make this like I mean because it's like say oh okay we you lost your money but look we can track it uh you know who cares well I think that was one of the first hurdles in the crypto ecosystem right is it only used by Bad actors and is it only going to be used by you know money launderers and you know through blockchain analytics and companies like elliptic we've been able to dispel that myth and now you know we've put that somewhat behind that it's not just for Bad actors and what else can it do um you know we were talking earlier how you know in the first block of Bitcoin right Satoshi mentioned the financial crisis we've now created our own crypto financial crisis so if we actually move the ball forward yet I don't know we may take two steps back but I think if collectively we can figure out how to actually make the system safer and actually achieve what the goal of crypto was originally which was bring more people into the economy make it faster and more efficient and cut out some of the intermediaries we need some more adults in the room who've lived through long-term capital and Lehman and the financial crisis and the.com so that we don't repeat the same mistakes right I think we have an opportunity to do Finance 2.0 and make it better I think we've taken a step back and kind of created some of the same problems that got us here but if we come back to the vision of a different way to look at Finance hopefully we can achieve it and I think the first step is setting some ground rules and some regulations so that your dry cleaner doesn't get sucked in on some crazy crypto coin that may not be worth anything versus keeping it in traditional markets there's room for both of us and we want to make crypto a traditional Marketplace I mean those are the individuals that we should all be feeling you know a deep sense of sadness and responsibility towards and not not one of these individual initiatives Solutions is a Panacea to the problems that we're facing we're going to have to tackle each one of these whether it's transparency and traceability for anti-money laundering purposes whether it's consumer protection regulation I mean I I really hope that we see some regulation around that coming very quickly you know CZ talked a little bit this morning about education and I couldn't agree with him more we need to do better as an industry educating participants so they understand what they're getting into as I said defy you know on the on the maturity curve is really early most people shouldn't be in you know investing in defy yet unless they really understand um how a smart contract is working like something like something like you know where you have to have the sophisticated investor something like that uh thing for it yeah whether you know we look at you know the accredited investor Marketplace for some of this but you know to your point about hacks I think as an industry we've grown so quickly that we haven't spent all the time on the cyber security controls and on what's the proper custodial storage whether that's cold storage right or single point of failures you know we we implemented and pioneered uh multi-sig right so there's not one actor who can move assets it takes shards and multiple people and in multiple jurisdictions right we need to get back to Pure safety and you know I think we have too many vulnerabilities between you know cross-chain capabilities that we haven't really thought through how to make it safe and I think we need to take a step back and kind of secure the ecosystem accredited investor worries me though because one of the things that we are also excited about in crypto is that there are no barriers to entry you know it's sort of democratizing uh access to finance and so we have to have a balanced approach you know there should be consumer protection there should be more education but we shouldn't put lots of barriers in place that stop people that do want to come into the space do want to experiment from being able to access those Technologies those types of assets that I think would be really damaging and is is straying pretty far away from the original Vision well as far as the original vision goes I think I think sort of the original Vision has been really hampered here I mean the original Vision was very very much you know the you know crypto let's do whatever we want to let's let's break it let's break things fast let's you know Etc uh and look look sort of where it got us and you're talking about bringing the grown-ups into the room uh you know sort of the that Spirit of crypto it's going to have to mature a lot if we're going to move past this you know it's it's you know you're gonna have to have you're gonna have to have elements of traffic coming in the question is is it going to be you know is it going to is so much gonna come in if if the industry doesn't regulate itself adults who don't know about crypto are going to come in and basically just just potentially kill it yeah run fast and break is not the model when you're when you're entrusted with billions of people's assets large institutions coming in you know in the early days and it was a little peer-to-peer and Bitcoin was at 200 it didn't mean as much but when we're a trillion and a two trillion dollar industry it does you know I think there's an opportunity to take the good aspects of Finance 1.

0 and create Finance 3.0 because Finance 2.0 we've had some problems here so I think we need to figure out how do we adopt the best of both some of that is Safety and Security some of that is privacy controls right I think people got into crypto because they they want some privacy and that should be their right and you know through blockchain analytics you have some privacy but you're also traceable and law enforcement loves the ability for us to trace this the 20 bill on the street corner not as traceable as blockchain so when I talk to law enforcement they don't want crypto to die they love the cases that they can bring because of the transparency but we need the same transparency and Trust on where your assets are who's marketing these uh you know new tokens and coins what are the use cases and it's up to us to educate the investors and to work collaboratively with The Regulators to come up with the right framework and you know we've been pushing the US and they've been sitting on the sidelines and not being a leader and there are other countries who are but I think the best way is a Global Response because there will always be the actor that goes to the path of least resistance find the place where there aren't any checks and balances and that's going to blow up again so it's really up to us as industry leaders and to work with our partners The Regulators but that of course is going to require the the the global uh you know a global industry response which we don't have yet I I think we need to do it and I think whether it's you know uh folks like CZ and Brian and Mike and others who get a collective voice I think we've had too many factions of what business model makes sense for them I think if we need the whole ecosystem to survive and grow we need to put down those business model discussions and just work on a framework and I don't think there's a horse of what country leads but we need a leader am I out of time yes I am oh okay they're they're bringing the hook up to get me off the stage uh just just uh just final thing uh we thought we were in winter uh it turns out that it was just an early uh you know an early fall Frost and now now nuclear winter has begun when do you see spring I've lived through three Winters you know in in my you know almost five years in this space I'm looking forward to summer I think it's going to take you know a step back and we've had a step back but I think the institutions now see the risk and also see the opportunity to come in and make it safer so I'm really hoping nine months 12 months down the road we'll actually have pen to paper on the best way forward thank you I think it really depends on the speed with which we and The Regulators can can really come to the table I'm unlike Jeff I'm not going to put a number of months on it you know I really hope that it's within 12 months you know but but we need to see some legislative action happening quickly okay thank you everybody thank you [Applause]