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Cryptocurrency regulations can be a controversial topic, but experts and policymakers say that investors and crypto businesses should accept them wholeheartedly. More regulations would mean more stability in the volatile cryptocurrency market. Countries like UK, USA, and India have openly discussed their ideas and prospects regarding how the governments would like to introduce digital assets into their economic and financial markets. Still, there are several cryptocurrency enthusiasts who believe that the introduction of regulations might directly interfere with the very concept of blockchain and cryptocurrency, hence, they fervently oppose cryptocurrency regulations. Recently, the executive crypto order issued by the Biden government ensures the development of digital assets, but it was more like a call of action than a specific game plan.

Robert Cruz is Vice President of Information Governance at Smarsh. He leverages 20 years of experience in the domains of regulatory compliance, eDiscovery, and risk management to lead Smarsh efforts in presentations, content, and customer advocacy surrounding these complex use cases. Robert has spent his entire career in Silicon Valley and holds an MBA from the Stanford University Graduate School of Business. In this interview, he talks about his take on Biden’s crypto initiative.

 

How does Biden’s new executive order impact cryptocurrency regulation?

At a minimum, if there had been any doubt about the legitimacy and future of cryptocurrency, it should no longer be uncertain. This order simply adds to similar moves by other countries around the world in calling for the legal structure, definition of oversight responsibility, and due diligence required to manage the impact.

 

What are the advantages and disadvantages of Biden’s crypto regulation executive order?

The advantage is that it has the potential to address the reality that consumers will not be denied. On one end of the market, technology-savvy consumers want to tie investments in Bitcoin and Ethereum to their bank accounts. On the other end of the spectrum, the “unbanked” want to buy and sell without the cost, overhead and complexity of dealing with the established financial market. Regulation can serve to provide order and structure needed as guard rails to address the reality that digital asset and crypto innovation will not be undeterred – as will those who see this as an opportunity for fraud and schemes. The potential disadvantage of action by the US government stems from the borderless and fluid nature of crypto. Overly aggressive regulation can have the effect of moving innovation to other markets, which could expose US investors to additional risk outside of the reach of US regulators – and reduce growth potential for US-based providers relative to internationally based counterparts. However, while the regulatory actions produced by the order remain uncertain, the current situation where ownership and authority of the SEC, FINRA, CFTC, OCC is ambiguous, and statements and actions of each can appear in conflict is clearly not sustainable.

 

What impact will upcoming cryptocurrency regulation have on recent crypto crime and hacks?

Opportunity will always have the effect of attracting those with the intent on wrongdoing, whether that is an individual hacker or a nation-state actor. Some of these threats are well established and frequently directed at other financial products, while some are new given the nature of the underlying blockchain technology and the new channels being leveraged to advise or market these products (e.g. TikTok, Signal, Telegram, etc.). One aspect that any regulation will need to address is how providers can construct an oversight mechanism that provides visibility into transactions that today are limited to trusted participants, which will give them the ability to monitor employee activities and take other proactive steps to minimize the probability and business impact to crypto-related criminal activity. This doesn’t solve the nation-state dimension, but it will at least allow them to extend their existing supervisory processes to address crypto as any other asset class.

 

What challenges will cryptocurrency regulation face?

First and foremost is regulatory overlap and underlap, and agreement upon the ultimate authority for crypto oversight. This has now been made more complex by the involvement of US government hearings, and the introduction of politics in a deeply divided Congress. Secondly, the challenge of regulation will be education – where many fintech entrants remain underinvested in compliance processes and internal expertise in relation to their investments in market-facing innovations. Recent fines would indicate some firms remain in catch-up mode even in relation to registration requirements (outlined in the 1930 Securities Act and 1940 Investment Advisor Act), as well as in record keeping and supervisory oversight obligations.

 

Can cryptocurrencies co-exist with a Central Bank Digital Currency if the Federal Reserve designs one?

It’s unclear how this coexistence will work, although it should help to rationalize investment offerings, separating those that have valuation tied to a central digital currency from those that don’t. Many countries around the world are studying this closely at this moment, to understand how the positive benefits of reducing the ‘unbanked’ population will be accompanied by an unknown impact on financial market stability. At a minimum, CBDCs would enable some degree of control over cryptocurrency using the normal set of financial policy controls, as well as a basis of exchange between CBDCs across countries.

 

How can organizations and financial institutions best prepare for upcoming cryptocurrency regulation?

For those involved in the selling or advisory services surrounding cryptocurrency securities, I’d start with Gensler’s Duck principle – ‘if it walks like a duck’. In other words, one class of security is not exempt from rules that apply to everyone else. Fintech market entrants are well served to add the compliance expertise that brings an understanding of recordkeeping, supervisory oversight, and policy controls that are well established over other classes of securities, and examine technologies that will provide the flexibility and agility to respond to a regulatory change that is almost inevitable.

 

Can you give me an overview of your company? What challenges does your organization seek to solve?

Smarsh helps our customers to leverage the communications and collaborative content sources that they use to interact with the public and use to get work done internally. We do so by providing solutions to capture, store, and enable control over those information sources in order to meet regulatory compliance obligations, identify risk, and leverage information as an asset of their business. As stated by Satya Nadella, CEO of Microsoft, “the most strategic database in a company is the knowledge repository of all communications within the enterprise”. Our job is to help firms tap into that information to drive business growth and new opportunities, such as the case of supporting services around cryptocurrency securities while ensuring that appropriate controls are in place and effective to identify and mitigate information risks.

 

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