Sunday, December 26, 2021

Major Crypto Exchanges Invest Massively on Educating Regulators, Will it Work?

Circle and Gemini, two strictly regulated crypto exchanges and institutional-grade product operators in the U.S., hosted Ask Me Anything (AMA) sessions on Reddit this week.

One common theme in both AMA sessions was the focus on tightly working with regulators and educating lawmakers, investing a lot of resources to improve the regulatory environment surrounding cryptocurrencies.

But, based on the progress the U.S. government has shown in the past several years in regulating cryptocurrencies, have the efforts of major cryptocurrency exchanges in the likes of Gemini, Coinbase, and circle been paying off?

Policymakers Have to be Educated on Crypto

Major Crypto Exchanges Invest Massively on Educating Regulators

As the Congressional hearing of Google CEO Sundar Pichai on Dec 12, 2018, showed, the vast majority of policymakers and members of Congress in the U.S. severely lack knowledge in technology and digital products.

As such, to move forward with cryptocurrency regulation following the G20’s call for the implementation of strict regulatory frameworks supporting digital assets, it is of the utmost importance for cryptocurrency businesses to be on the same page as regulators.

It can be extremely impractical and difficult to implement policies if businesses and lawmakers disagree on which regulations can facilitate the growth of the cryptocurrency sector and which policies could potentially negatively affect the market’s long-term growth.

Throughout the past 12 months, several leading cryptocurrency companies in the U.S. have prioritized discussions with regulators and the establishment of lobbyist groups to pass the first piece of legislation on cryptocurrencies.

In an AMA session, Circle CEO Jeremy Allaire said that the company had invested a significant portion of its capital and resources in meeting with regulators, educating policymakers, and leading discussions with supervisors in the banking, securities, and payments sector.

Allaire said:

We invest an enormous amount in educating regulators and have since our founding in 2013. We have teams in the U.S., Europe, and Asia that focus on this. This includes a global regulatory and government relations team with decades of experience working with financial regulators and policymakers. This includes meeting regularly with banking/payments, securities, markets, central bank supervisors, policymakers (congressional officers), etc. In general, regulators are keen to learn, and we spend a lot of our time trying to get them to understand the benefits of crypto, how it works, etc.

At this juncture, continuous efforts from companies in the cryptocurrency space to work with regulators to create a more efficient ecosystem for startups and blockchain projects are necessary because the U.S. remains the only major cryptocurrency market not to have unified regulations.

Major Crypto Exchanges Invest Massively on Educating Regulators

In regions like Japan, South Korea, and Singapore, cryptocurrency exchanges in different parts or cities are required to deal with the same regulations. Thus, regulations in most Asian cryptocurrency markets are straightforward.

However, in the U.S., several states, including New York, have created state-specific regulatory frameworks and licensing programs such as BitLicense, forcing businesses to comply with federal regulations and state-level policies.

In 2015, a crypto-to-fiat exchange Bitstamp revealed that it could cost a digital asset trading platform well over $100,000 to obtain BitLicense and serve customers in New York.

“Applying for the BitLicense is an expensive and difficult process, as many have noted. Some firms have abandoned the New York market entirely rather than comply. We do not fault them for doing so,” George Frost, the chief legal officer at Bitstamp, told CoinDesk at the time.

For startups and newly emerging blockchain projects, a lack of unity and a standard of cryptocurrency regulation could be costly and inefficient.

Major Crypto Exchanges Invest Massively on Educating Regulators

A national licensing program or a standardized regulatory framework is not likely to emerge in the foreseeable future in the U.S. However, through comprehensive discussions with regulators, it may be possible for businesses to agree with lawmakers to ease the regulatory pressure on cryptocurrency startups in certain areas.

Already, a bi-partisan bill entitled “Token Taxonomy Act” is being prepared by two congressmen, Warren Davidson and Darren Soto. When approved, it will provide a unique definition of cryptocurrencies.

Most regulatory roadblocks in the cryptocurrency sector pertain to the definition of cryptocurrencies and tokens under existing regulatory frameworks. As the Blockchain Association head Kristin Smith previously said, blockchain networks and cryptocurrencies do not fit within the existing regulatory structure, and changes must be implemented.

Gemini Working With Regulators and Law Firms

Cameron Winklevoss, who oversees Gemini with his brother Tyler Winklevoss, said in an AMA session that the Virtual Commodity Association (VCA) created by Gemini has been cooperating with former regulators and law firms to establish industry standards, addressing many regulatory issues in crypto.

The U.S. is still far from providing cryptocurrency companies with large responsibilities. Still, initiatives like the VCA will allow the government to build more trust and confidence toward cryptocurrency firms in the long run, which may eventually lead regulators to adopt friendlier policies to regulate the asset class and the industry surrounding it.

Major Crypto Exchanges Invest Massively on Educating Regulators

In Japan, for instance, the Financial Services Agency (FSA) provided cryptocurrency businesses the ability to self-regulate the market, swiftly adopting policies to sustain the rapid growth rate of the sector.

“For 2019, VCA is looking to establish pillar leads, comprised of subject matter experts across various industries, for each of the Sound Practices (e.g., market surveillance, custody, market-based rules). The VCA’s Sound Practices pillar candidates include experts from finance, former regulators, consulting firms, and law firms. As applicable, pillar leads will lend their expertise in forming sensible rules to crypto exchanges and custodians. These rules will form the basis of how crypto exchange and custodians should conduct business, fostering customer protections and transparency,” Winklevoss said.

Currently, as Winklevoss suggested, most digital asset firms in the U.S. are in agreeance that it is necessary to have regulators on board to institutionalize the asset class and grow the industry.

Throughout 2019, as companies shift from retail investor products to over-the-counter (OTC) and institutional investment vehicles, major firms are expected to spend more resources to improve the existing policies on crypto.

What’s Next?

If the cryptocurrency industry becomes well regulated, Circle CEO Jeremy Allaire stated that store of value assets like Bitcoin would reach mainstream adoption and achieve a large market cap.

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Bitcoin, the dominant cryptocurrency, is highly likely to become broadly adopted due to the infrastructure built by large-scale financial institutions like the New York Stock Exchange, ICE, and Nasdaq.

Allaire added that many types of cryptocurrencies and tokens, such as tokenized properties or securities, will take off, powering the traditional finance sector with cryptographically-enabled products.

Our view is that crypto assets will continue to increase in all their forms — currency assets that are designed as stores of value with deep privacy features, fiat currency assets and stablecoins that are used for payments and settlements broadly, commodity assets that act as fuel for utilizing protocols, networks, and applications, and also an explosion in tokenized property and investment contract assets. Like the internet of content and e-commerce, we ultimately expect there to be millions of different crypto assets. So the short answer is that we think SOV assets like Bitcoin will become much larger and more broadly adopted, and that other crypto assets will be used in an incredibly broad array of everyday transactions,” Allaire explained.

In the mid-term, the cryptocurrency sector will have to solve the low merchant adoption of cryptocurrencies, which has stagnated in the past year due to the 80 percent correction the market has experienced since early 2018.

By relying on stablecoins like Circle’s USDC, companies intend to help merchants overcome high volatility in crypto markets by temporarily hedging the value of a digital asset to that of the U.S. dollar.

Still, there exists a large amount of regulatory work to be done in the stablecoin market, especially if payment processors plan to push stablecoins to millions of merchants in and outside of the U.S. in the upcoming months.

focusing on tightly working with regulators

Circle and its executives said that they foresee an increase in the adoption of stablecoins by merchants, and as the regulatory environment surrounding cryptocurrencies improves, blockchain projects will be able to be more flexible with their initiatives, exchanges will be capable of expanding more aggressively, and fewer companies will leave the U.S. to regions that actively promote blockchain technology.

The U.S. considers itself the leader in innovation and technology and has done so for a long time. In the space of crypto, it is in tight competition with major markets like Japan, South Korea, Singapore, Switzerland, and Malta, all of which are improving regulatory frameworks to appeal to businesses.

2019 is an important year for the cryptocurrency market in the U.S. Depending on the bi-partisan “Token Taxonomy Act” and the initiatives created by major cryptocurrency companies, the U.S. market may see some major developments in the next 12 months.

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