The risk of regulatory overshoot threatens crypto



With any disruptive technology, there are both promises and dangers – the intrigue of innovation and the risk of everything going wrong, endangering its own users, or even offering fraudsters new avenues to put into practice. implement their schemes.

Foundation for Stellar Development Head of Policy and Government Relations Seth Hertlein told PYMNTS that when it comes to cryptocurrencies, it is possible that regulators are overstepping, erring too much on the side of what one might call caution by introducing draconian guardrails that underestimate the benefits of cryptos and exchanges.

As a result, innovation may not reach its full potential.

Illegal versus legitimate

For an example of over-regulation, or at least what one might call a distrust of crypto that is unsubstantiated by the facts, Hertlein pointed to the comment by Treasury Secretary Janet Yellen, who has said during its confirmation hearing that cryptos were used “primarily” for illicit activities.

“Now, I interpret ‘primarily’ to mean a majority, or at least more than 50%,” Hertlein said.

But the facts do not support that claim, he said, citing research by Chainalysis which found that a third of 1% of crypto transactions in 2020 involved elements of criminality. This is far less than the roughly 5% of the world’s gross domestic product (GDP) that is laundered by the traditional financial system in cash or fiat currency each year.

“Thus, the amount of illicit funding occurring in fiat currencies and through the traditional financial system is an order of magnitude greater than that occurring in crypto,” Hertlein said. “And yet this trope that crypto is primarily used for crime is often repeated.”

On the flip side, there is also a risk of underestimating the benefits of blockchain. US Senator Elizabeth Warren recently presented a scenario to Securities and Exchange Commission (SEC) Chairman Gary Gensler, in which a hypothetical investor buys crypto just before a market downturn and finds himself unable to sell his holdings because a stock exchange is offline and networked. costs are skyrocketing.

“She painted this image as proof that blockchain had failed to meet its financial inclusion goals,” Hertlein said.

He countered that the senator’s scenario “chooses” a turbulent market that is neither large enough nor a sufficiently objective sample size on which to base such broad claims.

Gensler himself said investors might not be equipped to assess blockchain risks – and Hertlein said blockchain-related projects are generally transparent and tend to offer more detail and information than banks and private companies. But the SEC doesn’t credit blockchain companies for the information they share because the information itself is different from what is typically disclosed in SEC files. The SEC tends to regulate corporations and intermediaries.

“But decentralized networks are fundamentally different,” Hertlein said. “And in my opinion, the SEC is trying powerfully to drive the square peg of blockchain into the round hole of traditional finance.”

More than commerce

Blockchain, he said, isn’t just about commerce – it’s about financial inclusion and empowering people to send money across borders (and their families) into places like Africa with the aim of strengthening financial inclusion. Bitcoin’s debut in El Salvador as legal tender earlier this month could pave the way for adding stablecoins to the mix, without the volatility that has characterized bitcoin. Other countries, like Ukraine, have taken a more measured approach to legislation and use cases related to blockchain and crypto.

In the United States, he said, the regulatory impact of stablecoins has not yet become clear – and there is a risk that coins will be “forced into existing financial product silos.”

None of this is to say that blockchain is risk-free. As he said, blockchain is still in its infancy, and yes, sometimes systems fail. He compared the development of blockchain to the internet, where there had been some hiccups along the way, but the system as a whole was allowed to develop and grow – and lead to economic prosperity.

Securities laws (dating back to the 1930s) and regulators must catch up in an era of great technological change. The regulations aim to make mandatory what intermediaries can and cannot do, but in this case there are no intermediaries.

“It makes it really difficult to try and adapt the old framework to this new technology,” said Hertlein, who added, “that’s why it deserves a new look. Blockchain is really a different model.



On: Eighty percent of consumers want to use non-traditional payment options like self-service, but only 35 percent were able to use them for their most recent purchases. Today’s Self-Service Shopping Journey, a PYMNTS and Toshiba Collaboration, analyzes more than 2,500 responses to find out how merchants can address availability and perception issues to meet demand for self-service kiosks.


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