Not to get all metaphysical about it, but what exactly is crypto? For regulatory purposes, that is. The decision by regulators as to whether to classify cryptocurrencies as securities, commodities, or something entirely different matters a lot for the future of a trillion-dollar industry that many see as defining the next wave of internet technology. When I spoke last week with Agostino Capponi, a Columbia University associate professor and founding director of the Columbia Center for Digital Finance and Technologies, he argued that Washington needs to take a completely new approach. I called him back to get more insight into what this new class of digital asset might look like — and how in order to be truly effective, crypto regulators might need to be as much computer scientists as they are economists. If you were the czar of digital asset regulation, how would you classify crypto assets? If we want to think about crypto as an asset class, the first point is that we have a very large and complex taxonomy of tokens. We have to think about how to regulate a large class of assets, not a single asset. Think about Bitcoin and then UNI, the governance token issued by Uniswap. If I hold Bitcoin, I have an unstable cryptocurrency which I can use to make payments or transactions on a DeFi exchange. If I hold a Uniswap token, I can participate in decisions about making changes to the network, or steering the direction of Uniswap projects. Another example is stablecoins versus non-stablecoins. With a stablecoin the value of the currency depends on the collateral that is being used to back the assets. You have to think of completely different regulatory regimes. If you think about the traditional reasons for financial regulation — to create stability, protect consumers, everything that an agency like the SEC is meant to do — how would that look different for cryptocurrencies? This ecosystem would have to take into account the regulation of the software that receives every transaction. The distributed ledger technology — which is based on “ smart contracts ” — needs to be certified and verified carefully, so we can make sure that only users with the credentials to do so are launching new projects on the blockchain. It would also need to make sure the underlying technology of that digital exchange is solid. Most of the regulatory system right now is based on regulating individual entities or tokens, but in the case of cryptocurrencies we should regulate the flow of transactions on the blockchain, rather than those specific entities. It sounds like the existence of the blockchain empowers engineers and computer scientists who understand that technology, and diminishes the relevance of regulatory expertise in the traditional finance system. I agree with that. The new regulators of the crypto ecosystem will have to be educated in the technology. Otherwise there will be no way to regulate, because the risks are quite unique. We never thought of the technology risk in thinking about regulating stocks or bonds because the risk of hacking is quite low, but with crypto assets that’s changed. Another point is that these markets are open 24 hours, seven days a week, so might need to make new regulations. There might have to be a new agency created specifically to regulate crypto assets that would operate without interruption.
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