The collision of money with the internet was bound to present risks, many of which became apparent in 2022. While crypto's speculative phase might be experiencing an ice age, the demise of internet-scale always-on open technologies in financial markets is not, writes Circle’s Dante Disparte.
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The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
JANUARY 2, 2023
The collision of money with the internet was bound to produce a blend of novel risks, as well as serve as a new terrain for age-old human greed, criminality, and fraud. And yet for bankers to proclaim crypto is dead because 2022 produced a particularly dark and cold crypto winter, is not only disingenuous, it ignores one key thing—the emergence of blockchain-based financial services was never about substitution of their business models, it was about augmenting them. So perhaps, 2022 marks the beginning of a crypto ice age of the speculative phase, but not the demise of internet-scale, always-on open technologies in financial markets. Herein, the promise of crypto (short form for cryptography), could not be brighter or its necessity clearer.
Watch what the biggest and most well-endowed banks do, not what they say with repeated dismissals of crypto, bearing in mind crypto as an industry is no more monolithic than banking, central banking, or any other institution. Indeed, the crypto companies that fared well during 2022—a year punctuated by one epic failure after another—have all the basic preconditions and operating rigor of well-regulated, trusted financial services firms. While some have withered in the face of sunlight, the greatest disinfectant, others were born in it. They have eschewed from the outset the idea that stablecoins should be unregulated internet hot money like Terra-Luna—the collapsed $60 billion algorithmic stable-in-name-only coin. At best, this was a poorly designed digital derivative. At worst, it was fraud. But to link all crypto innovations, the responsible and the irredeemable, together would be like dismissing all banking because of Danske Bank’s $230 billion money laundering pipeline.
Instead, USDC, the dollar digital currency, which has safely processed more than $8 trillion in blockchain transactions, conforms with existing U.S. electronic stored value, money transmission, and state supervisory frameworks—all while guarding against and being responsive to global financial integrity and prudential norms. As countries, global regulators and policymakers call for hardening their regulatory posture towards digital assets, the regulatory principle of same risk, same rules, and technology neutrality should be remembered. All too often, the crypto conversation focuses on risks, which is fair enough especially after an annus horribilis like 2022, despite the fact that most of the failures have human protagonists. However, it is again disingenuous for bankers to criticize the fundamental technologies that underpin crypto, on the one hand, while trying to co-opt its innovations on the other. This is not a dire contest between emerging industries and the technologies that power them and traditional finance, it is convergence.
One of the key ways in which well-regulated payment stablecoins (or Europe’s e-money tokens under emerging regulatory frameworks) are making upgrades is by rejecting the leverage and rehypothecation that makes fractional reserve banking risky. Indeed, the conservative balance sheet construct, asset-liability management, and liquidity coverage ratio underpinning USDC is on par or better than what is expected of globally systemic banks. We have to remember the daisy chain of leverage, systemic correlations, opacity, and dangerous financial alchemy that set off the 2008 financial crisis triggered a multi-trillion-dollar public bailout. Thus far, crypto’s eye-watering losses in 2022 have been “self-insured,” borne by sophisticated investors and speculators, early adopters, or people who may know not to invest more in anything than they can afford to lose—or not to invest in anything they do not understand. All “crypto” losses triggered by fraud, criminality, or race to the bottom regulatory arbitrage, as with the real economy or any other sector, should be categorically rejected, prosecuted, and consigned to history, like the failure of FTX. If policymakers, legislators and regulators, fail to meet their own calls to action for a digital asset rulebook, the next crypto crisis may not be so cleanly contained from the real economy.
As the frothy, speculative waters of 2022 recede taking with them the brigands, crypto corsairs and frauds, an enduring, regulated, always-on financial system will remain. This is solving for what we cannot do with money, banking, and financial services if they remain largely analog and consigned to brick and mortar. The history of both technology innovation and finance teaches us that it often takes a collapse or a bubble bursting for enduring value to remain. Just as the dot-com bubble handed over the development of the internet to durable companies, unlocking novel business models we now cannot live without, 2022 marks crypto’s Dodd-Frank moment. Meeting the moment with rules-based competition and sensible regulation that protects consumers and markets is the only right choice. On this, even crypto’s biggest detractors agree.
The collision of money with the internet was bound to produce a blend of novel risks, as well as serve as a new terrain for age-old human greed, criminality, and fraud. And yet for bankers to proclaim crypto is dead because 2022 produced a particularly dark and cold crypto winter, is not only disingenuous, it ignores one key thing—the emergence of blockchain-based financial services was never about substitution of their business models, it was about augmenting them. So perhaps, 2022 marks the beginning of a crypto ice age of the speculative phase, but not the demise of internet-scale, always-on open technologies in financial markets. Herein, the promise of crypto (short form for cryptography), could not be brighter or its necessity clearer.
Watch what the biggest and most well-endowed banks do, not what they say with repeated dismissals of crypto, bearing in mind crypto as an industry is no more monolithic than banking, central banking, or any other institution. Indeed, the crypto companies that fared well during 2022—a year punctuated by one epic failure after another—have all the basic preconditions and operating rigor of well-regulated, trusted financial services firms. While some have withered in the face of sunlight, the greatest disinfectant, others were born in it. They have eschewed from the outset the idea that stablecoins should be unregulated internet hot money like Terra-Luna—the collapsed $60 billion algorithmic stable-in-name-only coin. At best, this was a poorly designed digital derivative. At worst, it was fraud. But to link all crypto innovations, the responsible and the irredeemable, together would be like dismissing all banking because of Danske Bank’s $230 billion money laundering pipeline.
Instead, USDC, the dollar digital currency, which has safely processed more than $8 trillion in blockchain transactions, conforms with existing U.S. electronic stored value, money transmission, and state supervisory frameworks—all while guarding against and being responsive to global financial integrity and prudential norms. As countries, global regulators and policymakers call for hardening their regulatory posture towards digital assets, the regulatory principle of same risk, same rules, and technology neutrality should be remembered. All too often, the crypto conversation focuses on risks, which is fair enough especially after an annus horribilis like 2022, despite the fact that most of the failures have human protagonists. However, it is again disingenuous for bankers to criticize the fundamental technologies that underpin crypto, on the one hand, while trying to co-opt its innovations on the other. This is not a dire contest between emerging industries and the technologies that power them and traditional finance, it is convergence.
One of the key ways in which well-regulated payment stablecoins (or Europe’s e-money tokens under emerging regulatory frameworks) are making upgrades is by rejecting the leverage and rehypothecation that makes fractional reserve banking risky. Indeed, the conservative balance sheet construct, asset-liability management, and liquidity coverage ratio underpinning USDC is on par or better than what is expected of globally systemic banks. We have to remember the daisy chain of leverage, systemic correlations, opacity, and dangerous financial alchemy that set off the 2008 financial crisis triggered a multi-trillion-dollar public bailout. Thus far, crypto’s eye-watering losses in 2022 have been “self-insured,” borne by sophisticated investors and speculators, early adopters, or people who may know not to invest more in anything than they can afford to lose—or not to invest in anything they do not understand. All “crypto” losses triggered by fraud, criminality, or race to the bottom regulatory arbitrage, as with the real economy or any other sector, should be categorically rejected, prosecuted, and consigned to history, like the failure of FTX. If policymakers, legislators and regulators, fail to meet their own calls to action for a digital asset rulebook, the next crypto crisis may not be so cleanly contained from the real economy.
As the frothy, speculative waters of 2022 recede taking with them the brigands, crypto corsairs and frauds, an enduring, regulated, always-on financial system will remain. This is solving for what we cannot do with money, banking, and financial services if they remain largely analog and consigned to brick and mortar. The history of both technology innovation and finance teaches us that it often takes a collapse or a bubble bursting for enduring value to remain. Just as the dot-com bubble handed over the development of the internet to durable companies, unlocking novel business models we now cannot live without, 2022 marks crypto’s Dodd-Frank moment. Meeting the moment with rules-based competition and sensible regulation that protects consumers and markets is the only right choice. On this, even crypto’s biggest detractors agree.
About
Dante A. Disparte serves as the Chief Strategy Officer & Head of Global Policy for Circle. He is a life member of the Council on Foreign Relations and serves on the World Economic Forum’s Digital Currency Governance Consortium. He is also a member of Diplomatic Courier’s editorial advisory board.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
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