For many FinTechs, particularly those operating in cutting-edge spaces like blockchain and cryptocurrency, regulation has often been seen as a dirty word; something that can only shackle innovation.
But lack of regulation in the blockchain and crypto space has often served as a greater restriction than most actual laws can be, creating an air of uncertainty for companies looking to innovate in the U.S. and convincing many that the risks are simply not worth the potential gains.
How government can set up regulatory policy that helps FinTechs in this space, rather than hindering them, was a major topic of discussion at the 2021 International Blockchain Conference held last week.
“I think the useful thing the government can do is to set basic standards for things like legal traceability and reversibility,” said Congressman Bill Foster (D-IL). “You can design a basic infrastructure around that. The main thrust for blockchain applications developers will be to build on top of that infrastructure. Most blockchain applications do not depend on absolute anonymity, so I think it’s a mistake to focus on that. What they’re really talking about is a variety of ways to transact digital assets.”
It’s a solid concept, but still far away from reality – or even much that’s been proposed. Illinois is making progress with a new charter law that could put it on a better footing to serve FinTechs working on the crypto space, but even this progress is only a first step in light of what the market’s needs are.
“Switzerland allows you to tokenize stock, right now,” said Wulf Kaal, principal at Kaal Consulting and Professor of Law at the University of St. Thomas. “It allows you to set up a limited entity that does crypto business by paying in crypto. The Swiss government will let you pay in Ethereum, Bitcoin, whatever, to set and fund a crypto entity. This is light years ahead of what we’re even contemplating. And I commend Illinois for the new bill! But I don’t think we really appreciate how far along other jurisdictions already are.”
For Kaal, the warning is clear: if the U.S. is still only talking about holding digital assets when it comes to regulation, there’s a world of trouble ahead for U.S. marketplace. Many companies outside the U.S. already exist doing the kind of work that’s still only theoretical inside the States; if the government doesn’t work quickly to reach out to innovating communities, they may locate elsewhere.
That work’s difficult, however, as Congressman Foster notes, because the underlying technology is a moving target. “On the Congressional Blockchain Caucus, we focus on understanding the broader policy implications of this rapidly-changing field,” he said. “It seems like every month I hear some new and interesting use case of blockchain we should be exploring.
“And it’s bigger than one country. The area where we’re going to need collaboration among the free democracies of the world is in having a secure digital ID for citizens who want it. This comes up again and again, and it’s coming up with the need for vaccination passports. How do you recognize if they’re fraudulent or not? The starting point for that has to be associating it with a unique identifier for a human being, essentially a digital passport. For that to work, the owners of digital passports have to be biometrically deduped – so you can’t get five different passports in different countries – and that’s a very sensitive discussion between countries with different levels of trust.”
Ultimately, the key is going to be coming to a consensus on precisely what shape regulation needs to take. Whether that takes the shape of largely self-regulatory bodies, sweeping policy shifts, or something else remains to be seen: but finding that point of commonality to work toward is going to be critical.
“You have to liberate the people who are building these assets,” Kaal said. “The developer community is underrepresented, across the board. We can’t build this based on the decision of some centralized company deciding. We have to be chasing innovation. And I know how hard this is, but I think what’s needed is a recognition that you let developers thrive. If you crush that community, don’t allow them to flourish – I’m very worried for the future.”