In a webinar yesterday, Jay Clayton, Chairman of the U.S. Securities and Exchange Commission (SEC), observed that all stock trading is now electronic, compared to twenty years ago. In the past, there were stock certificates, now there are digital entries. “It may very well be the case that those all become tokenized,” said Clayton. Along with Brian Brooks, Acting Comptroller of the Currency (OCC), he took part in a Digital Chamber of Commerce event, “Two Sides of the American Coin: Innovation & Regulation of Digital Assets”. A full transcript is available here.
True to the event’s title, both regulators were keen to recognize and encourage innovation, but within limits.
The point Clayton was making is that the technology might change, but the principles underlying certain activities’ regulation remain the same.
“One of the problems that we had, was we got off on the wrong foot in this innovation,” said Clayton. “There was the theory that, because it was so efficient because it could have so much promise, we could toss aside some of those principles of responsibility and transparency. I think now three years later, four years later, we are in a much better spot.”
He was keen to point out that the promise of blockchain technology and distributed ledger technology (DLT) is now being seen in terms of the efficiencies it brings.
Turning to the OCC, some might be surprised that Brooks, a former Chief Legal Officer of Coinbase, sounded dismissive of many cryptocurrencies. “The original concept of Bitcoin and all of these other innovations was not supposed to be to create some made-up investment asset,” noted Brooks. Indeed, the ICO boom was ignited by Ethereum to attract users to the new network. In 2017, at the height of the cryptocurrency bubble, the move was something Vitalik Buterin openly questioned, even regretted.
Brooks articulated his vision of the shift. “What we think is going on is the idea that networks are fundamentally more resilient and efficient than vertically integrated sort of control towers.”
The centralized model created “single points of failure,” said Brooks. “If a bank went down, really bad things happened. We saw that in the financial crisis. All it took was one Lehman Brothers and the end of the world as we knew it arose. Same thing if a bank data center gets taken out in a hack. That bank may be unavailable for days creating chaos in markets.”
He compared that to blockchain networks.
“Networks don’t behave that way. And what crypto tokens are fundamentally about is they’re supposed to be the assets that are powering networks. They’re the things that are incentivizing people to connect to the networks, such that the functionality of the network, like the internet becomes very stable and resilient over time. So we see this as more of an infrastructure issue than an investment asset issue in its maturity.”
Brooks continued: “In the mature phase, what you have is a radical new payment system that may be better than existing payment systems, which are built on antiquated technologies.”
However, he acknowledged that we’re not there yet, and given it’s still early days, you have speculators.
His vision is a “medium-term future where these blockchain networks that have been built are basically the internet of finance.” Hence blockchain is a “mindblowing challenge to the banking model,” said Brooks.
But he’s not abandoning banks and said the regulator’s responsibility is to chart a course for banks in this future.
Both the regulators spoke about their collaboration in issuing guidance for banks to custody deposits for stablecoins. Brooks said they both want to promote American leadership.
And he continued to fly the flag by contrasting America’s strengths with China’s, mentioning the digital renminbi. “If they want to dictate that we’re going to have this kind of a currency, they can do that tomorrow. And we can’t do that because we’re a democracy and everything else. So that’s never going to be our strength.”
Brooks continued: “We’ve already built a bunch of real time payment systems. It just wasn’t the government that did it because that’s the magic of America. We’re the people who will deliver you eight different flavors when the Soviet Union would deliver you one.”