The presence of prominent companies and individuals in the digital asset space, such as Galaxy Digital (Mike Novogratz), Gemini (Winkelvos twins), Cumberland (Don Wilson), John Tudor Jones, Hehmeyer (Chris Hehmeyer), (heck even Mr. Zuckerberg is bent on getting in with Libra), is the reason you can, with some comfort, place the chance of a draconian change of US government stance toward digital assets in the “Unlikely to Happen” column. In the US, you can be relatively assured that the digital assets space will be permitted to develop without drastic government interference.
To be sure, we have all seen the breathless headlines and heard some windy speeches. But the regulators have indicated by their words and relative inaction that the current rules are sufficient to govern the space. For the regulators, it has been more a matter of applying current precedent to a new asset class and adopting a wait-and-see approach if there are details that need to be specifically addressed. Many of my fellow lawyers will be quick to tell you that it’s all in the details. It will take time to work out the details, but this relative uncertainty also offers opportunity for the bold.
Perhaps the biggest issue from a government regulatory perspective is money laundering suspicions hovering over the space. This has kept the banks on the sidelines. This is also not just a US concern, but a global first world one as well. We and our fellow competitors feel that we will be okay as long as we perform standard due diligence and comply with applicable rules and best practices. While it is probable that more specifically-tailored regulations will be imposed, such as requirements to do blockchain surveillance, off the shelf tools already exist for this so we tend not to be too concerned. This may be a larger concern in the retail space. In the institutional space like ours, the time to sale is lengthy and we truly get to know our customers. In the end, this is why a start up company like Drawbridge Lending is allowed to open up and compete and that is precisely why us forward looking entrepreneurs think that we are ahead of the game and, hopefully, in prime position when the markets develop and expand.
The SEC has been very slow to issue guidance and rules with respect to digital assets and markets, and within that vacuum all that speaks for the SEC at the moment are a couple of speeches and enforcement actions, primarily against illegal coin offerings on the grounds that they were unregistered securities offerings. I posted a couple of blogs on this topic before if you’re interested. The SEC has yet to authorize a cryptocurrency ETF primarily on the basis that the pricing/valuation mechanisms are not transparent enough. In addition, we understand there is a backlog of applications for digital asset related registrations. These will be processed in due time but at the moment there does not seem to be any urgency to address the backlog.
The future of the SEC is a bit murky with a presidential election and a succession underway. Over the weekend, the head of the SEC, Jay Clayton, was just nominated by Trump to be the US Attorney for New York City. Succession at the SEC can take upward of a year and with a presidential election upcoming nothing will happen on a successor at the SEC until next summer.
Our friends at the CFTC are a bit more far-sighted and have already indicated that cryptocurrencies, like Bitcoin, are commodities. That is why we see standard exchange-traded futures and options on BTC offered at CME and Bakkt and other startup exchanges. We now have futures on ETH at ERISX (see my blog about this). We are already seeing derivatives volume migrate from the unregulated offshore exchanges, such as Huobi and Deribit and the like, to the more regulated environment. (See Jason Urban’s blog about record CME BTC options volumes). It is just a matter of time until these markets mature and seek safety and creditworthiness. Again, we are at the forefront of the new horizon.
Finally, we saw the Federal Reserve/Treasury start to awaken this spring. Trying to get stimulus dollars out to citizens exposed some issues in the current banking system. There were long delays with payments. There was a fairly serious attempt in Congress to introduce a digital US currency and use it as a means to disseminate the stimulus. It was a bit premature and left out of the final bill but we should see further attempts at implementing a USD digital currency sooner rather than later. Every taxpayer has an account at the Fed. It’s a matter of building a blockchain and using that account structure to create a large distribution network directly between citizens and the government. And let’s not forget the fact that from an economic competitiveness perspective, the imminent issuance of a yuan-denominated digital currency only serves to push Congress even faster to that end.
Have we seen the end of intermediary banking? Maybe, at least on the retail side of things. Given the massive amount of free money and free money policies, we feel that it will expose fault lines in our economic systems that will require innovative modernization and result in long-term systemic changes to the financial system and central banking.
Taking into account the uneven, imperfect state of US regulation, it is natural to see risks and uncertainty. New technologies and systems will always strain the status quo regulatory environment. But the uncertainty is not a portent of drastic changes. Rather it stems more from the relative immaturity of the marketplace and its actors. Yes, this industry is the wild west in some respects. However, with a firm grasp of current legal and regulatory precedent, steering clear of rocks and hard places is entirely plausible as long as you insist on avoiding shortcuts and taking the time to understand the long-standing requirements. The details may change but the general concepts and principles will continue to be applicable. This is our credo at Drawbridge Lending.
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