What the crypto sector needs is the moody blues.
We’re not talking about the band. We’re talking about how using a ratings agency model, like Moody’s, is much better than federal or state regulation to protect investors while fostering innovation.
And … blues? Check CoinMarketCap.com!
The White House has issued an all-government executive order on ensuring the responsible development of digital assets while protecting the public. Secretary of Treasury Janet Yellen’s speech at American University reinforces this balanced model.
The chairs and rank-and-file members of the Congressional Blockchain Caucus, with thought leadership from others such as Rep. Glenn Thompson (R-PA), all state the same aspiration.
A call has gone forth to establish a legislative and regulatory regime to allow the blockchain sector to flourish while protecting the public. Now … how?
Recently, legislation has been introduced in the Senate calling for applying the antique, early 20th-century, model of regulatory agencies, specifically the SEC and CFTC—to forge a regulatory future.
This is like proposing a mechanical-calculator-based solution in an era where an iPhone 13 has the power to perform 15.8 trillion operations per second.
There’s a reason that the United States Senate is called “the world’s greatest deliberative body.” But… aren’t they still debating heliocentricity?
What’s the problem? For one, the legal fees of compliance can amount to as much as half of a typical startup’s seed capital. This was noted at an Axios event keynoted by Congressional Blockchain Caucus co-chair Darren Soto (D-FL), who really gets it.
Balancing between innovation and protection is a sensitive calculus. What we are seeing in the Senate is a failure of imagination.
There’s a way to let the marketplace protect the public without stifling key innovation.
How key?
Consider what China’s Xi Jinping, said. He called blockchain the “commanding heights” of technology. And vowed to dominate it.
In October 2019 President Xi, a trained engineer, threw down the gauntlet:
“It is necessary to strengthen basic research, enhance the original innovation ability, and strive to let China take the leading position in the emerging field of blockchain, occupy the commanding heights of innovation, and gain new industrial advantages. …”
That’s key.
Protecting retail investors from getting fleeced is, yes, imperative. There’s a way to do that without proposing to crush innovation with unsustainable compliance costs.
The financial sector routinely assesses and quantifies risk in bonds. Moody’s, Standard & Poor’s, and Fitch, provide risk assessments. Per Investopedia:
“Credit ratings provide retail and institutional investors with information that assists them in determining whether issuers of bonds and other debt instruments and fixed-income securities will be able to meet their obligations.”
In crypto, far too many naïve investors have seen their life savings stolen by fraudsters and “rug pulls.” It is right to strengthen government regulatory and enforcement agencies to go after crooks. Amp it up!
That said, some naïve investors were simply victims of their own irrational exuberance, not of crooks. Retail investors deserved, and deserve, a clear assessment of risk.
The American way is to empower investors to protect themselves. Ratings that make a clear distinction between unrated (“pig-in-a-poke”), low rated (“junk”), and investment grade blockchain assets will give investors clear information, helping to restrain them from making imprudent investments.
Meanwhile, ratings agencies, being part of the market, will modulate compliance costs while still giving prospective investors what they need to know to intelligently evaluate the risks.
Such a mechanism would be synergistic with the mission of the regulatory agencies. It fully supports the regulators’ mission to protect the public while allowing the regulators to focus on their top priorities—going after the bad actors.
And it does all that while optimizing compliance costs into the “Goldilocks Zone,” not too hard, not too soft, just right. Take that, Xi Jinping!
It’s just not useful for the blockchain sector’s professional advocates to keep calling for a regime that generically, magically, somehow protects the public while still allowing the sector to flourish.
That’s a goal to which everyone, regulators very much included, aspire. Where’s the beef?
Here’s the beef! Let our thought leaders in the White House, the executive branch, Congress, the agencies and the media encourage ratings agencies to make and prominently post rigorous risk assessments of virtual assets.
Let the regulators set the standards while the rating agencies administer them, while amortizing the cost of compliance over the full marketplace. Then, let investors make an informed choice.
Market forces are the sternest regulators of all! Bring on the moody blues!
