If digital currency is ever going to go mainstream, regulators will need to remove the doubt that surrounds it. But before that happens they need to understand the technology.
At a series of panels during the second day of the Consensus 2016 conference in New York City, a representative of the Federal Reserve Bank of St Louis, a former member of the White House communications team and multiple startup founders took turns predicting the future regulatory climate for digital currencies like bitcoin.
What connected each of the panels, which spanned a wide range of topics, was a distinct sense that the chasm between regulators and digital currency was only as big as the industry’s willingness to teach them.
Educating the regulators
Former spokesperson for President Obama, Jamie Smith, argued on her panel that the first step to getting a more widespread regulatory blessing on digital currency is to teach international regulators about the technology.
Now global chief communications officer at mining company BitFury, Smith is working to expand the firm’s services to include a wide range of blockchain efforts. And, true to her word, she’s engaging with industry leaders and bureaucrats to standardize the way we talk about cryptocurrency.
“Everybody wants to be part of something special and they want to talk about it. I think we shouldn’t underestimate that a lot of regulators are really young and fresh on the scene and others have been around for while, and they’d both like to have something interesting to engage with.”
By standardizing the way we talk about this new technology, she believes regulators will accelerate the rate they learn and, as a result, be less likely to react negatively to topics they don’t immediately understand.
While Smith mentioned the Blockchain Alliance as a specific example of a group able to get influential people in one room to educate them, panelist John Edge noted another option.
Edge is the founder of the non-profit digital ID startup Identity2020 and the White Chapel Think Tank, which aims to help increase trust in distributed ledger technology by regulators and policy influencers.
Edge told the audience of how White Chapel had once managed to gather about 16 representatives from the “Central Bank”, the Executive Branch of the US Government and other regulators for a conversation with Adam Back, the creator of Hash Cash and co-founder of Blockstream.
To help them better understand blockchain, Edge said, governmental organizations and companies should create sandbox environments in which they can safely experiment, then invite younger members to take leadership positions exploring the technology.
“You’ll end up with an army of young people,” he said, adding: “Before we can do those conversations, we have to do what Jamie’s talking about.”
Jonathan Levin, founder and CEO of Chainalysis, had his own strategy for doing exactly that – teaching policymakers at any organization, including large corporations about blockchain.
Instead of pursuing an “army of young people,” Levin advocated that the organization should identify a single person with at least some bitcoin or blockchain knowledge, and offer them a position as a specialist.
“What works really well for any business who’s not in this [is] to find a point person,” said Levin, who is also the co-author of a paper written to teach the British government about blockchain.
While it’s unlikely you’ll get 25 or 30 people to understand and take action to implement a blockchain strategy, one person can become a valuable leader and an advocate, he explained.
“That person usually works three times as hard when they’re given that responsibility,” Levin said.
Overcoming the banking problem
It’s not just government regulators who have been shy about getting involved with bitcoin and other blockchain applications. Policy makers at big banks have also proved wary – a fact made clear by a report released today by Coin Center.
Co-authored by Partin Valabhaneni of international law firm Arnold & Porter, the report titled “Overcoming Obstacles to Banking Virtual Currency Businesses” paints a bleak picture of the banking industry’s relationship with bitcoin companies.
Effectively, and with very few exceptions, the digital currency industry still has very little success when applying for bank accounts. And if a bitcoin entrepreneur is eventually given an account, it could take between six months and 12 months, according to the report.
“You are bucketed by many bank’s standards as a very high-risk account,” said Valabhaneni.
Though he spoke primarily to US bitcoin companies, he said most of them had global platforms that experience similar difficulties abroad.
While Valabhaneni said there’s no single industry bank or regulator to blame for the constricting conditions, he agreed the solution was education.
“We would employ banks to learn,” he said. “Many banks are investing lot of time through various labs … yet those very banks are reluctant to provide those same companies accounts.”
Not all banks are so anti-bitcoin, however. Silvergate Bank CEO, Alan Lane said his company is currently doing business with between 15–20 banks and is open to digital currency-based firms.
“We are in the business of providing service to businesses. It just so happens that bitcoin and blockchain companies are all businesses,” he explained.
To overcome objections from the bank’s board, Lane indicated that he and his team had to figure out a way to “articulate” the opportunity in a way that didn’t raise fears that doing business with bitcoin might negatively impact their reputation.
“It’s not something you’re going to talk about until you’re ready. I guess what I’m saying is we’re ready.”
Contrary to the Coin Center report, Lane said he can onboard a bitcoin company in between 30 days and 60 days. The firm’s due diligence can include a visit to the company’s office, among other things.
Xapo president Ted Rogers also chimed in with some advice to startups looking to do business with banks, with his firm being one of the better known bitcoin companies to be granted a bank account. But even with $40m in venture capital available, Rogers said it wasn’t easy.
In the early days of the application process, he said, the company may have had an “attitude problem”. After “going through the five stages of grief”, though, the team decided to play nice with the banks.
For entrepreneurs who don’t have the venture backing to afford such a learning curve, Rogers suggested they should stop viewing the banks as the enemy. Instead of going after a high-end enterprise account, founders should be willing to start slowly with something smaller, teach the bank about their service, then add more complicated services later.
“I think it’s good for the virtual currency group as well, because you’re going to learn a lot.”
Digital cash for central banks
If all goes well, one of the more extreme possibilities is that central banks around the world, such as the Federal Reserve, might issue a digital currency of their own.
While this may seem like a far-fetched dream of the cryptocurrency diehards, David Andolfatto, vice-president of the Federal Reserve Bank of St Louis, suggested the idea is more accessible than some might think.
“Its essentially what we have now. Most of our money is already online anyway.”
Another hypothetical idea floated by the panel was the idea that a so-called “FedCoin’ might compete against other digital currencies, something Andolfatto said he was “hopeful” might lead to a more stable financial system, should it ever come to pass.
Simon Johnson, a professor of entrepreneurship at MIT’s Sloan School of Management, said that perhaps non-central banks might run “their own private version of currency with increasing ease.”
“You’ve also got to think about before 1914,” he added, in a reference to the founding year of the Federal Reserve.
Instead of being a threat to the Federal Reserve, Johnson said that a FedCoin would simply give the bank another tool, adding:
“Its really just another denomination of currency.”
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