Former Crypto Regulator: Prudential Regulatory Framework Is 'Extremely Necessary' and 'Overdue'

A former crypto regulator for the New York State Department of Financial Services is taking a new role at crypto Custody Tech company. Firelock. Joining us now to discuss is Firelock director of Digital Identity, Peter Martin. Welcome to the show, Peter. Thanks for having me. Thanks for being here. All right, former regulator. Now you're working in the private sector, talk to us about what you're going to be doing at fire blocks. Sure. Thanks for having me. So this is a new role created by fire blocks of digital identity in this capacity. I will be working alongside Chetana Konda who's, you know, one of the premier cryptographers in the space to help build out an on decentralized identity platform within the fire block stack. Um So uh really an opportunity for me to leverage a lot of what I've been doing on the regulatory and policy side alongside what Chetana has been doing on the Zero Knowledge Proof and cryptography side. And we, we kind of that, of course, always comes under criticism when a regulator goes into private sector for an industry that they regulated. Uh you say you're leveraging what you've done. Is there any relationship that fire blocks will then have with regulators that you'll be involved with. Sure, it's an interesting question. I mean, ultimately, this is a product role. So I'll be working in, in many ways to build a lot of open source and interoperable channels with other entities. Uh Chetana similarly has a lot of background in working with other industry standard setters. So in this capacity, it's really a product role for me to help build uh globally across the fire blocks network. So this is a really good opportunity for me to kind of leverage a lot of what I've done, not just at DFS, but in the past around what does good look like in the context of best practices for industry best practices for regulatory standards. And I think apply a lot of what we've done across the industry and within the policy space with anti money laundering, consumer protection, compliance and risk management to rebuild on top of that stack here, Peter, you know, it's interesting you're working on decentralized identity, maybe just for our audience unpack what that means for, for the everyday man on the street. And then I'd love for you to add, just given your background and your experience what regulatory roadblocks you see um for the development of decentralized identity. Sure. Um So maybe I'll take the, the second part first. So if we think about what the current regulatory landscape looks like, I think that there was a lot of perception in the past few years that, you know, the crypto space does not align with, you know, what regulation looks like. And over the past few years, you know, one good example would be in my time at DFS, we produced the Blockchain analytics guidance and really what that did was to help illustrate. And I think this was clear to the licensees at the time, but in particular, are helpful for applicants to say, hey, how do we harness the existing technology available to us through Blockchain technology? Being able to look on chain to see transaction flows, understand customer identity in a way that allows us to meet existing regulatory requirements, whether it's customer due diligence, transaction monitoring KYC. So if you take that analog for Blockchain analytics and guidance to the digital identity space, imagine a world where if you are going to the bar, you have to show a driver's license that shows your date of birth. But a lot of these regulatory requirements are really specific. So what we're really trying to do is leverage some of the other capabilities akin to what we've done with Blockchain analytics. What we are seeing unfold in the travel rules space and other applications of actually using the on chain applications here in a manner that allows us to basically say, hey, rather than show the driver's license, let's show a verifiable identity that says, hey, person is above the age needed to enter this bar So we don't need to show the whole driver's license, but we can demonstrably prove on chain through zero knowledge proofs that this person is above 21 therefore can enter the bar. So that kind of as an analog for how we are thinking about use of really specific and evolving tech, whether it's cryptography, zero knowledge proofs or otherwise in an interoperable way to get past through some of the hurdles we've seen in kind of applying this tech on chain. What kind of demand though do you see for it? So I would say a few different things. So you know what we, what we're seeing right now is an increasing number of use cases for on chain activity. So, you know, fire blocks bread and butter, of course, safekeeping of customer assets in the secure environments. It's public that you know, there was a recent acquisition in the asset tokenization space. So I think that there is a lot of pent up demand being able to build on chain. And one of the struggles has been, how do we do this in a way that preserves customer identity doesn't create honey pots and can be regulatory compliant in the same way. So even in the few weeks, I've been here a lot of questions and a lot of interest in, hey, how can we build some of this on chain? How can we do this in a compliant way across a range of different use cases how long do you think it is before I walk into a bar? And I'm showing, uh, my ID in the way that, that you just described. Uh, listen, I, I think it is a really interesting question that will have many different answers in many different jurisdictions. So, you know, one of the things that we're, we're discussing both with clients and prospective clients is, you know, where is the need right now? I suspect there will be certain jurisdictions that are leaning a little bit more forward with respect to regulatory sandboxes and really experimentation. So I cannot promise you that you will have a verifiable credential to walk into a local bar here in New York anytime soon. But I do think a lot of the underlying tech will almost be something that you see in the back end. So you might not be aware that you're using it, but it's something that we can integrate across the fire block chain and platform and increasingly, you know, work with other players in this space in a manner that, you know, reduces customer frictions. So you're not needing the on board across three different entities to do the same type of activity as well as reduce the burden on the back end for institutions. As this tech is able to do things that, you know, in the traditional financial services space, we're not used to a a and uh in terms of development and, and sort of to the question that I asked earlier is what's the demand? Uh How are you seeing this space in general evolve uh to, to require demand for such uh uh uh for, for such uses? Uh What, what exactly is going on? Because obviously, we're seeing the price of Bitcoin, as we said in the previous segment doubled this past year. But yet, it doesn't seem that activity in terms of development activity is where it was earlier. So can you explain a little bit how that plays into uh product development here? Sure. So, so a number of ways to answer that, I think the first thing is when we, I think what people are really clamoring for real world use cases for activities. I'm not going to comment on price but you know, as we think about some of the applications and where people are actually using different types of cryptocurrencies. I think stablecoins is a really good example where you have the ability to seamlessly near instantaneously move value across different jurisdictions if you can do so in a regulatory compliant way. So with you about the appropriate Blockchain analytics and the appropriate safeguards between institutions that you can do that. So I think there's a lot of building going on behind the scenes right now that we'll see, you know, coming to the front as we get more regulatory clarity globally. And you know, whether it's through asset tokenization of real world assets or being able to move more of your identity with you as you move across the internet. This is a space that's got a lot of room to grow. We just wrapped up coin desk's state of crypto conference in Washington DC. We spoke to lawmakers regulators there. And so I got to ask you since we're just coming down off of that energy, what you think the most important piece of legislation that's missing for clear regulatory guidance for crypto is, uh, listen, I'm, I'm just two weeks away from New York DFS. And so I would encourage folks to go look at the guidance and regulatory requirements. We've New York has had in place for the better part of a decade. Uh The work superintendent Harris and the team have done there is really tremendous. I, I think, you know, a lot of times people focus on, you know, what is the right statute, what is the regulation? But I think there's also something to be said for, you know, people putting in the work in terms of examinations, ongoing monitoring and the licensing process. So a lot of the conversations I've had with regulators has been like, how do we do the thing once we implement the regulations to the actual question? I think, you know, especially here in the United States, a true prudential regulatory framework that we have in New York is extremely necessary and overdue in the manner that we have in New York. We've seen a lot of states build in this space in the absence of a true federal framework. And, you know, when I, when I think about the role that I was in for the past two years before fire blocks, it is how do we keep customers in, in a solvent, like operating with companies that are solvents that are safe for cybersecurity purposes that are preventing anti money laundering and, you know, fostering, you know, consumer protection environments. So as, as we look at statutes, I think it's really important to keep those based principles and minds and I think we've got a great model at DFS to build on. So, you know, when I think about my work to translate at fire blocks, a lot of that is, you know, cybersecurity is in the core DNA of what fire blocks does. So being able to stack on top of that to allow for secure instantaneous transfers and move more activity on chain through secure identity channels is really where a lot of the world is moving to within the crypto space. All right, Peter, we are all out of time. It was a pleasure chatting to you. Thanks for joining us and congratulations on the new role that was Fire Block's Director of Digital Identity. Peter Martin.