On Friday, May 31, the Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (known as “FinHub”) hosted a FinTech Forum at its headquarters in Washington DC. The day-long event, spotlighted distributed ledger technology and digital assets. It comprised several panel discussions, punctuated by remarks by the Director of FinHub, Valerie Sczepanik, SEC Chairman, Jay Clayton, Director of the Division of Corporation Finance, William Hinman, and Director of Compliance Inspections and Examinations, Peter Driscoll, in that order. These key regulators offered clarifications and guidance on the existing federal securities law regulatory framework, thus demonstrating their openness to connect with the blockchain community and their desire to spur emerging technology innovation.
The event was notable, laudable even, for bringing together practitioners and regulators for engaging discussions on an array of topics, including: capital formation, trading and markets, and investment management for distributed ledger technology.
As I boarded the train heading back to Delaware, I contemplated the many insightful points made during the day. With a 2-hour journey home, I reflected on the panelists’ pervasive focus on cryptocurrency and public blockchains, the inevitability of confidential or private information on public blockchains, the interoperability of blockchains, the promise of decentralized exchanges, and the need for custody solutions. I also thought about what went unsaid.
The blockchain universe is vast. It would be impossible to explore every facet. Even so, I considered what wasn’t discussed (or mentioned only fleetingly) at the event, and why that was so. And with a little help from my friend Lewis Cohen, from DLx Law, I compiled this list of unexplored topics:
- Scalability and latency of public blockchains
For all of the discussion about public blockchains, there was little mention about the real life challenges in using this technology. The panel discussions instead focussed on what could be and not the current reality. No doubt the current thinking is that these problems will be addressed if not now, then very soon.
- Energy consumption and transitioning to proof of stake
“Proof of work” blockchains require massive amounts of energy. But it was not addressed at the event. Of course, it is a recognized problem, which is why “proof of stake” and so many other consensus mechanisms are being developed. Yet there are very limited examples of these alternative consensus mechanisms working successfully at scale.
- Wyoming
There was a thoughtful and thorough discussion of how custodians might protect digital assets which drew on the massive amount of work done recently in Wyoming, but nobody mentioned the groundbreaking state-level legislation there, nor Caitlin Long, its champion and lead architect. Perhaps the panelists thought is was not in good form to bring up Wyoming’s bold (and as yet untested) regulatory structure in a federal forum.
- Decentralized finance
DeFi is one of the buzzwords of 2019, but it hardly got a mention at the event. I suspect the reason is that the panelists weren’t asked about it, or perhaps they didn’t have direct experience with this nascent field. Still, DeFi raises important regulatory questions, including how long a truly decentralized (i.e., purely algorithmic) financial market participant would be handled.
- Using crypto to secure loans -- and the rehypothication of digital assets.
This is another hot topic. But it didn’t come up in conversation. It’s also highly controversial, which is another reason to avoid this topic in “mixed company” (regulators and non-regulators). The fact remains, though, that bitcoin and other non-income producing digital assets represent idle capital, something abhorred by nature almost as much as a vacuum, so this is one topic unlikely to go away.
- Use of blockchain technology in machine-to-machine transactions
This is a very important topic, and one likely to play a critical role in the overall development of the space. But it is not directly part of the SEC’s domain, and the panelists likely were not looking at this subject.
- That average people are not engaging with crypto
The reality is that use of blockchain, cryptocurrency and decentralized applications (dApps) has not reached the mainstream. Only a very small group of people are engaged with digital assets. The SEC focuses on protecting people who invest in securities. But we also need to talk about how to make digital assets and blockchain-based applications relevant to everybody. If those in the blockchain community can’t find a way for digital assets to deliver value to our friends and family, then they will largely become an artifact of a promise that never materialized.
- Stable coins
Almost out of nowhere, so-called “stable coins” have taken on a life of their own. Frankly, I find them wholly uninteresting. But they serve as bridges between fiat currency and the digital world, which is an important role. Strange that they were not probed to any meaningful extent (holding aside a short reference to their close cousins, central bank digital currencies).
What does all of this mean? There is a swell of excitement for digital assets which continues to grow. And yet, much of the discussion at the event was aspirational. This tells me we are still very early in the space. Clearly, the SEC wants to get the regulations right, and is carefully considering how best to navigate this new wave of securities. The SEC openly encourages cooperation, soliciting the experience and knowledge of the blockchain community. Seeing regulators and blockchain thought leaders sharing ideas on stage (and mingling offstage) gives me hope that we are creating the path that we need right now to innovate and secure our future together. Combining what was said with what wasn’t, it is clear that there is a great deal more in the world of blockchain still to come.
