Type to search

Articles Trading technology

Giving Tech a Lead Role in Crypto Policy

By Mike Castiglione, Director of Regulatory Affairs, Digital Assets, Eventus

Crypto policy debates often get portrayed as warring sides battling over values. Not unique to crypto, policy formation is nearly always an exercise of identifying and balancing trade-offs. Common trade-offs in policy are:

  • Individual rights vs. common good
  • Innovation vs. safety
  • Continuity vs. new paradigms
  • Protect downside vs. capture upside

The tension is giving up something to gain another. Yet there’s one element, one variable, that gives more options. And that’s technology. In economics, tech pushes the frontier curve outward. In business, it opens up new markets. In politics, it can make multiple constituencies happy. And in regulation, technology allows us to achieve safety objectives without stifling innovation.

Of course, technology requires wise decisions and skillful application. But when it works, it empowers and it makes difficult decisions easier. So where is technology in crypto regulation?

A Crypto Upgrade

 Mike Castiglione, Eventus

Technology should be at the heart of the crypto policy debate. Crypto itself is a technology—Layer 1 and Layer 2 blockchains, dApps, zk-SNARKS, other engineering pieces—make distributed networks work in practice. Yet crypto technology also includes the supporting capabilities that make it all useful for more people long-term. The current Internet needed anti-virus, two-factor authentication, encryption, and penetration tests. Likewise, a new suite of tech is available to give crypto an upgrade in its trust and safety.

Eventus is part of this ecosystem with trade surveillance that detects fraudulent trading and transaction monitoring to help companies manage financial risk. This supporting tech universe includes blockchain analytics for financial crime investigations, code audits to make sure smart contracts perform as designed and custody services to secure private keys.

Policymakers who are aware of these supporting capabilities learn they have expanded options. They can opt for more flexible, principles-based regulations versus having to list out specific rules. And they can lean on private self-regulated organizations. Companies who use this supporting compliance tech get to build their businesses with trust and transparency baked in and send a strong positive signal to customers and regulators.

Navigating Regulatory Uncertainty

For crypto, there is regulatory clarity on anti-money laundering (AML) and, in leading jurisdictions, the need to monitor platforms for abusive trading. The E.U.’s pending Markets in Crypto Assets (MiCA) regulations, along with current rules in Abu Dhabi, Dubai, Hong Kong, and crypto-friendly Bahamas all require monitoring to detect market abuse. Most draft legislation or rules in the U.S., U.K. and Australia include some form of market surveillance.

Yet rules are still being written. Given crypto is an emerging industry, we will be operating among regulatory uncertainty for the foreseeable future, even if baseline legislation passes in the United States. When I served at the C.I.A., we often dealt with ambiguity and had to make purposeful, measured decisions within a fog. The reality is that when faced with uncertainty, a strategy—whether business or national security—must plan for a range of scenarios.

So the best way to operate now is to focus on what is controllable. One simple framework to follow is People, Process, Technology.

  • People: Seek out experienced talent who are adaptable enough to apply the lessons of other asset classes to crypto. They can bridge cultural gaps among crypto, financial institutions and regulators.
  • Process: Build habits for compliance, such as doing market abuse risk assessments and creating internal standards for due diligence, documentation, escalation and reporting of market abuse cases. Much of what regulators are looking for is surprisingly process-based.
  • Technology: As outlined above, this is where the right software stack can unlock the ability to monitor data to remain ahead of potential problems.

If we fail to apply the expertise, processes, and compliance technology that works in other asset classes, crypto’s market integrity will lag behind. Companies, especially those innovative enough to move into crypto, are faster than policy and can get this right.