Former clearing head urges ‘reasonable regulation’ of crypto

Chris Perkins, president and managing partner of crypto asset firm CoinFund, says “technology has outpaced law and regulation” in the digital asset sphere, and hopes “technology is embraced via a principles-based regulatory framework.”

“I think everyone that I talk to is supportive of reasonable regulation,” said Perkins during a panel discussion at the Risk USA conference on November 9. “I also think that there’s a general theme wherever you look that the technology has outpaced law and regulation.”

Supervisors in the US are grappling with who has the jurisdictional right to regulate digital assets, while the President’s Working Group on November 1 recommended legislation should require issuers of stablecoins—whose value may be pegged to a fiat currency—to be insured depository institutions.

Perkins added that decentralized autonomous organizations—digital-based, member-owned communities not influenced by authorities—were proliferating crypto assets under management with a “democratized” model that surpassed regulation and law through use of technology. “We now have the technology to organize global groups instantaneously with treasury for a common goal, which is unbelievable,” he said.

Attributing the global financial crisis to concentration amongst intermediaries, Perkins said the subsequent regulatory response “was even more centralization through central clearing” because policy-makers were constrained by the technology of the era.

“If you step back now, and we’re honest with each other, an alternative to uber-centralization could have been decentralization and dissemination from a systemic risk perspective,” he said.

There’s a general theme wherever you look that the technology has outpaced law and regulation

Chris Perkins, CoinFund

He described technology currently used in the crypto industry as “generations ahead of what I was used to dealing with”, and said that banks not involved in the nascent space were missing out.

Perkins was formerly co-head of derivatives clearing and foreign exchange prime brokerage at Citi.

“I remember when I was in traditional finance, we used to have to take everything that we did to the reputational risk committee. Now, as I look backwards, I wonder what’s the reputational risk of not participating in a market where bitcoin itself has generated the highest returns of any asset class in the last 10 years?” he said.

On the same panel, Sebastian Bea, president of crypto asset manager One River Digital, said proposed capital requirements from the Basel Committee on Banking Supervision were a hindrance to development of the crypto industry: “If you look at [Basel], you could argue they’re saying: ‘It’s OK, but don’t do it here.’”

He added: “Look at the capital requirements for a bitcoin exchange-traded fund [ETF], which has to leverage, and which has to use futures—basically, in both cases, they’re saying you can, but if you want to do it in this traditional financial environment, it’s going to be pretty costly and painful to do.”

A third panellist was even more forthright in his criticism of the current regulatory approach.

“The current regulatory regime is really trigger-happy, and wants absolute control over everything, I think that general direction is bad for humanity,” said Gabor Gurbacs, a director of digital asset strategy at VanEck.

“It just adds cost to businesses and presupposes that governments can do things better than businesses, which is factually wrong.”

Last month, asset manager VanEck filed with the US Securities and Exchange Commission to launch a bitcoin ETF, following the first successful listing of such an investment vehicle by rival ProShares.

“We tried to get a regulated ETF to market, and the US is one of the last countries to approve an ETF, so that’s a shame, regulators are not doing enough. They just want authority, which I don’t support,” said Gurbacs.

Shadow banking

However, a fourth panelist was more circumspect about the need for crypto regulation. Daniel Tenengauzer, head of markets strategy at BNY Mellon, warned that a quasi-banking system had been created, and that there was “a very high chance of very large losses—we’re talking about $3 trillion”.

According to digital currency analysis firm CoinGecko, the cryptocurrency market is currently worth $3 trillion.

BNY Mellon has been working on a series of products to tokenize conventional financial assets, and Tenengauzer was skeptical about the sums of money being pumped into cryptocurrencies. He thought funds could be put to better use if instead invested to support the growth of small and medium-sized enterprises.

He added there needed to be a regulatory focus on stablecoins that claimed to be fully backed up by assets. Tether says its stablecoins are backed one-to-one with dollars, but was fined $41 million in October by the Commodity Futures Trading Commission over the false claims.

Tenengauzer said: “You deliver something that is not exactly what it is backed by … that’s essentially shadow banking, and as a result of that, you do need some sort of regulation.”