It’s time to reset the crypto opportunity

The writer is CEO and Chairman of BNY Mellon

The events of the past few weeks offer a cautionary tale for anyone following the crypto space. Blockchain technology and the resulting crypto-assets were built on the promise of a revolution in finance but, amid the latest market turmoil, it’s time to reset and examine the opportunity.

Cryptocurrencies have dominated the headlines, but they represent only a small part of the digital asset world. To fully realize the untapped potential of the emerging digital asset ecosystem, it is incumbent on public and private sector leaders to work together to accelerate a smart regulatory framework that unites traditional and digital asset systems, anchored in two fundamental principles.

The first is the recognition that regulation should allow the financial sector to cautiously embrace innovation.

Over the past two centuries, the world has seen many generations of fintech. Representations in digital ledgers of traditional assets such as cash, bonds and stocks could be a big step forward, as the original computer ledgers and real-time payments came from paper before them. This can lead to improvements in record keeping accuracy, easier management of certain types of assets such as real estate and loans, and faster and more efficient settlement.

The distributed ledger technology underlying crypto-assets can be used to support new market infrastructure that provides benefits to the financial system. Central bank digital currencies and token bonds being explored by major jurisdictions are just a few examples of efforts to harness the benefits of this new technology.

Last month, the Federal Reserve Bank of New York and the Monetary Authority of Singapore announcement a joint effort to investigate how central bank wholesale digital currencies can improve the efficiency of cross-border wholesale payments involving multiple currencies. Exploration and innovation around digital ledger technology should therefore be encouraged, not punished, in future regulatory frameworks.

The second principle is to maintain the core principles of client protection, orderly markets, and clear regulatory guidelines, regardless of the new technology, asset class, or type of entity serving it.

Our established frameworks for market health and safety in the United States are the result of a series of depressions. Although the progression of banking and securities regulation has not always been linear, it has remained rooted in these principles. Digital assets operating outside of these principles risk undermining the wider financial system.

The fallout from commingled client assets, poor disclosure, and missing internal controls should remind us that while the cast of characters and products may change, the scenario of financial market mess remains painfully familiar.

Although technology has evolved, there are established concepts that should apply to all market participants and all assets, regardless of their technology envelope. These include good governance, segregation of client assets, maintenance of clear records, security and technology standards, capital and liquidity requirements, limits on the effect of extreme leverage, anti-money laundering protections, strong risk management and regulatory safeguards.

Today, banking establishments already operate within a regulatory perimeter. While conferring both privileges and obligations, this perimeter instills what is arguably the most important currency of the global financial system: trust. Investor and public sector confidence stems from the knowledge the game has of the rules.

Without confidence in our financial system, we will have nothing of use. Worse, without the resulting trust in the system, we may remove the opportunity to adopt exciting technology that could help drive the industry forward.

With a majority of institutional investors interested in tokenization, distributed ledger technology could represent the next financial frontier. Some elements of the digital asset space have confused disruptive innovation with generally disruptive behavior, but they shouldn’t be allowed to spoil the opportunity for everyone.

A comprehensive regulatory framework is needed, but much of the foundation already exists and can be extended from the regulation of traditional assets.

There is a way to find. We must embrace digital asset innovation and align it with established rules and measured regulatory principles to protect customers and promote resilience. In doing so, we also protect the most valuable asset of all: confidence in our financial system.