Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Chana Schoenberger (00:00):
Hi, I am Chana Schoenberger. I'm the editor in chief of American Banker, and I have with me here Margaret Butler, who is the head of the financial services practice at the law firm, BakerHostetler. Welcome.
Margaret Butler (00:12):
Thank you very much, Chana. I am so excited to be here for Digital Banking 2025.
Chana Schoenberger (00:17):
So tell me what it is you are doing in DeFi right now. What's going on?
Margaret Butler (00:22):
So I am watching with bated breath because the regulators are in a flurry of activity, and I'm excited for the things that they put forth so far in order to implement the January executive order. And I'm also excited for what I believe is coming before the end of this year. The most exciting thing that I've seen happen just this past Thursday. The SEC issued a statement that staking activities on proof of stake networks are not securities, and therefore they don't require SEC registration. This is huge. Previously, the SEC had been legislating by enforcement and they had taken a very broad definition of what a security is. This is now a use case that is clear and defined and is going to open up a lot of activity
Chana Schoenberger (01:23):
That's enormous. So what could this mean for banks and for payment companies?
Margaret Butler (01:29):
So I think bank and payment companies had been hesitant to adopt blockchain-based technologies because of the regulatory uncertainty. But the technologies are excellent. The technologies are fast. They offer enhanced transparency. They're just very efficient. So if banks feel more comfortable that it is lawful to engage in these activities, and there's a clear roadmap, I expect to see much broader FinTech adoption this year.
Chana Schoenberger (02:06):
That'll be enormous. What will this mean for things like stablecoins?
Margaret Butler (02:11):
So I think stable coins are something that's being addressed. I don't think this particular announcement goes directly to stable coins. However, I am seeing a lot of interest in stable coins. I'm seeing M&A activity with respect to stable coins, because I think stable coins are just the most logical bridge between DeFi and traditional finance. They're really an on-ramp and an off-ramp, and they create the opportunity for those two financial systems to interact.
Chana Schoenberger (02:46):
It's going to be so interesting to see what happens next.
Margaret Butler (02:49):
I am incredibly excited. Another regulatory development over the past six weeks is the Office of the Comptroller of the Currency put out guidance permitting, essentially,a banks to custody crypto assets, which is another area we had been waiting for. This is going to particularly impact investment funds, and once we have additional clarity around that, we can also just expect more investment activity into these assets. So again, I think we are going to finally bridge DeFi and traditional finance with this additional regulatory guidance.
Chana Schoenberger (03:33):
So is this 2025 is going to be the year that crypto goes from a bro thing to a real bank thing?
Margaret Butler (03:40):
I want to say yes, but I think it's both, right. So I think we're seeing the maturing of the DeFi industry. We're seeing M&A activity within the industry, which I think will be helpful because right now there were very ad hoc technology stacks underpinning a lot of the applications, and that introduces risk to the system. So I think we're seeing some maturity, some M&A activity, which will help DeFi be a more robust product. And we're also seeing a lot of interest in stable coins and a lot more guidance and positivity from the regulators, which I think will definitely allow banks to feel comfortable using blockchain technologies.
Chana Schoenberger (04:37):
So one thing that I've heard from banks is that, and this was not in regard to defi, this was actually in regard to KYC and other sort of bank regulation, supervision issues, is that they're a little afraid to change their procedures because even if the regulators are okay with it now, there's no telling what regulators in four years are going to say, and they might look back and say, oh, well, you dropped all your KYC guardrails. I know the government told you to, but we're the government now, and that's not okay.
Margaret Butler (05:04):
So I think that's a fair point, and obviously the financial services industry being so highly regulated needs to be very cautious. However, I do think the technology is sort of inexorable, and it's not just the blockchain technology that will be relevant to A-M-L-K-Y-C, it's also artificial intelligence technology. There are already applications of AI that can drive down the costs of A ML and KYC dramatically, and those are just efficiencies that banks will have to adopt, right? Because as soon as they can't afford not to online, they can't afford not to.
Chana Schoenberger (05:43):
Yeah. That's another thing that I'm really interested in is the intersection between DeFi and AI. I think it's sort of like the world getting completely taken over by software.
Margaret Butler (05:56):
So you always raise a very interesting and sobering point. I mean, I think the idea of the world, it's a little scary, right? It's a little scary, but I think in addition to being a little scary, I do think, and I'm not a technologist, I'm a lawyer, but I do think those technologies go together. I think the blockchain's ability to be used to trace and authenticate really compliments AI's ability to generate and solve problems more quickly. I also think venture capital investment is going to drive a lot of this innovation, and just as blockchain had its moment, I think AI also had its moment. And I think now people are really interested in how those technologies operate together. I can see an agentic AI layer on top of blockchain technologies really helping to solve a lot of the centralization and governance concerns if we can fully automate the process.
Chana Schoenberger (07:07):
If it works.
Margaret Butler (07:07):
If it works.
Chana Schoenberger (07:08):
Yes. That sounds really interesting. I mean, it's sort of like the irrational exuberance phase is almost over, and now we're at the phase where we're thinking about how we can actually use the technologies within financial institutions not to blow the whole place up or have cartoons of apes, but just things that actually make banks work better.
Margaret Butler (07:29):
Absolutely. Yes. I am very excited for these applications. But you again, raised a very important point, which is people want to create technologies that work well. When they acquire, they want to acquire technologies that work well, and there are risks just as the financial services industry has had to deal with risk traditionally with these technologies.
Chana Schoenberger (07:56):
Sure.
Margaret Butler (07:57):
The primary risk, I think, is technological, right? You want to make sure the technology works well. You want to make sure that it's not vulnerable to hacking. That remains a huge problem, even though DeFi is supposed to be resilient to that, but that's not the only area. Data privacy is going to be very important. What's interesting about finance and about DeFi is kind of the vast set of regulations with which those products have to comply.
(08:28):
So we're talking Federal Bank Secrecy Act, right? We're talking kind of supernational concerns that people have about money laundering. And then we're talking just on the ground, like consumer protection laws,
Chana Schoenberger (08:44):
Which are different in every jurisdiction. And especially now in the US, there are going to be, it looks like there will be fewer consumer protection laws at the federal level, but some states are still very serious about them. New York, for instance, they have stepped up and they seem to want to take a more national role,
Margaret Butler (09:00):
That's right. And so I haven't seen it yet in the blockchain space, but absolutely in other areas. We're already seeing the states try to level up their regulatory game to address what they see as changes at the federal level. And that makes things harder in a lot of ways because it's easier to comply with one set of regulations than 50. I think we will get a clear roadmap from federal regulators, at least from the SEC, hopefully by the end of 2025. And if we can get a few years of traction before any other potential changes in regulation, I think that will give the industry a great headstart.
Chana Schoenberger (09:46):
Great. Well, thank you so much for joining me here. I really appreciate having you in.
Margaret Butler (09:50):
Thank you so much, Chana. This has been fun and enjoy the conference. I'm very excited for it. Thank you.
