A decade ago New York state did something bold. The Department of Financial Services designed a special kind of limited trust charter for crypto firms, called the BitLicense. It held them to the standards of a trust company, but carved out some specialized rules and regulations to take into account the different nature of these businesses.
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A few companies were very eager for it, but many squawked loudly about it, mainly because they didn't want to deal with the hassle and cost of getting approved for it. Businesses actually left the state rather than comply. The crypto exchange Gemini, founded by the Winklevoss twins Cameron and Tyler and one of the loudest voices in favor of regulation, was the second firm to receive a "BitLicense," in 2015. A few years later it launched an ad campaign touting its approach. "The revolution needs rules," it proclaimed.
The irony of that campaign was so thick you could hang wallpaper with it. Bitcoin, the original cryptocurrency, was expressly designed to go around the financial markets, or more accurately the "trusted third parties" that control those markets. The idea was that you could, in theory, build a platform for exchange where the rules were baked into the code, where there wasn't a need for third parties. In practice that didn't work at all, which is why today crypto firms are racing to grab as much regulatory cover as they can, our Ebrima Santos Sanneh explains today. The Winklevoss twins and others clamoring for rules were right. But in becoming a rules-based industry, Gemini and Coinbase and the others are themselves third parties that require some level of trust from their customers. And if there is one thing the history of financial markets teaches, it is that without really clear, good rules, there isn't much trust. The industry gave up the thing that made it different, the attempt to automate trust.
Looking at it broadly, there really is no major difference now between crypto firms and banks. Both deal in trust. Both need to be regulated to guarantee trust. "If a digital asset exchange goes bankrupt, customers have no guaranteed right to their own assets," Wyoming Sen. Cynthia Lummis wrote yesterday on Twitter (I know some people, including its owner, like to call it X). "If a digital asset exchange goes bankrupt, customers have no guaranteed right to their own assets." Now, she's not wrong, but in case you missed it when I said it above, I'll repeat it: cryptocurrencies were designed specifically, consciously, purposely, to get around trusted third parties. That was the entire point. Now the market is almost nothing but trusted third parties, all of whom are also clamoring for legal protections. The revolution got rekt, in crypto parlance.
Meanwhile, the stodgy, boring old tradfi's have spent years figuring out the technology. Earlier this week, Mastercard, the big, global credit-card company, announced it had been granted a BitLicense from the NYDFS, as our John Adams reported. Mastercard said that it applies for any regulatory charters that would proscribe its business wherever it operates, but it also saw the BitLicense as giving it a competitive advantage. Sofi, too, built a proprietary stablecoin and released it this week to all its customers. Melinda Huspen wrote up that story. But the really interesting endeavor to watch is something called Project Agora, from a consortium led by the Bank for International Settlements. Agora is a digitized platform for cross-border payments, and it looks like it might be a better version of what the crypto industry has failed for a decade to build itself.
Project Agora comprises central banks including the Bank of England, the ECB, and the New York Fed, and private banks including JPMorganChase, Citi, HSBC, BBVA, Mastercard and a bunch of others. The group announced earlier this week that it has built a prototype that allows for multi-currency cross-border settlements using tokenized central-bank reserves and commercial-bank deposits. The prototype, they say, showed that a blockchain-based network could work at scale that "meets policy, business, legal and regulatory requirements." They also hinted at enough roadblocks — information sharing, privacy, cybersecurity — that the prototype doesn't appear anywhere close to production. But the bottom line is that while the crypto firms were figuring out they needed rules, the banks were figuring out crypto. Cryptos are now competing with the banking industry for customers on a level playing field, and one of those groups has much more experience building stable, successful financial networks.
