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1:52, 01 October 2018

Interview: Caitlin Long on Cryptocurrency Regulation and Why Wyoming is the Next ‘Crypto Valley’


Interview: Caitlin Extended on Cryptocurrency Regulation and Why Wyoming is the Subsequent ‘Crypto Valley’


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Note: This is part two in a multi-element interview series with Caitlin Long, a 22-year Wall Street veteran who formerly led Morgan Stanley&#8217s Pension Options Group.&nbspExtended, an ardent blockchain advocate, has been critical of Wall Street&#8217s corrupt banking practices, which she fears institutions&nbspwill integrate into their cryptocurrency merchandise and services. Read component 1 here.

Component two of CCN&#8217s Interview with Caitlin Lengthy

CCN: The entire [framework of] regulation is just a mystery to me at this point. There are so several issues that are obvious that you consider makes sense that just aren&#8217t out there as far as protections go. I think we saw a lot of that in 2008 exactly where you had these retail investors saying, &ldquoI had this much cash, what happened?&rdquo I believe there was a case where you had a savings bank losing hundreds of thousands of dollars with Lehman Brothers, that wasn&#8217t guaranteed because I consider they were a citizen of Hong Kong.

CL: I was reading an IMF paper. Sad adequate just on that basis, they had been speaking about the Lehman scenario and in the meltdown in both Lehman and also in MF Global. Although that specific 1 wasn&#8217t referred to in this IMF paper, they stated that Lehman did not acknowledge the firewalls that we&#8217re supposed to have firewalls of client assets. This is an concern for me, personally, that&#8217s a worry that I had when you&#8217ve got a brokerage firm that&#8217s going under like Lehman was, like MF Global was, even although these client assets are supposed to be ring-fenced.

Well, guess what, when John Corzine the CEO of MF Worldwide is attempting to save the firm, he&#8217s got a heck of an incentive to ignore these ring fences. These ring fences are not a literal firewall. These ring fences are just these assets that are sitting in a separate account, and folks can go to jail if they dip into those consumers separate accounts. Did John Corzine go to jail? So there you have it. There&#8217s an awful lot of moral hazard when it comes to segregation of assets. Unless the assets are segregated on an open blockchain exactly where it&#8217s transparent, and you can see that they&#8217ve not been messed with, then you can&#8217t trust that your assets are actually being custodied in the manner in which they ought to.

CCN: Do you see blockchain being used as a custodian&rsquos tool across each kind of asset class?

CL: Yes, and in truth, that&#8217s 1 of the items that I did say that was optimistic about the undesirable news that they [Bakkt] lept appropriate over the &#8220blockchain, not bitcoin&#8221 intermediate step that so many other firms are undertaking appropriate now, which is, basically, &#8220Well, let&#8217s not go all the way to natively digital assets. Let&#8217s just try to tokenize, to try to improve and reduce charges and all this duplication and reconciliation of details that we have to do amongst all the various counterparties on Wall Street. Perhaps there&#8217s a way that we can share a ledger for a toke we don&#8217t need to go completely open blockchain due to the fact we do sort of trust each other. So let&#8217s do these private walled garden-type blockchains.&#8221

In truth, truly, when ICE [Intercontinental Exchange] came out and mentioned they were embracing bitcoin, that was a game changer for me simply because that is a natively-digital asset. It&#8217s not a tokenized asset but natively digital. It in no way existed in something other than native type at its genesis moment. It only ever existed on the blockchain, and it in no way leaves the blockchain, only its ownership modifications. So that is a game changer. I believe that ICE could be tremendously profitable if it have been to adopt that as a strategy as opposed to attempting to sort of mess with bitcoin if you will and try to rehypothecate and commingle it.

Rather of attempting to do that let&#8217s go out and get natively-digital securities. As a stock exchange, ICE could be a actual leader if they said, &#8220Let&#8217s overlook this crazy structure exactly where there&#8217s 1 international security sitting in a vault at the DTCC for all of the Apple shares outstanding and let&#8217s as an alternative start off actually issuing these factors natively digital and allocated them out to their rightful owners.&#8221 So you don&#8217t have any of this commingling and rehypothecation without explicit consent from the owners of the securities. I&#8217d really like to see that, and that would be a enormous good relative to where we are right now.

CCN: But do you truly consider ICE is going to do that? I mean do they have incentive to?

CL: I positive hope so. As essential as I&#8217ve been of ICE over the rehypothecation of bitcoin, I&#8217ve been extremely complimentary of ICE as an institution. The CEO, Jeff Sprecher, is a single of the most respected people on Wall Street and some individuals would say he saved in New York Stock Exchange. He&#8217s the guy who engineered the digitization of equities markets in U.S. digital trading far more than anyone else. That saved a lot of individuals&#8217s cash. Yes, are there are downsides to it simply because you&#8217ve got things like higher-frequency trading and all the manipulation that comes with that.

It developed problems like anything else new would. Of course, we all know bitcoin has its personal troubles, as well. But is it a resolution to this overarching issue, which is that Wall Street doesn&#8217t maintain correct track of who owns what and ends up always issuing more securities than are legally upstanding since the ledger systems can&#8217t hold track. Yeah, and to me, that&#8217s a massive dilemma. And I would rather see that solved and take on the new troubles that they&#8217re obtaining natively-digital bearer assets involved than attempting to sort of construct a technique, which is what we&#8217ve been doing for the final 40 years.

CCN: 1 of the interesting items I found about ICE, in general, is&#8230Sprecher&#8217s background, he truly comes out of [the] immediate settlement market with&#8230energy policy. I imply, they were competing straight with Enron.

CL: Yeah, I knew that that&#8217s how we got to start off with electrical energy trading, but I didn&#8217t comprehend that that was instant settlement. I don&#8217t know if it is or not, I just don&#8217t know how that market operates.

CCN: Okay, I consider that&#8217s going to heavily influence his thoughts going forward. Like you said in the beginning of this interview, your background is heavily going to influence what you do. I&#8217d be genuinely interested to see how that power market place is regulated and settled to attempt to see what Ice is organizing here.

CL: Definitely that market place became a lot less manipulated following Enron, and the CFTC moved in and regulated it to a a lot higher degree, but I&rsquom just not familiar with it. I&rsquove by no means personally traded or carried out something in that marketplace, so just not certified to speak about it. But your point is effectively taken. That&#8217s exactly where he came from, and he generally acquired a entire series of crucial infrastructure players in U.S. markets and global markets. He owns what may possibly be the biggest clearinghouse in Europe. This is a international giant in market place infrastructure it is actually too large to fail. I say that both in the positive and adverse context that that indicates since 1 of the things that I wrote about in the last write-up on Forbes.com about rehypothecation and commingling is the economic regulation utilized to try to disperse credit risk about the banking program.

I&rsquom pondering that it was really going to be quite uncommon for the entire banking method to incur a run. So as long as all the credit threat was dispersed, extensively distributed, broadly decentralized way to use some of the crypto phrases that was the safest way to deal with credit danger. We&#8217ve primarily centralized it, post-monetary crisis, it&#8217s centralized in organizations such as ICE and these items are literally too massive to fail, and the rehypothecation of collateral is a means by which all of these organizations can appear like they&#8217re more solvent than they genuinely are. The difficulty is that due to the fact of the way how repo accounting functions, you have multiple parties recording that they personal the identical asset at the identical time. That is the way U.S. GAAP accounting needs the accounting for repo transactions to operate.

Consequently, it appears like each financial institutions are solvent because they both are reporting that they own the asset, but there&#8217s actually only a single asset. In a regular functioning industry, if nobody really desires to go claim their asset, then its fine, but if you get runs on the method, that&#8217s when you comprehend just how insolvent the program is. I would give hats off to CFTC regulator Christopher Giancarlo. He&#8217s been talking about this for years, and he&#8217s appropriate that the regulators don&#8217t have a way to back out [of] all that double and triple and quadruple, quintuple counting of assets to know just how solvent the method as a whole truly is.

CCN: I want to hear a small bit about how you genuinely took Wyoming and turned it into this &#8220Crypto Valley&#8221 that&#8217s now truly competing with incumbent giant Delaware.

CL: Thank you. I grew up there in Wyoming, that&#8217s the nexus and has stayed very close. I have served on charitable boards there for years, and I just knew that this was an alignment of interest in between Wyoming wanting to bring application firms into the state. It also had one particular of the worst laws for bitcoin and once we got the ball rolling to fix that bitcoin law (especially it was the income transmitter law that primarily essential the Coinbases and Circles of the globe to have to leave the state into 2015. We set out to repair that, and we ended up doing that and a lot far more, and there&#8217s going to be more to come and I believe &#8212 remain tuned &#8212&nbsp we really have yet another task force meeting in September exactly where we&rsquoll work on legislation that&#8217s going to be introduced in the subsequent legislative session in early 2019 and we&#8217re not completed, there&#8217s more going to be taking place to support this sector in Wyoming and bring much more firms into the state.

CCN: What do you think has been the most crucial as far as producing Wyoming this crypto valley?

CL: Candidly, I truly feel it&#8217s the one particular that exempts crypto from property taxes. There&#8217s no income tax in Wyoming, and there&#8217s virtually no sales tax, practically no home tax, it&#8217s the lowest taxed state in the nation and by coming out and saying that, given that there&#8217s already no earnings tax, there also is no home tax. It&#8217s quite tax friendly. That&#8217s meaningful.

Secondly, there is possibly the one that got a lot more attention, which is the utility token bill. That has run into the issues at the federal level, which is that everybody&#8217s afraid of the SEC and operating afoul of the SEC. What we&#8217ve unfortunately seen is that a lot more organizations have elected to go outdoors of the United States and domiciled their start-ups in areas like Singapore, or Japan, or Malta, or Switzerland, or Gibraltar, then organizations that are taking the SEC threat and staying in Wyoming. That has undoubtedly blocked the degree of success that we had been hoping for in Wyoming, at least in the brief term.

CCN: What federal regulation would you like to see for the U.S. to compete with these places like Malta that are quite cryptocurrency and blockchain-friendly?

CL: I actually think what we did in Wyoming would be excellent. It is to say, we&#8217re not going to adjust the securities laws, despite the fact that there are many of these that require to be changed, but let&#8217s acknowledge that certain factors like airline points and gift cards and loyalty rewards applications can be traded in secondary markets and they&#8217re not necessarily securities. If they&#8217re not securities due to the fact they meet the criteria that we put in the Wyoming bill for not becoming securities in the State of Wyoming, then they are not going to be regulated by the SEC. The SEC has sort of played each sides there because they&#8217ve come out initially and mentioned that almost everything they&#8217ve seen so far was a safety. That comment just caused the complete business to seize and frankly flee offshore. They walked it back since then, I think, in portion because they saw just how several American firms were really fleeing offshore as a outcome.

I would like to see that. I&#8217ve also recommended I&#8217d like to see them do away with the requirement that if an open blockchain is used to custody an asset that setting up a requiring a certified custodian for that asset, [which] in fact introduces risk where those risks wouldn&#8217t otherwise exist. A certified custodian is like a pension funds custodian. We&#8217ve been talking about them earlier in the in the interview, and the gist is that massive investment adviser ought to manage a lot more than $150 million or needed to segregate their assets and hold them in a third-celebration custodian. The difficulty with that is, of course, if you&#8217re obtaining somebody hold digital assets in a third celebration, we&#8217re back to the Andreas [Antonopoulos] point, &#8220not your keys, not your bitcoin.&#8221 You can use multi-sig, you can use time locks, there&#8217s a lot that you can use, but none of them is recognized below current certified custodial laws. I actually consider that that&#8217s almost certainly the most critical modify the SEC requirements to make to support the sector, is take that old law, it&#8217s outdated for this technologies. If we&#8217re talking about digital bearer assets, don&#8217t introduce threat exactly where otherwise doesn&#8217t exist.

CCN: I consider that makes a ton of sense there. Coming back to Wyoming, I&#8217m curious about your viewpoint on New York&#8217s Department of Economic Services actions more than the previous 4 or 5 years relating to blockchain, what they did right, what they did incorrect, with your experience in that marketplace.

CL: Way too heavy-handed. Wyoming took the method of &ldquolet&#8217s create enabling legislation rather than restrictive legislation.&rdquo New York did the opposite. New York said, let&#8217s restrict, let&#8217s not enable. It was arrogance frankly, that they believed everybody would want to be in New York, but a lot of the massive players primarily just avoided New York. You saw Jesse Powell of Kraken talked quite publicly about that. He&#8217s just not in New York because he&#8217s not undertaking company in New York they have no jurisdiction over him. I agree with Jesse. I consider New York &#8212 it&#8217s acknowledged in the market &#8212 that they went way also far and that wants to be rolled back.

CCN: The regulations there are just insane. And the cost to obtain a crypto license is beyond what a lot of these smaller sized startups can handle.

CL: Yes, that&#8217s right. It&#8217s unfair. It&#8217s portion of the point that sends these smaller sized commence-ups offshore. As soon as they&#8217re gone offshore, the intriguing query is, will they ever come back?

CCN: Do they actually have any incentive to come back?

CL: Correct. Once they&#8217ve set up offshore, they incur fees to come back onshore. They&rsquoll only come back onshore if it&#8217s in their interest, but when we can capture firms and have them set up in a nearby jurisdiction, and they have no switching expenses, is that their genesis moment and that&#8217s why again, Wyoming is going soon after this so hard, and I positive want that the SEC would just clarify issues. I consider a lot of folks are interested in just clarifying the guidelines and if we get clarity on the rules, then it provides lawyers the capacity to advise customers saying yes that they can keep in the United States without having danger of literally going to jail. Proper now, there&#8217s too a lot risk, and most lawyers are advising their buyers to leave and go offshore.

CCN: Final query right here. Up until this point in this podcast, we&rsquove quite much just interviewed cryptocurrency founders. 1 of the questions I adore to ask them is exactly where you see your company in five years? I&#8217m curious exactly where you see this whole market in five years, and in certain, how Wyoming fits into that?

CL: I feel Wyoming is going to be the Delaware of this market. I think a lot of firms are going to domicile there and current businesses are currently re-domiciling there in part for the tax and regulatory clarity. I feel Wyoming is going to be the Delaware of the crypto market. Exactly where will the crypto industry be? I&#8217m very convinced that income is going to be digital open blockchain tokens, i.e. bitcoin. It could not look like bitcoin right now, simply because it&#8217s going to more than the subsequent 20 years evolve substantially, but I do think that it is such a superior method and it&#8217s fairer to typical people, especially folks [that] have limited implies. It&#8217s so a lot fairer than the system that we have these days and that we will end up transitioning more than to that how smooth that transition is going to be, is an open query. It all depends on whether the powers that be in the current economic sector recognize that this is the path that it&#8217s heading. I will compliment ICE for recognizing that and becoming the very first of the big mainstream institutions to dip their toes into natively-digital assets. This is just a much far more superior technique. Let&#8217s keep that ball rolling.

Remain tuned for part three of CCN&#8217s interview with Caitlin Long.

Note: This interview is portion of the&nbspCCN Podcast. The podcast and this interview are also accessible&nbspon&nbspiTunes,&nbspTuneIn,&nbspStitcher,&nbspGoogle Play Music,&nbspSpotify,&nbspSoundCloud,&nbspYouTube&nbspor wherever&nbspyou get your podcasts. Make positive you rate and subscribe!

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Published at Mon, 01 Oct 2018 00:40:00 +0000


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