On March 10, 2023, California regulators shuttered Silicon Valley Bank (SVB) after customers rushed to withdraw assets amidst growing evidence of a liquidity crisis. The news supplanted seemingly daily financial headlines focused on institutional failures of digital asset firms such as FTX and Solana. Since and during the continuing failure of SVB, the shuttering of Signature Bank and other casualties in the banking sector have left regulators grappling to shore up turbulence in the financial industry and cushion ripple effects in the macroeconomy.
Similarly, journalists and industry participants often reflexively paint failures of firms in the blockchain ecosystem as a symptom of poor regulatory oversight. Correspondingly, crashes inevitably engender calls for heavy-handed legislation or impulsive regulatory action echoed among policymakers, media outlets, and even industry stakeholders.
The responses mirror those that emerge after fallout from any large-scale industry failure corporate behemoths and regulators are perceived to have left customers and hard-working employees in the dust while executives softly land under golden parachutes or lateral to lucrative positions or board seats at firms in the periphery (or even high-level roles in government). Occasionally, the monolithic industry offers a handful of scapegoats to atone for its ubiquitous malfeasance. But in the absence of heavy-handed regulatory reform, the story goes, the industry will largely carry on unscathed, left to repeat its sins another day. Indeed, these repeated narratives are often successful in resulting in implementation of the quick fixes they seek.
To be sure, bad actors, fraud, and simple negligence exist everywhere in life, with no exception in the offices of America’s corporate financial giants. In kind, the legal and regulatory system should adapt and extend to protect innocent participants from injustice. But repeated and cyclical failures of firms in the highly-regulated traditional financial industry as is currently unfolding with SVB, Signature Bank, and others should make those calling for policymakers to repeat similar interventions in the digital assets industry consider whether the means of impulsive, heavy-handed regulatory action will accomplish their desired ends.
In 2008, the pseudonymous Satoshi Nakamoto published the Bitcoin whitepaper the landmark document that laid the foundation for distributed ledger technology. For early adopters, distributed ledger technology promised a secure, transparent, efficient, and accessible alternative to traditional currency transactions. Nearly 20 years later, innovations in decentralized, “trustless”, and market-driven distributed ledger technology have opened a world of applications and use cases in traditional currency, banking, securities, and real-world asset markets.
Notwithstanding the recent front-page exposés of bad actors in the digital assets industry, the promise of distributed ledger technology to revolutionize the traditional financial sector remains untarnished. Indeed, integration of the distributed ledger technology into traditional banking markets remains a promising alternative to centralized, heavy-handed regulation as a solution to the woes that cyclically plague the financial sector.
For instance, at Tacen, our hDEX technology which gives users absolute control over their assets with the speed of transactions executed through traditional financial institutions seeks to harness and build upon the profound benefits of distributed ledger technology first envisioned by Nakamoto. The hDEX is designed to be fully compliant with existing regulations. Further, the architecture is “trustless” users do not need to trust us, or any intermediary or counterparty, with their digital assets. Our platform stands to be integrated by a variety of projects and institutions, including those that trade commodities and any other asset class, who, in licensing our technology, will give their customers the confidence that their assets can never be stolen, frozen, hacked, or otherwise manipulated by counterparties.
Still, Tacen and other promising innovators in the industry are not shielded from the ever-changing, uncertain, and progressively hostile regulatory environment in the US. Tacen has engaged in significant efforts to comply with and keep abreast of regulatory changes and has focused the design of our technology on user protection. Nonetheless, we, along with many other companies in the digital assets space, remain exposed to business risks posed by ill-devised, hastily promulgated regulations that inhibit innovation and support capture by incumbent actors all while doing little to protect consumers in the long run. Industry participants, journalists, and regulators should heed the repeated mistakes of impulsive, short-sighted regulatory action in the traditional financial sector that typically follows headline-making crises.
To be sure, in innovative and emerging industries, regulators should be diligent and adaptive in establishing bright lines and readily ascertainable rules to protect innocent actors and provide firms with regulatory certainty. But, considering the cyclical failures of well-intended financial regulation, policymakers would be wise to prudently and soberly consider similar regulatory calls emanating during times of crises in the digital assets industry. Even the most banal adages linger for their truth those who do not learn from history are doomed to repeat it.
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