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Who will regulate crypto and fintech in the US?

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As cryptocurrencies have grown in popularity, so have calls to regulate them. Last month, the federal Financial Stability Oversight Council warned that the market needs stronger oversight

Experts hosted by the MIT Industrial Liaison Program concurred.

“What we’ve seen is, in the absence of regulation, abuses occur,” said Dan Doney, CEO of blockchain infrastructure company Securrency Inc.

Doney was a panelist on “Regulating Disruptive Innovation,” a webinar that explored the nuances of designing policy and the ways regulation can impact innovation in financial technology. He was joined by MIT Sloan professorthe director of the MIT Golub Center for Finance and Policy, andthe center’s executive director.

It’s essential to protect consumers from scams and other risks, the group agreed, but it’s equally important to strike the right balance between regulation and innovation. Here are the experts’ thoughts on the biggest questions facing the sector:

Which agencies will regulate crypto in the U.S.? 

Regulators say crypto’s increasing popularity could pose risks to the broader financial system if not regulated. And yet, because there has been confusion over which agency is responsible for what, many entities will have a hand in regulation. 

“I think all the existing regulators will have [a role] in accordance with their regulatory mission,” Lucas said. 

For a while there seemed to be a sense that the regulation would fall to the Commodity Futures Trading Commission, which regulates derivatives and markets, rather than the Securities and Exchange Commission, which regulates securities, Lucas said.

“I think that we’re seeing that both agencies have some interest in regulating crypto, and, in fact, the SEC has recently clarified its definition of what is a security in order to bring crypto more into its fold,” Lucas said.

Because there isn’t alignment on which agency has responsibility for what, the U.S. is at a disadvantage. Companies are going abroad to do business in crypto where regulations are clearer, Doney said.

“Parties are going elsewhere with this amazing and powerful new technology,” he said. “It’s something that we should really seek to align on as a policy objective as a country.”

Will regulation in the U.S. hurt innovation? 

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Clarity on U.S. regulations will make it easier — not tougher — on companies, not just in terms of doing business but in terms of cost, Doney said, pointing out that uncertainty often leads companies to proactively hire lawyers and incur legal fees.

“Regulatory uncertainty becomes a massive barrier to innovation,” Doney said. “We have a responsibility to provide that regulatory certainty if we want to be an innovative leader in financial service technology. If we choose not to lead in innovation in financial technologies, we risk losing that benefit that we've had of being an innovative society.”

In addition, coordination with international regulations is crucial to innovation and to making sure that “things don't fall through the cracks in very important places,” Lucas said. Crypto regulations vary from country to country, which is why it’s essential to have global coordination among regulators.

How can developing countries benefit from fintech? 

In developing countries where populations need access to banking services, the demand for fintech is strong. Crypto provides financial inclusion at a reasonable cost. Unfortunately, if these countries don’t have strong regulations, problems could arise.

“Developing countries have been some of the biggest beneficiaries of these technological improvements,” Lucas said. However, “to the extent that developing countries have weaker regulatory frameworks, they're more susceptible to scams and other problems that could come into their borders through these new developments.”

Crypto is especially popular in Venezuela, for example. Expatriates use it to quickly send money back and forth, but it’s also been used by the military in drug-smuggling operations and by wealthy citizens seeking to bypass financial sanctions.

“I think there are risks for these countries as well as great potential,” Lucas said.

Will traditional financial institutions bring fintech in-house?

Already, big banks are beefing up their crypto and blockchain capabilities. But will these incumbents continue to onboard fintech and crypto to the point where it’s no longer decentralized, which proponents tout as one of its chief benefits?

“That's always a question,” Golding said. “That’s one possible outcome — that it really doesn't become decentralized. There's no doubt there's a lot of interest in bringing a lot of the technologies into the existing financial structure.”

Lucas said that the “hope and dream” of crypto is “to get away from centralized intermediaries, to get away from the large banks.”

“But, in fact, if there is no one who has a big stake and is taking responsibility, it's also very hard to have this conversation with regulators where there can be some kind of a balance that's struck that makes things feasible,” Lucas said.

Read next: How to move crypto regulation forward

For more info Tracy Mayor Senior Associate Director, Editorial (617) 253-0065