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Crypto regulation: There are 'protections in place' to prevent fraud, former CFPB director says

Kathy Kraninger, former CFPB director and Solidus Labs regulatory affairs VP, examines the price bounce cryptocurrencies like bitcoin are experiencing, crypto regulation, and ethereum's 2.0 merger.

Video transcript


- Marathon, Bitcoin, and Ethereum leading a crypto bounce back that's impacting publicly traded companies, as well as including that Marathon Digital Holdings, that's up the most there. That's up about 22% on the day, so definitely want to keep an eye on. Well, here to discuss the latest in crypto is Kathy Kraninger, Solidus Labs Vise President of Regulatory Affairs. Thank you so much for joining us. So a lot of people are wondering, what is driving this surge that we did see in crypto start over the weekend?

KATHY KRANINGER: Look, we've all said that this is still an emerging market. There is volatility in any investment. People need to be careful and thoughtful. But if you're in this for the long haul, it is clearly-- Bitcoin's been around and it's going to have a rebound again. So that's essentially the pattern that so many expected and exactly what we saw. And we'll see what goes ahead.

I don't like to have a crystal ball out, but this is an area where the use cases, technology evolution, companies are constantly building things on top, and you see the changes too coming with the next iteration of Ethereum. So it's an exciting place.

- But I do want to ask you specifically about this last month because as we look at the Bitcoin fear and greed index, which tracks sentiment for Bitcoin, that is actually seen a three-fold improvement since June of 18th. So there does seem to be something, because at one point, Bitcoin was sort of lingering under that 20,000 mark. Is there something, in terms of it's optimism, that is well founded versus something that we should perhaps be keeping an eye on if it's over enthusiasm?

KATHY KRANINGER: Well, I think there has been a question all along as many assumed, particularly given the genesis of Bitcoin with its libertarian roots, that it would be something that would actually be, you know, getting counter-cyclical or a place to invest perhaps when traditional markets are down and that they-- you know, Bitcoin would not run with the market. And, you know, in-- there are some who argue we have seen that, perhaps that's what this rebound is about.

At the same time-- you know, I play a long-term game myself and I am not here to give investment advice. But in terms of, again, this technology and the companies that are building on it, you definitely see the desire and the recognition that, clearly, it went to a low, you know, that doesn't seem to be in keeping with the value and possibility of these markets.

- And I want to ask you about regulation, because a lot of people saw what happened with Celsius filing for bankruptcy, stopping those transfers. And especially for retail investors, this was a particularly heavy blow. Where are regulators in terms of protecting some of these smaller investors and really keeping an eye on these certain kinds of crypto platforms?

KATHY KRANINGER: As I noted already in terms of the way people should approach investment, it's always a risk. And you've got to understand it. And there are people who feel really good about this asset class and understand what they're getting into. There are regulations that apply today. That's important to note as well that, you know, you have, particularly, financial crime regulation. So there are protections in place. There are protections against fraud and manipulation.

You see even with Terra Luna there are investigations ongoing. And in fact, there are regulators who have noted they're looking at Celsius as well to just ensure that the appropriate steps were taken along the way. But look, the best scenario is certainly prevention and for people to think carefully before they get involved in investments.

And there is a lot of education out there about this space from regulators, from industry. And that's I think something that everybody should be looking for as they're thinking about it, particularly if they've got some nearer term needs rather than a long-term view.

- I do want to ask you about the Lummis Gillibrand Responsible Financial Innovation bill trying to make its way through, really trying to create a framework for regulation of digital assets. Talk about what's in that and what sort of progress, or perhaps even bipartisan support, that you think this might see.

KATHY KRANINGER: It really is a big step forward. It certainly give the executive branch also some credit with the president's executive order, really laying out the governmental goals at a high level for this industry in US competitiveness, and investor protection, and preventing financial crime. So they really laid all of that out. And similarly, senators Lummis and Gillibrand deserve a lot of credit for taking a step that really goes to the next level.

There are, as I noted, clear regulation and authorities in place, and there are gaps and areas where you need to be tailored to really make sure, again, that those governmental goals are met in this space. So, you know, there are provisions around something that people generally agree that there is a need for. And that is oversight of the spot markets, not just an enforcement authority over fraud, but really truly overseeing those markets and that going to the CFTC.

Provisions around addressing some of the questions that have been in tax treatment. There are provisions around self-regulatory organization. And that is critical I think for the future of this industry. A lot of different ways you can go about doing it, that bill proposes one, and there's going to be a lot of discussion in the future going forward around that. But I think it really is, again, a big step to continue this conversation.

The last thing I'd note too is, as it said there, fraud is already prevented as illegal, but there are definite dynamics around market manipulation, the need to really conduct market surveillance and understand the role of different players in this market compared to traditional markets. And so there are, obviously, some things to refine and tailor just like there continue to be in financial systems generally as new products and new innovations come about.

- And speaking of new innovations, something that's really been in the works for a while is the Ethereum merge, obviously, this shift in terms of proof of stake mechanism. What do people need to understand about this in layman's terms and the impact that it's going to have on the crypto market?

KATHY KRANINGER: So many are certainly watching this with enthusiasm. There are a lot of technical issues to work through that I am not the expert on, but I will note that, you know, that's what's taken long and making sure to do it right. But it is exciting to see from, particularly, those who are concerned about energy use of proof of stake-- proof of work versus moving to the proof of stake model. In terms of what people need to understand about it, it's really, again, how we move this technology forward and get to scale.

Some of the criticisms that are out there I think are a misconception of this marketplace, because, you know, the blockchain does not work without token creation. So that's something that, you know, you really need to, you know, make sure you manage and understand. But the ultimate use case is, for blockchain, really looked more like the original adoption of the internet and all of the things that we did not see in 1990 around the way that that's fundamentally transformed the way we operate.

And so we really do see blockchain digital asset markets getting to a place where they're going to fundamentally change financial services and the way we operate. And so there are great opportunities there.

- We have to make sure people do their homework before, as you mentioned, they get into investing in this space. A big thank you there to Kathy Kraninger. Thank you for joining us.