Crypto Innovation and Regulation Can Co-Exist, Top Industry Executives Agree

AUSTIN, Texas — Crypto innovation and regulation can mesh, a quartet of high-profile executives agreed during a spirited panel discussion on potential changes to crypto markets at Consensus 2023.

BitGo CEO Mike Belshe, Kraken Managing Director North America Guy Hirsch, Cboe Digital President John Palmer and Cumberland DRW Global Head Chris Zuehlke noted that smart regulation stemming in no small part from the debacles of 2022 could benefit crypto by giving companies clearer guideposts and increasing public trust in the asset.

"There's no reason why innovation and regulation have to be mutually exclusive" Zuehlke said, adding that the industry had already made significant progress in a short period.

Read full coverage of Consensus 2023 here.

The wide-ranging discussion came as the industry rebounds from a calamitous year when a number of major crypto-focused firms imploded and trust in digital assets waned. Regulators, particularly in the U.S., are now eyeing crypto to an unprecedented degree and some observers believe the scrutiny will hurt the industry's growth, or at least shift the balance of power outside the U.S. The panelists discussed new challenges for liquidity and prime brokerage, how custodial services will change, regulatory issues and requirements for exchanges to prove their reserves.

The panelists noted industry anxieties about regulation's potential damping impact, but said the relationship between crypto firms and regulatory agencies must not be contentious.

Palmer noted that Cboe Digital's conservative offerings, which once seemed a hindrance to adoption, have become a strength as investors search for safe, trusted vehicles to store their assets. Cboe Digital offers exchange and clearinghouse services for crypto spot and derivatives markets

The Kraken exchange's Hirsch highlighted the need to protect client assets by creating environments where customers “can trust the venues” where they engage in digital asset transactions. The group also emphasized the need for separating assets but that notable crypto failures of 2022 were related to fraud more-so that structure.

Hirsch said the challenges that befell the crypto industry in 2022, can provide an opportunity moving forward, specifically via proof-of-reserves accounting. He said that the cryptographic method allowing for verification of assets can be more reliable than audits in traditional finance.

Zuehlke said that despite the crypto industry's 2022 woes, the banking industry's recent near meltdown and lingering concerns about its vulnerabilities prompted a migration to bitcoin (BTC) and other digital assets.

"The cat's out of the bag. Bank deposits are risky in a way that people didn't understand," Zuehlke said. He added that bitcoin has grown more resilient, with price dislocations becoming less frequent and significant, despite recent contractions in liquidity.