Crypto regulation gaps risk ‘uneven playing field’ and stifled innovation: Next Edge Crypto CEO

Next Edge Crypto CEO and Founder Paul Fiore and Stellar Development Foundation CEO Denelle Dixon join Yahoo Finance Live to discuss rallies in crypto pricing amid the Russia-Ukraine conflict, regulation for cryptocurrency, federally issued stablecoins, and digital assets in traditional financial institutions.

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- Investors continuing to pile into cryptocurrencies as Western sanctions against Russia make the use case for a decentralized channel for finance, which means regulation is probably in the offing. Yahoo Finance's David Hollerith and Jen Schonberger here now with some special guests to break down the outlook for what some traders are calling digital gold. David?

DAVID HOLLERITH: So, Denelle, I sort of wanted to point in the first question to you. So given the geopolitical circumstances that are currently bearing down on the markets, there's been some interesting reports about cryptocurrency use in light of the Russian-Ukrainian conflict. In addition to that, there's a major-- there are major levels of inflation in currencies across the world. So I wanted to ask, in light of all these events, what's your-- has your perspective on cryptocurrency regulation in the US, or more broadly, shifted at all?

DENELLE DIXON: No, I don't think my perspective has shifted. First of all, thank you for having me here. I think the need that we have for us to collaborate with regulators all over the world is still there. I think that there are-- when-- regulators already have the opportunity and the ability to regulate at the activity level. And most of this is already in laws and regulations that exist globally. So financial institutions and money service businesses already are regulated in all of these regions.

And so it's just there might be some gaps that we have to work through, but my view on the value and the benefits of blockchain and crypto stand, and how we can actually bring a lot of value. We're already seeing that in this awful conflict that's happening in the Ukraine with the invasion by Russia, where we see that cryptocurrency is being leveraged to be able to do a tremendous amount of good for the local-- the humanitarian aid there, as well as with the government of Ukraine. So I think it's a real positive, and I think we're working towards a better resolution with respect to the public to private partnerships, and working together to make some needed regulation appropriately leveled for the industry.

JENNIFER SCHONBERGER: And thanks so much to you, Denelle Dixon from Stellar Development, for joining us, and also to you, Paul Fiore, CEO of Next Edge Crypto, for joining us. Paul, I want to come to you because there is so much market turbulence now amidst this geopolitical landscape, meaning that we need crypto regulations more than ever. So I'm curious, where do you see the biggest gaps right now in regulation, and what risks does that expose?

PAUL FIORE: Sure. Thank you for having me. The risks are an uneven playing field between banks and non-banks and to stifle innovation. So for a regulator, they have a hammer. And the first thing you need to know is the nail. Is the product a security, a commodity, money transmitting business, a payment network? And then from there, they have to figure out which regulation infrastructure to put. But what happens if it's a crypto product that kind of crosses the boundary and touches several different product maps? So the goal for the banking industry is to have the regulators work with them to enable them to compete.

DAVID HOLLERITH: Yeah, and Denelle, to follow up on that point, I often hear that people working in the space, you know, contrary to sometimes what is said, at this point, they welcome better, clearer regulation. And at the same point, that's what a lot of US investors are waiting for, particularly financial advisors, before they think about allocating portfolios to the asset class. So given all of this, I was sort of interested, do you think that there's any one-- is there any one regulatory issue in the US that you've been following that is sort of the most concerning thing, or thing that needs to be solved before the industry can move forward?

DENELLE DIXON: Well, I think there's been a lot of focus on the SEC and the SEC's view of stablecoins, as well as cryptocurrencies generally. I think that there's the Howey Test, which the SEC employs, which, by the way, was about orange orchards. So we clearly know that oranges aren't securities, but there's this question around how to-- where do cryptocurrencies fall. And certainly, there are thousands of cryptocurrencies out there, so none of them fit neatly into any bucket.

But I think if we focus on, what the Howey test focuses on, which is-- what that activity is and how to regulate that activity, that would bring a ton of clarity. Because Howey exists and this is the test everyone goes back to, but how that applies with respect to cryptocurrency is something that we're watching to see what the SEC is doing. And I think lots of folks are watching there.

But I think that right now in the United States in particular, there's so much more momentum with respect to this conversation that we're having with regulators. And so this is something that I think is really important that we continue because that is-- it's where the cryptocurrencies and blockchain are here, they bring a tremendous amount of value that solves a lot of really significant problems here, but also in other parts of the world. And so we really need to make it work for everyone. And so that's I think the goal and I think we're seeing a lot of momentum on the regulator and policymakers side working with us to be able to help to solve some of these issues.

JENNIFER SCHONBERGER: President Biden is set to issue an executive order on regulating cryptocurrencies that would direct agencies across the government to study cryptocurrencies and come up with a strategy or proposal to regulate them among the items as I've reported that this order will issue is ordering the departments of treasury state, justice and homeland security to develop a report on the future of money and payment systems and then direct the SEC, CFTC Fed and others to weigh in on market protection measures. Denelle to you first, your reaction to this and what you hope to see in that executive order?

DENELLE DIXON: Yeah, I have a really positive reaction to this because I really want to see these agencies working together, which is not something that we're seeing right now. Again, if we focus on the activity and what's actually happening, these agencies cover a lot of this even with respect to cryptocurrencies. So again, there might be gaps. Let's use stablecoins, for example. There's a gap as to where-- how a stablecoin fits and what it should be defined as, and we're seeing lots of momentum. In fact, it's the topic in DC a lot right now about how to create regulations around stablecoins that makes it work. So I love the idea of these agencies really digging in on this and then figuring out how they can work together.

What I don't want to see, because I think it's the worst thing that could happen is a specific agency set up just for cryptocurrency and blockchain. We don't need another regulatory body. We need the bodies that exist they're already regulating this space to focus on that activity and to make sure that they're covering their space with respect to it and to be really clear about where their tracks are. So that I think-- generally, I like this idea. I just want it to be used for more education, more momentum and we're here and we want to actually be available to talk about these issues.

JENNIFER SCHONBERGER: Paul to you, your expectations for this executive order and reaction, and what are you hearing from regulators that you talk to about regulating crypto?

PAUL FIORE: Yeah, so I actually-- I am in Washington, DC, happened to be today. Met with some groups of credit unions executives and the members of the NCUA. Executive Chairman Kyle Hauptman, in fact, is for the NCUA setting up a new division called the Office of Innovation and Access with the goal to collaborate work with financial institutions realizing that they're behind today, but they don't have customer acquisition cost. Credit unions have members, banks have customers that are already at the financial institution don't need KYC. So the regulator I feel is looking to become a partner with the financial institutions to keep them competitive.

DAVID HOLLERITH: And Denelle to your point to your last point you made about whether or not it should be one regulatory body or several, I was sort of curious about the classification in terms of assets from the Stellar's Foundation's perspective, how do you view crypto assets in particular? There are securities, commodities that they fit into one, do you think there needs to be a new framework?

DENELLE DIXON: Yeah, I don't actually think there needs to be a new framework, I think that there are thousands of cryptocurrencies as I said and so they don't fit nicely into any bucket. And I think, again, it's what you're doing with that asset. The lumen, for example, which is the native currency on Stellar. It's really used for spam and DDoS. It's really used for that utility piece. There are other tokens that are out there that have been used to really create and to fund products and to be able to deliver value to their users.

I think it's determining what the activity of the asset is. But remember, and this is what's complicated with respect to Howey right now is that as I mentioned about the orange orchards, it doesn't need to be that the underlying cryptocurrency is a security. It's how you use that asset to be able to do something, whether you're creating an investment contract. And there is the issue where we need to actually have more clarity from the SEC. And I really feel like we need to really dig in on that a bit more. We're seeing a lot of really great framework discussions around stablecoins. And we just need to understand, again, how we can be applicable here and we have the test, but how that test applies and all these different scenarios is important.

JENNIFER SCHONBERGER: Paul, you talked to credit unions. You advise them as well as the banking sector on crypto, you help educate them. Are you seeing crypto become more connected to the traditional banking sector? And if so, do levying bank-like regulations make sense to you, as the Biden administration has suggested in certain cases? Or do we need a whole new set of rules for digital assets?

PAUL FIORE: Yeah, so for the first question, absolutely, financial institutions are fast followers. So once there's a new product and money is leaving financial institutions to go into these alternate sectors, you could sure there's going to be action. So there's a number of large banks and a number of groups of credit unions that are starting to roll out basic exchange services similar to what you would find at an eToro, Robinhood, Venmo, or even Coinbase. So those products are coming in.

I agree with Denelle, I don't think we need new regulators. I think we need more clarity on the regulations that exist, specifically in the world of credit unions in December of 2021, the NCUA issued a letter that essentially said there's already existing authority for financial institutions to deliver products that serve their members and the crypto exchange products fall into that category.

JENNIFER SCHONBERGER: Paul, Denelle, thanks so much to both of you for your insights. Hope to see you soon. Karina, I'll toss it back to you.

- OK, thank you so much, and our thanks again to the panel Paul Fiore, from Next Edge Crypto and Denelle Dixon from Stellar Development along with Yahoo Finance's Jennifer Schonberger and David Hollerith.