Congress is ‘very active’ in looking at best regulation for crypto after FTX failure, expert says

Bitcoin Association for BSV Global Public Policy Director Bryan Daugherty joins Yahoo Finance Live to discuss the road ahead for crypto regulation, the collapse of FTX, and crypto mining.

Video transcript

- Well, in the aftermath of the collapse of crypto exchange FTX and the downfall of Sam Bankman-Fried, a trove of internal messages has now been added to a court filing and released to the public. SBF, along with executives from FTX and Alameda, reportedly joked around via Slack messages, as one does, about the possibility of coming into compliance with normal financial controls.

According to the filing, SBF describes Alameda as, quote, "Hilariously beyond any threshold of any auditor being able to even get partially through an audit." And he added that FTX would, quote, "sometimes find $50 million of assets lying around that we lost track of. Such is life." Indeed, such is life. So you can read all about this in today's Morning Brief, written by Myles Udland. That's up now on the Yahoo Finance home page.

And the collapse of FTX has, indeed, shined a light on the need for stricter crypto regulations. For more on this, we welcome in Bryan Daugherty, Bitcoin Association for BSV global public policy director. So, obviously, there is the alleged fraud that happened at the company. But then there's also the idea that it was so opaque that an auditor wouldn't even be able to get in there, right, and that no auditor was, in fact, maybe required by regulators. So what does this latest-- what do these latest revelations tell us, if anything, that we didn't know about the need for regulation, Bryan?

BRYAN DAUGHERTY: Yeah, thank you for having me on. I mean, from my perspective, there appears to be little question in my mind that FTX suffered a critical failure at leadership at best and criminal activity at worst. I find it interesting because the primary objective of blockchain as a ledger is to create an infrastructure that fosters trust and transparency and record keeping.

And I believe this is a prime example of the stark contrast between the speculative nature of cryptocurrencies and the true value offered by blockchain technology. And by harnessing the power of blockchain for its transparency and utility, it can create or act as the backbone for any trading platform, whether they involve cryptocurrencies or traditional stocks. And this approach really paves the way for real-time auditable settlement of an exchange layer, which guarantees reliability, assurance, and prevents the misuse of assets that either don't exist or aren't under the controls of those who are attempting to take advantage of previous gaps in the fintech sector.

- Even with regulation that has been asked for by the crypto landscape so that they know exactly what kind of boundaries to operate within, even with that on the table for discussion, there's still so much question about what utilization will even look like in the future. And perhaps that regulation will drive the utilization picture there. But how do we eventually gauge what the appetite for the end consumer and for the regulatory framework that is to come, what the appetite would be for this to be a leading currency or one of many leading currencies in the US, especially when other countries are stepping away from the US dollar?

BRYAN DAUGHERTY: Yeah, that's a great question. I think the US is really involved. They're very active on the Hill right now in looking at the best regulatory framework, whether that's allowing the SEC to continue on their quest or potentially the CFTC or a new regulatory framework.

From my perspective, I really believe that the laws that we already have in place, such as the Howey test, really allow us to distinctly remove some of the froth or bad actors from this sector. And just the application of even the Howey test would clean up a lot of the nefarious activity that's occurring. And I think until then, until we have a sound understanding of really the legality and the regulatory outlook of these, that it is going to be difficult for cryptocurrency or blockchain in general to kind of solidify itself.

- OK, and so one of the full screens that we were just showing a moment ago as well, it really raises this question of what energy usage with cryptocurrency and with any kind of significant type of infrastructural play that cryptocurrency would require, what that energy correlation looks like and if we are even on the path towards realizing what that actual footprint, what the detriment of that footprint could be or even the benefits on the other side of that. How are you evaluating this?

BRYAN DAUGHERTY: Yeah, so I spent a great deal of time looking into the energy consumption and utilization of proof-of-work. I believe there's a great misunderstanding, really, about mining, Bitcoin mining, proof-of-work mining, in the sense of we judge everything currently through an economic model that really doesn't justify technology. Most technology is judged by throughput.

And so when you see competing proof-of-work protocols that are working to scale, it's interesting that scalability is really equal to sustainability. So the more that these technologies scale, the more sustainable they are. And what we've seen is by increasing that throughput of blockchain transactions, it lowers the actual carbon footprint per transaction.

And so as we kind of go through this sandbox of testing out these technologies and scaling them, we will see clear winners and losers. And, unfortunately, from the perspective of utilizing this technology, it has to scale. So if something is only providing seven transactions per second, even on our best day, that would not serve as a global currency at all.

So we really need to focus on how to scale this technology. I think proof-of-work provides the information security that we desperately need in our systems. So I really think it's just a misunderstanding of how to scale blockchain, how to scale Bitcoin. And that footprint actually could displace legacy footprints that we currently have in whether it's the financial industry, whether it's cloud technology. From my perspective, blockchain provides much more than just a tradable asset. It really starts to play into the key infrastructure and security of data and data integrity.

- Not there yet, but maybe eventually we will be. Bryan Daugherty, thank you so much, Bitcoin Association for BSB global public policy director. Appreciate your time this morning.