Balancing Innovation and Regulation: The Future of Crypto in Retirement Plans

Mm.

Last week may not have been a big one for Bitcoin prices, but the crypto industry saw major regulatory moves.

Trump signed two executive orders, one allowing crypto to be included in 401k plans and another targeting financial institutions that engage in de-banking.

All this taking place as Senate Republicans work on revisions to the House passed Clarity Act.

Now separately, Roman Storm, co-founder of Tornado Cash, found guilty of conspiracy to operate in unlicensed money transmitting business, blockchain.

Experts warn the verdict sets a dangerous precedent for the crypto and open source software community.

Joining me this morning to break all of this down is Timothy Massa, director of the Digital assets Policy Project at the Harvard Kennedy School.

Timothy, good morning.

Thank you so much for joining me.

So first and foremost, let's start off with the tornado cash case.

Now, blockchain advocates warn of criminal liability for developers and a chilling effect on open source innovation.

So what are the implications here of the verdict against the co-founder?

Sure, well, he was convicted of operating an unlicensed money transmission business.

The jury was hung on the other two counts, which were conspiracy to engage in money laundering and conspiracy to evade sanctions.

It's a complicated case.

I think it's really important to step back and think about what are the policy goals that we should have in this area, and one is that developers should be free to develop software.

But you know, we do have to think about when that software is used for improper purposes.

What happens.

The second is people should be entitled to some privacy in their transactions.

But the third is that the government has legitimate interests in preventing money laundering, enforcing sanctions, and that means identifying some financial transactions and putting regulatory obligations on actors in the system.

So we need to figure out how to balance those goals.

I think it means that sure developing a software protocol is fine, but when you go further than that, when you engage in kind of a business, then you may have certain responsibilities, and that's, I think, was kind of the essence of the question.

In the Roman strong case in terms of the privacy issues and government identification, that's a tougher one, you know, in some ways you could say blockchain has it wrong, right?

The government can't necessarily find out who's acting and yet all of your transactions can be seen on the blockchain.

So we need to develop tools so that people do have some privacy. but also that the government can identify transactions where important.

You know, our financial system is not built on anonymity and so if blockchain technology is really going to take off, we have to be able to have the government identify things when it needs to.

Impose requirements on actors in the system.

They may not be as sufficient or they may not be as significant as what we impose on banks, but we will need to think about who are the actors in the system who can help us prevent money laundering and enforce sanctions.

Yeah, and Timothy, you bring up a lot of important points there as we keep an eye on the nation's capital in terms of policy regarding digital assets.

Now one headline that we're paying attention to this morning is Bo Hines stepping away from the Trump administration, but indeed he did help with the White House crypto report.

So I do want to get your take on that extensive report.

What did you make of that?

Sure.

I think it's a very good report.

It's very thoughtful.

It lays out a lot of issues.

It makes a number of suggestions of ways we can move forward.

I don't agree with every single one, but I thought it was a very productive report.

And really, when you look at where we are, you know, you've got the White House report, you've got regulators like the SEC and the CFTC taking action.

They're developing rules.

They're developing guidance to address how can this technology be used?

How can we have technologically neutral rules so that people can engage with this technology, and that then puts the question to Congress.

You know, what should Congress do?

Congress passed the Genius Act for stablecoins.

That was very good.

Now it's turning to market structure legislation, and that's where I think it needs to catch up.

You know, it shouldn't be trying to supplant what these agencies are doing.

It should support what they're doing.

And unfortunately, some of the proposals that have been made to date on market structure are simply far too complicated, far.

Too detailed.

They're kind of fighting the last war, you know, when regulators weren't addressing the need to modernize rules.

So we need to rethink that piece a lot, and I'm hoping that that Congress does that.

I think the Senate banking proposal that came out was better than the Clarity Act, but I think, you know, there's still room for improvement here.

Yeah, I'm building on what you just said, Timothy, the Senate GOP released a discussion draft containing revisions to the Market Structure Act.

So what are you looking for specifically when it comes to the Clarity Act?

Sure.

Well, I think, first of all, there's, there's a couple of things.

There's not going to be a simple line between when is a digital asset, a security, and when is it a commodity.

I mean, even.

Advocates like the venture capital firm A16Z, you know, put out a proposal that says, well, look, we can see already 7 or 8 different kinds of tokens, and how you regulate them depends in part on how they're used.

So you have to think about, you know, is a token being used to raise capital for a business if that's. on, then we do want the regulation to be closer to what we've had traditionally for securities.

Is there an enterprise that's creating value, and that's why people are buying a token.

Once again, you, you sort of then tend toward the securities type regulation.

On the other hand, if there's no one in control, if, uh, the token is more of a utility, then it's different and then maybe it is more of a commodity.

So I think we need a more nuanced approach on that side, uh, and we need to give discretion to the SEC on that.

And then on the commodity regulation piece, it would be good.

Uh, to give the CFTC clear authority to, uh, to regulate the spot market.

But you know, the key thing here is The SEC and the CFTC need to work together, and Congress should really force the agencies to do that, you know, we're not going to solve this by having the two agencies kind of do their own things in their own houses.

There needs to be more of a continuum of regulation.

There needs to be consistency in how we think about. organization and blockchain technology whether it's being used for something that's a security, whether it's being used for a commodity so we need to require the SEC and the CFTC to work together and I think that will go a long way to solving these issues.

And Timothy, last but not least before I let you go, I do want to get your reaction to Trump's executive orders on 401ks because this order does offer retirement savers, crypto as well as private assets, but also higher fees and higher risks.

So what is your take on this?

Well, look, I think it's reasonable to say that retirement plans should have access to alternative investments if, as the, as the order says, the risk adjusted returns are appropriate.

The question is how do you decide that and how do the plan fiduciaries decide that because they can't put that.

Legally they can't put that decision simply on the plan participants.

So that's where The uh what happens next will be really important because the Department of Labor under the under the Trump order, the Department of Labor is supposed to come out with rules and guidance as to how planned fiduciaries should address these questions.

That's really the tough part.

How does a planned fiduciary decide is this appropriate from a risk adjusted standpoint for the beneficiaries of the plan?

OK, Timothy, we will have to leave it there, but as always, great having you on the show.

Thank you so much for joining me.

Thank you for all of your insights as well as your perspective.

Thank you for having me