or the first time since Bretton Woods, money is primed for reinvention. Digital innovations, like cryptocurrencies and the underlying technologies they are built on, have opened the door for a new, more inclusive and efficient approach to finance—but only if implemented compliantly and securely. With proper regulation, there is a unique opportunity to leverage digital asset infrastructure to expand financial inclusion, strengthen financial system integrity, and position the United States as a technology and inclusion leader on the global stage.
This is not the first time we’ve had to radically rethink the financial regulatory landscape. In the wake of the September 11 attacks, the U.S. and key allies developed a new regulatory regime to address money laundering and financial terrorism vulnerabilities. Banks began to “de-risk” by ceasing services to "high-compliance risk" customer segments. This ultimately has had a disproportionate impact on low- and moderate-income constituents globally, cross-border remittances, and alternative financial services providers—the groups most in need of reliable financial engagement. Ironically, heightened Anti-Money Laundering (AML) and sanction regulations have had a limited impact on actually curtailing money laundering.
Such practices assume an everlasting attractiveness of the U.S. dollar and its global banking and capital markets. Different playing fields for different financial service providers have made it easy for criminals to pivot to laundering through services and jurisdictions with fewer governance controls. Understandably, a fear of risk and a reaction to enforcement-based oversight have caused banks to continue to de-risk entire sectors. Indeed, institutions continue to make ill-advised risk-management decisions with consequences for not only the digital financial ecosystem, but the broader economy too.
The Growth of Financial Digitization
With constant technological advancements and an open web, banking increasingly knows no geopolitical boundaries and can operate 24/7 365 days a year. Our new challenge is to extend innovative risk, governance controls, and U.S. fundamentals into growing native web-based services accessible by anyone, anywhere.
In its early stages, virtual asset services appeared to be yet another avenue for money laundering, as a proliferation of anonymizing tools associated with many digital tokens and algorithmically facilitated coins created opportunities for illicit actors to trade and transact outside formal oversight. Further, the events of 2022 exacerbated the eroding confidence in the sector, with the collapse of Terra Luna and through the corruption and fraud perpetrated by FTX—contributing to some $2 trillion in market losses in 2022.
But upon closer inspection, virtual assets, Decentralized Finance (DeFi), and Web3 technology present a clear opportunity because they are more efficient than traditional financial market technology and can be leveraged to solve the problems of the post-9/11 regulatory era. The potential to access economic tools and financial services directly via the web and embed the capabilities to review and trace transactions through immutable ledgers would be a boon for law enforcement and financial development. Moreover, these core technologies also enable the export of U.S. dollars through cyberspace. Driving compliant financial inclusion through entirely digital engagement channels like the open web gives the U.S. an opportunity to reinforce its global leadership in security, economics, and technology.
Privacy, Security, and Inclusivity
These benefits can only be realized if virtual asset services reinforce essential privacy principles and protect the integrity of a globally interconnected ecosystem. The good news is that privacy controls can be directly coded through pseudonymity and identity verification, and can link traditional and web-based services. Indeed, these attributes enhance money laundering prevention and enforcement, increase financial inclusion, and extend the power of the U.S. dollar to other parts of the world via a new digital economic infrastructure.
Importantly, through extending the power of the U.S. dollar, these attributes can also further America's foreign policy goals. For example, humanitarian funds could be directly deposited into an NGO's or refugee's digital wallet on their mobile device, thus avoiding rent-seeking intermediaries or local officials; while capital and development funds can go directly to the businesses and entities most in need—rather than those organizations with local political connections.
Virtual assets, and an open web-enabled infrastructure for data—including money—are the new frontier for global geo-politics and economics. America's competitiveness in this new frontier will be determined by how we translate our infrastructure, and equally important, how we translate our democratic values to cyberspace. Extending secure and compliant financial opportunities to citizens around the world (and digitally at home), requires interoperability across the totality of the financial system—web-based and traditional.
Now is the time to reinforce financial regulatory guidance in the U.S. through the growth and support of U.S.-backed digital value and infrastructure. It will serve not only to bring virtual assets under appropriate governance, but will also reinforce the fundamental qualities we have come to associate with the U.S. dollar and U.S. banking—fairness, security, and inclusivity.
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Achieving Financial Inclusion in an Evolving Economic Landscape
AgnosticPreachersKid, CC BY-SA 3.0, via Wikimedia Commons
July 24, 2023
Virtual assets and an open web-enabled infrastructure for data are the new frontier for global geo-politics and economics. Better financial regulatory guidance will ensure good governance and help bring about more fairness, security, and inclusivity in our financial system, writes Amit Sharma.
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or the first time since Bretton Woods, money is primed for reinvention. Digital innovations, like cryptocurrencies and the underlying technologies they are built on, have opened the door for a new, more inclusive and efficient approach to finance—but only if implemented compliantly and securely. With proper regulation, there is a unique opportunity to leverage digital asset infrastructure to expand financial inclusion, strengthen financial system integrity, and position the United States as a technology and inclusion leader on the global stage.
This is not the first time we’ve had to radically rethink the financial regulatory landscape. In the wake of the September 11 attacks, the U.S. and key allies developed a new regulatory regime to address money laundering and financial terrorism vulnerabilities. Banks began to “de-risk” by ceasing services to "high-compliance risk" customer segments. This ultimately has had a disproportionate impact on low- and moderate-income constituents globally, cross-border remittances, and alternative financial services providers—the groups most in need of reliable financial engagement. Ironically, heightened Anti-Money Laundering (AML) and sanction regulations have had a limited impact on actually curtailing money laundering.
Such practices assume an everlasting attractiveness of the U.S. dollar and its global banking and capital markets. Different playing fields for different financial service providers have made it easy for criminals to pivot to laundering through services and jurisdictions with fewer governance controls. Understandably, a fear of risk and a reaction to enforcement-based oversight have caused banks to continue to de-risk entire sectors. Indeed, institutions continue to make ill-advised risk-management decisions with consequences for not only the digital financial ecosystem, but the broader economy too.
The Growth of Financial Digitization
With constant technological advancements and an open web, banking increasingly knows no geopolitical boundaries and can operate 24/7 365 days a year. Our new challenge is to extend innovative risk, governance controls, and U.S. fundamentals into growing native web-based services accessible by anyone, anywhere.
In its early stages, virtual asset services appeared to be yet another avenue for money laundering, as a proliferation of anonymizing tools associated with many digital tokens and algorithmically facilitated coins created opportunities for illicit actors to trade and transact outside formal oversight. Further, the events of 2022 exacerbated the eroding confidence in the sector, with the collapse of Terra Luna and through the corruption and fraud perpetrated by FTX—contributing to some $2 trillion in market losses in 2022.
But upon closer inspection, virtual assets, Decentralized Finance (DeFi), and Web3 technology present a clear opportunity because they are more efficient than traditional financial market technology and can be leveraged to solve the problems of the post-9/11 regulatory era. The potential to access economic tools and financial services directly via the web and embed the capabilities to review and trace transactions through immutable ledgers would be a boon for law enforcement and financial development. Moreover, these core technologies also enable the export of U.S. dollars through cyberspace. Driving compliant financial inclusion through entirely digital engagement channels like the open web gives the U.S. an opportunity to reinforce its global leadership in security, economics, and technology.
Privacy, Security, and Inclusivity
These benefits can only be realized if virtual asset services reinforce essential privacy principles and protect the integrity of a globally interconnected ecosystem. The good news is that privacy controls can be directly coded through pseudonymity and identity verification, and can link traditional and web-based services. Indeed, these attributes enhance money laundering prevention and enforcement, increase financial inclusion, and extend the power of the U.S. dollar to other parts of the world via a new digital economic infrastructure.
Importantly, through extending the power of the U.S. dollar, these attributes can also further America's foreign policy goals. For example, humanitarian funds could be directly deposited into an NGO's or refugee's digital wallet on their mobile device, thus avoiding rent-seeking intermediaries or local officials; while capital and development funds can go directly to the businesses and entities most in need—rather than those organizations with local political connections.
Virtual assets, and an open web-enabled infrastructure for data—including money—are the new frontier for global geo-politics and economics. America's competitiveness in this new frontier will be determined by how we translate our infrastructure, and equally important, how we translate our democratic values to cyberspace. Extending secure and compliant financial opportunities to citizens around the world (and digitally at home), requires interoperability across the totality of the financial system—web-based and traditional.
Now is the time to reinforce financial regulatory guidance in the U.S. through the growth and support of U.S.-backed digital value and infrastructure. It will serve not only to bring virtual assets under appropriate governance, but will also reinforce the fundamental qualities we have come to associate with the U.S. dollar and U.S. banking—fairness, security, and inclusivity.
