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Preroll: PolicyCast explores research-based policy solutions to the tough problems we’re facing in our society and our world. This podcast is a production of the Kennedy School of Government at Harvard University.

Intro (Ralph Ranalli): Welcome back to PolicyCast, as usual, I’m Ralph Ranalli, sitting in the hosting chair here at the Kennedy School, bringing you important topics, renowned experts, and data-driven solutions. Today we’re talking cryptocurrencies. Also known as digital assets, they’ve been around for more than 15 years, and in that time, they’ve been derided by critics as a purely-speculative asset with zero intrinsic value—think of digital Beanie Babies without the stuffed animal. Meanwhile, the blockchain that supports them has been criticized as a climate-change-exacerbating energy hog and as a 15-year-old technology still without a use case beyond helping criminals and terrorists launder money. For most ordinary people, they’ve been viewed as mostly irrelevant, a way-to-risky investment traded by tech bros and basement day traders. But that’s all about to change. Thanks to some new types of digital assets, interest from Wall Street and the Trump administration, and some bills currently before Congress, looks like it could soon be going mainstream and becoming integrated into the financial system, bringing with it both risks and possible benefits to all of us. My guests today were among the first experts who tried to wrestle the wild west of crypto into the U.S. financial regulatory system. Timothy Massad, who is not a Senior Fellow at the Mossavar-Rahmani Center for Business and Government at ����vlog����, is the former chair of the Commodities Futures Trading Commission and one of the first regulators to establish jurisdiction over crypto. Professor Howell Jackson is an expert on financial regulation at Harvard Law School, and a former consultant to the Securities and Exchange Commission when the SEC made its first attempts to wrap its regulatory arms around digital assets. They’re here today to help us understand what’s going on in the world of cryptocurrency, discuss where things are headed, and to share some recommendations on how to make sure crypto is a true asset to the American public and not the source of the next financial meltdown.

Ralph Ranalli: So Tim, Howell, welcome to PolicyCast.  

Timothy Massad: Thank you. Thank you for having us.  

Howell Jackson: Good to be here.  

Ralph Ranalli: So we’re talking about cryptocurrency and cryptocurrency regulation, and I wanted to start with some definitional basics. What is cryptocurrency? One of the things is that I think people use that term in popular discourse as if it’s one thing, but there are actually multiple types of cryptocurrency with different purposes and the different ways that they operate. You’ve got payment cryptocurrencies like Bitcoin and Ethereum. You’ve got tokens which represent a share in a company or a right to access a service like Binance. You’ve got stable coins, which we’ll talk about, which are very much in the news, which are designed to maintain a stable value and are pegged to a fiat currency like the US dollar Tether is an example of that. Then you’ve got Central Bank digital currencies, which are basically digital versions of central bank currencies. And then you’ve got meme coins, which are speculative tokens that focus on sort of viral internet and pop culture references. Can you both talk about the different kinds of cryptocurrencies that are out there, and with a special emphasis on which one people should be most concerned about right now and paying the most attention to. Tim, do you want to start?  

Timothy Massad: Sure. Well, I try to avoid using the term cryptocurrency entirely, actually, because I think of currency as really being things like the dollar, the euro, the yen. I use the term digital assets as the broad category, and by that I would say it is a digital representation of something that is recorded and can be transferred on a blockchain on a distributed ledger. And those blockchains are based on the use of encryption techniques, public and private keys, we can get into that, that provide the means for their security and identification and so forth. And so within digital assets, you can talk about tokenizing things that we already understand as financial assets, stocks, bonds, so forth.

And people are increasingly talking about that. But there have also been a number of things that have been developed that aren’t those things, and I refer to those as crypto assets because they don’t, they don’t represent something else that has underlying value. Some of those are the blockchains themselves. The blockchains themselves have native tokens. Some of those are protocols or applications built on blockchains. Some, as you say, are stable coins. A particular type of digital asset where its value is pegged to a currency, such as the dollar, whereas most other crypto assets like Bitcoin, Ethereum, and so forth, don’t have that kind of peg, don’t have that underlying connection to something, and therefore their value is just whatever people ascribe to it.

So that’s kind of how I think about the universe. In terms of which one should we care about the most. Well, obviously Bitcoin is what started all this off, and Bitcoin is important because it’s the largest and most widely distributed digital asset. And the blockchain itself is now so widely distributed that that’s significant in its own right. We can get to that. Ethereum was kind of the second biggest one. And that was different than Bitcoin because it’s a blockchain on which you can build other applications, you can build other protocols. And when I mean protocols or applications, it’s just computer code that performs a, a function. But we’ve seen a lot of building on Ethereum and then there’ve been a whole series of others like that.  

Ralph Ranalli: What kind of function can you build on top of Ethereum and what is the use case?  

Timothy Massad: Well, you can have a trading function. So today, if you want to buy or sell a share of stock, you call up your broker. And that happens on any one of, you know, what do we have now 16 exchanges or various other markets? You can create a protocol that allows you to basically exchange one crypto asset for another through this protocol. It’s entirely automated and decentralized. And so while those things have been created and are used today, in my mind for a lot of assets that still may have no real value, you could imagine them being used for things that have real value. And that’s why you see a lot of traditional financial institutions getting very interested in this technology.

Ralph Ranalli: Howell, what are your eyes on these days as the most interesting and/or concerning?  

Howell Jackson: Well, I definitely agree with Tim that thinking about these as digital assets and framing them in the way he described makes a lot of sense. Bitcoin, in some ways regretfully still is so important because the market capitalization is so large and it’s sort of dominated discussion. But I think looking ahead, if you’re thinking about use cases, Bitcoin is, is a little puzzling because they’re the only real use case of Bitcoin, is the hope that the next person will pay more for it than you paid for it. And no, I, I should say, I’ve been saying that now for more than a decade and, I’ve been stymied a little bit by its continued popularity.

But looking ahead a digital asset for payments I think is actually an interesting thing because it has potentially useful characteristics in a lot of contexts that we can talk about. That’s really not Bitcoin. Bitcoin is volatile in pricing. It’s very slow in settlement. There’s a lot of characteristics about its blockchain that’s not nearly as robust as Ethereum and some of the others that, that Tim was discussing. So I think payments we can talk about is, is an interesting and important use case.  

This notion that you might put traditional assets on blockchains for clearing and settlement. Someone my age can remember when securities traded and settled over a five-day period. That’s shortened and over to three days into one day settlement. But there’s really no reason not to have real time settlement of financial assets. And one of the things about the distributed ledger is it does allow for real time payment, and you can imagine all sorts of asset classes also moving to that speed if they were on a blockchain and tokenized and that could be financial assets, but it could also be real estate. It could be many other things. So I think that use case is, is another interesting one.  

And finally there’s a lot of micro payment functions that are not economical, and traditional payment systems, that sometimes are trivial around gaming and things like that. But there’s a host of other, small transactions that might make economic sense on the blockchain. And there’s a lot of people who are thinking about those ideas and that’s speculative. But I think that’s a possibility.

Ralph Ranalli: Right. From a regulatory standpoint, one of the most interesting questions about digital assets as Tim calls him is are they a security or are they a commodity? And I think it great having the two of you in to this podcast is because Tim, when you were chairing the Commodity Futures Trading Commission, you were one of the first US regulators to extend jurisdiction over Bitcoin. That was back in 2014, and Howell, you got engaged with this issue in 2017 as a securities regulation professor when the SEC first took on ICOs, which are initial coin offerings. Howell, can you start us out just to talk a little bit about why the issue of, is it a security or is it a commodity matters from a regulatory standpoint?  

Howell Jackson: This has been a much debated question and if it’s a commodity then it is subject to regulation potentially by the CFTC. And Tim had the insight, when futures began to be developed on Bitcoin, to determine that Bitcoin was in fact a commodity for that purpose, and really exerted the first regulatory oversight of digital assets there.  

As you mentioned, a couple years later, the SEC and other securities leaders were faced with these new uses of digital assets, these tokens that were being used to raise money for various business enterprises. And there were a couple of interesting examples where entrepreneurs tried to raise money the old fashioned way by selling stock, and there was no interest. But if they rebranded what they were doing as a token, where what you got was the product or potentially the product that the company was going to offer, all of a sudden there was a lot of investor interest. In fact, maybe 10 times or a hundred times the interest if you simply denominated an ICO. And the SEC looked at these transactions and concluded that under their statute, these entities were generating investment contracts because there was really money being put in in the hopes of getting profit from these entrepreneurs and that therefore qualified for SEC oversight, and they were designated to be securities.  

So, after 2017, there’s this world where some digital assets are securities under the SEC’s jurisdiction and others, at least Bitcoin, are commodities, ’cause with Bitcoin there was no issuer, there was no obvious capital raising early on that they were paying attention to. And so you had this dichotomy that landed certain digital assets in the SEC space and certain digital assets in the CFTC space and, you know, that that was puzzling and has remained problematic in ways that we can discuss.  

Timothy Massad: Yeah, if I could maybe add to that. I think the question of whether a particular digital asset is a security or a commodity can be an important one, but frankly, it’s one that we’ve spent far too much time on and has bogged down our development of proper regulation. And I say that for a couple reasons. One is, I think the way to think about it is this is a technology, it’s not an asset class. So you can have, as Howell was saying, digital assets, which can be characterized as securities. They can be commodities, or they can be neither. Secondly it, it was an important debate because of the unique kind of fragmented regulatory system that we have in the US where we have the SEC regulating securities, CFTC regulating commodity futures. But here’s the important thing: the CFTC doesn’t have the power to regulate the underlying commodities, except in a very, very narrow sense.

What do I mean by that? We could regulate futures contracts and swap contracts that pertain to Bitcoin or Ethereum or some other digital asset, but we couldn’t set rules for how Bitcoin itself was bought and sold, or any other digital asset. And you might wonder, well, why is that? It’s perfectly logical given how the CFTC came about, right? Because the CFTC came about because of agricultural futures. And you had farmers deciding how much wheat to grow, worried about what the price would be when harvest came, so they needed futures contracts. And flower mills had to worry about whether the price would be too high. So you had futures contracts pertaining to agricultural goods, and then later all sorts of other goods. And so we set up a federal agency to regulate those futures contracts, but we never gave that federal agency the power to regulate how wheat was bought and sold, or how cows were bought and sold, right? So that’s why the CFTC doesn’t really have that power over what we call the spot market or the cash market.  

And that’s why this debate has been significant because, well gee, if it’s not a security. Then no one really regulates it. And what Hal and I have argued is, yeah, that’s why this debate has gotten us off track, because what we need is a regulatory framework for that cash market. And frankly, it doesn’t really matter all that much how you classify it, because a lot of this principles that we want in terms of investor protection are the same.  

Ralph Ranalli: Right.

Howell Jackson: I mean, I, I agree it doesn’t matter how you classify it, as long as you have a clear set of Yeah. Rules. And one of the challenges of having these dual regulators is it’s allowed the industry a little bit to play one off against the other and, take advantage of the uncertainty within Congress or different committees that oversee the CFTC and the SEC and there’s kind of opportunities to exploit that. But happily, Tim and I have, we actually came together initially to write on how digital assets might be regulated in a unified way, which contemplated coordination of the SEC and CFTC, which is now actually reflected in some of the bills that are being kicked around in Congress.

But there’s still this underlying tension that as, as Tim said earlier, there’s some digital assets that are simply tokenized stocks and bonds, which are clearly on the securities side of things.

Ralph Ranalli: Right

Howell Jackson: And then there are some that are capital-raising and the information that you want to give investors about the company and its prospects and its financials is sort of SEC type information. But when what you’re really trading are minutes of computer use or something that’s kind of like a service, well, then that doesn’t require the same kind of information. You wanna know what product are you getting and there’s general anti-fraud principles and general principles about trading markets. But there is, there is this set of regulatory concerns that evolve over time and trying to create a rational structure is a challenging exercise.  

Timothy Massad: Yeah. The security versus commodity distinction is very important. I didn’t mean to say, by any means it’s not. It’s simply that I think as we would both say, it kind of got us so bogged down, we couldn’t get to some, some basic things. But it is important that we think about that distinction because what you don’t want to do it create some new rules for essentially what is a technology. Which undermine the decades over which we have built up a very, very good body of securities laws that have made our securities markets the greatest in the world.

Ralph Ranalli: Right. And I think you said in your testimony to the US Senate in February, that the US created an excellent regulatory framework after the 1930s, and it’s still a model for the world. Right?  

Timothy Massad: Right.  

Ralph Ranalli: So before we get further into regulation, I gotta ask a foundational question that I think people who are not on Wall Street or are not sort of in the regulatory world, or even the policy world, want to ask given their sort of generalized knowledge about digital assets slash cryptocurrency. And Tim, in your testimony to the Senate, you also said that it’s been 16 years since Bitcoin was launched.  

Timothy Massad: Mm-hmm.  

Ralph Ranalli: And we have not yet seen that much use that has generated real world value. And then you’ve got an economist like Paul Krugman, won the Nobel Prize, whose basic attitude towards cryptocurrencies is that it has two use cases, pure financial speculation and money laundering and tax evasion and other sort of criminal activities. Foundational question, why not just regulate it out of existence? Is there a potential benefit that you see to these digital assets that outweighs what may already be its harmful uses out in the world?

Timothy Massad: Well, I would say the technology is potentially very, very useful. Number one. And number two, you can’t regulate it out of existence is the other reason I would say. So let me maybe just explain both of those. The concept of representing something through a digital token and recording it on what we call a distributed ledger, a blockchain, and being able to transfer it on that ledger is potentially very very useful. It can be more efficient than the way we do things. It can be more inclusive and accessible, and it can provide for much greater innovation. So I think it’s a very important technology.  

I think we’ve seen a lot of innovation that’s basically just been, you know, experimentation and a lot of speculative activity for sure. People developing ways to make a quick buck, we’ve seen a heck of a lot of that, in part because we haven’t had a good regulatory framework which has allowed us to kind of tamp down and reign in the speculative activity and maybe encourage the innovation toward more useful applications.  

But you know, we’ve already seen some good applications. Stable coins, I think are probably the most important one to date, and we can get into exactly why that is and what they are. But also you do see big institutions, whether it’s BlackRock, JP Morgan, Fidelity, Visa, taking this technology very, very seriously. Again, because they see the potential that it can be used for things that truly have value. And so I think if we can create a regulatory framework that tamps down on a lot of the speculative activity and a lot of the frauds and scams that we’ve had, and we’ve had more than enough of those. You might see more development of those real world useful applications.  

Howell Jackson: Yeah. Let me just jump in and maybe give some examples that might be a little bit concrete. There is a lot in the financial back office that could be improved, but people don’t kind of interact with clearing and settlement of securities, but they do interact with the payment systems in a lot of ways that I think, are meaningful. So when you write a check, the money comes out of your bank account and it takes some time before it gets to who you’ve sent the check to. And even if you use ACH, which a lot of people use for paying bills nowadays, there’s usually a two or three day gap where the money is being held by someone else. And that’s a bank usually.

And if you think about your credit cards, which Americans are very fond of using and all of us love our frequent flyer miles that we get for 1%, but the credit card system takes up 3% of the cost of goods. So the merchant gets 97 cents on the dollar. We are all being bribed with a penny back, but it’s the two other pennies are going to the financial services industry, and all of that cost could be eliminated by a better payment system.  

And you know, actually it’s, it is rather embarrassing. The United States has the most backward payment system for retail customers, really in the developed world, while we have the most robust capital markets. And one of the things that stable coins could promise to do is put a lot of pressure on that domestically. And then there’s a cross border payments, which are a whole other kettle of fish. But if you’re concerned about vulnerable populations, remittances back to many countries around the world, when done through the banking system, are incredibly expensive and slow. And that’s an area where stable coins are actually being used already to lower costs and increase speed. So there are tangible consumer benefits that you could imagine happening relatively quickly. Stable coins aren’t being used for that today. But things can change quickly in the payment space.  

Ralph Ranalli: That question about regulating out of existence was really more of a philosophical question than a real world question. Because I think if you look at just the numbers on stable coins, I mean, it’s there in a significant way. There’s close to a quarter trillion dollars of stable coins in global circulation, there were transfers of $27.6 trillion stable coins in 2024, which surpassed the combined volume of Visa and MasterCard transactions that we were talking about. And then you have the largest stablecoin, which is Tether. It’s larger than bitcoin. But people have described it as basically an unregulated offshore bank, which was founded by a former child actor who starred in the Mighty Ducks movie and a former plastic surgeon. But I guess if a wrestling executive can be the education secretary, and we’re no longer surprised by things like that. But it was also being investigated by the Manhattan US Attorney’s Office for possible violations of sanctions and money laundering rules. But Tether has a big booster in Howard Lutnick who is the new Trump commerce secretary whose firm Cantor Fitzgerald manages Tether’s treasury bills. And we’ve got a new SEC chairman potentially coming in, Paul Atkins, his nomination just passed the Senate Banking Committee. What are we expecting from the Trump administration in terms of the direction they’re going to try and take stable coins?  

Timothy Massad: Sure. Well, the Trump administration and the Republicans in Congress have prioritized passing legislation on stable coins as kind of the first thing they wanna do in the whole digital asset space. And I think that’s a very good priority. I think stable coins are the most important application of this technology thus far. And again, that term stablecoin is used to refer to lots of things, okay? I am going to use it today to refer to just one type, which is a digital token whose value is pegged to what I call a fiat currency like the US dollar, the euro, the yen. And frankly the most important ones are pegged to the dollar. And then you get into how do we ensure that peg is maintained? And that’s where a lot of principles have been developed about that.  

So that’s what the legislation is about. It’s about those dollar-pegged stable coins, and there are bills pending in both the House and the Senate. I’ve testified on both. Hal and I and another law professor from Cornell, Dan Awrey, have written about these, looking at the pros and cons of this legislation. They both have some very good features, some basic, what I would call safety and soundness or prudential type features. Those are principally that for every token an issuer sells, they get back a dollar. They’ve gotta keep that dollar and conservatively invest it and put it in a bank deposit, put it in US treasuries, or a limited number of other things so that the money is always there.  

And in some ways you could argue that’s even safer than a bank, right? Because a bank leverages those deposits. They’ve gotta have some capital and some liquidity requirements and some other risk management standards. Where it starts to get more complicated, and where views differ, are then on things, well, who exactly should be the regulator? Should it be a federal regulator or a state regulator? Because what we’ve had to date is no federal regulation. Whereas we’ve had states which have allowed this and chartered this. So both bills try to strike a balance there. We’ve commented on whether that balance has been struck properly.  

Another question is, well, do you apply this requirement only to stable coins issued in the US? Or what about those issued offshore, but that flow back into the US like Tether? That’s an extremely important issue, and unfortunately the Senate bill doesn’t address this at all, and it’s one of the things we’ve criticized it for.  

Another issue is, well, who can be a stable coin issuer? It can be a bank under these bills. It can be a non-bank, but can it be any non-bank? Can it be Google? Can it be Amazon? Traditionally, we’ve had a separation in this country between what we call banking and commerce. We didn’t want commercial firms owning banks or engaged in financial services.. Are we gonna maintain that here or not? Unfortunately, neither bill addresses that. Hal worked very hard under the Biden administration, with the Biden administration as well as leaders in the House, to develop stablecoin legislation which did address that issue and many of these others. And I’m sure he can add his thoughts to that.  

Ralph Ranalli: Yeah. Howell, so some Democrats in particular have singled out the Genius Act, which is one of the bills. There’s the Genius Act, the Stable Act, and then the McHenry Waters Act, Which I think is, that’s the one, sort of the leader in the clubhouse as far as you two are concerned,  

Howell Jackson: As we’re concerned...  

Ralph Ranalli: But the lack of protections in the Genius Act, they say, could allow someone like an Elon Musk to essentially just create his own currency that would compete with the US dollar. And that would have negative consequences. Is that going too far with the hyperbole or is that... what do you think about...

Howell Jackson: No, it’s not going too far in terms of describing the content of the Genius Act. It allows basically any firm, to set up a specialized entity to issue a stable coin. So, X or Tesla or, or Google or, or whomever could set up a stable coin under the bill. And, and that’s something, at least the corporate affiliations, the McHenry Waters bill would have not permitted. And I should say that’s not a Democratic bill. McHenry was a Republican. This this was the bipartisan approach from 2024. And I think what you’re seeing in this year’s bills is a different administration with, as Tim said, a different set of priorities and they, they really have elevated this particular issue to push along. And they’re supporting, as I understand it, pretty heavily legislation. Exactly where it’s gonna end up, I think is still a bit of an open question. But the current version of the Genius Act would go in the direction that you said.  

Let me say, Tim outlined a number of the key components, and I, I think it’s important to say that there’s some percentage, more than 50%, where there’s just bipartisan agreement that the assets should be safe and there should be regulatory oversight. And while the exact balance of state and federal authority is still being worked out, all the bills now contemplate of federally articulated set of standards, and the states need to be substantially similar. Now, that has a little bit of fuzziness in it. But the notion that there would be a US model of regulation is clearly out there.

In addition to the commerce and banking question, the illicit-finance-money-laundering issue that you alluded to, and Krugman and others have written about, and Elizabeth Warren has been particularly strong on , is, is one of the important issues out there and it’s, it’s a challenge of defi, of decentralized finance. And Tim alluded to smart contracts, which are pieces of code that can be used to exchange things, including stable coins, and exactly how you make sure that they are not used for money laundering or sanctions evasion, or, or other things is genuinely an an issue. And it’s one that’s hard for Congress to speak to directly ’cause it’s a, essentially a technical issue. And, one of the open questions in the bills today still is how much discretion the Treasury Department, which is the relevant agency, will have to develop standards for AML compliance in the future.  

The one thing that’s important to notice about stable coins is there is an issuer, there is a company, there is Circle, potentially there’s Tether if it’s regulated, that can take responsibility and set up protocols. So in some ways, this kind of digital asset is a good one to get expertise on in dealing with AML issues. And maybe that’s something that we can then apply more broadly to other forms of digital assets.  

Ralph Ranalli: And I’m actually glad to have a Harvard Law professor in the room because I’ve heard it said that the Supreme Court decision in Loper Bright also, which overturned the Chevron case also comes into play here because, where this area of capital and liquidity requirements, the rubber really meets the road on how much Congress can do and how much the regulatory agencies can do. Can you just tell the audience really quickly, what the issues are there?

Howell Jackson: Yeah. So, this is a law professor kind question. And let me just say before this past year, the courts were willing to assume that Congress, when it delegated regulation authority to agencies, meant to give them some latitude in interpreting ambiguous provisions and defining regulations, which could change over time as regulatory policy shifted, and that was known as the Chevron doctrine. And the Supreme Court overturned Chevron in the Loper Bright case this past year. But what they really did is that they changed the presumption. The presumption now is that Congress does not intend for the agencies to have this authority unless it says so. So there’s a few justices that didn’t go along with this part of the decision, but Congress does have the latitude to delegate interpretive authorities to agencies. And this is actually, when you work on a bill now, in addition to the substantive provisions, one of the things you argue about with staff on the floor is, okay, do we wanna give some latitude to the agencies to work things out in areas like illicit finance?

And Tim and I and Dan have written that actually this is just the kind of area, ’cause it’s really complicated and you don’t know how technology is going to evolve. And this is an issue that I think there’s some progress has been made actually in the GENIUS Act here is better than the STABLE Act, which hasn’t taken on this issue. So, you know, I’m hopeful that that will remain in the act and on some interstitial issues, there will be latitude for the agencies to work things out.  

Ralph Ranalli: Right? On the theory that agencies are much more nimble than Congress and can respond to, and learn and respond to evolving technologies much faster.

Timothy Massad: Yeah. And what’s important, I think, to understand- what makes this hard with respect to illicit finance is that the system we’ve had traditionally to prevent money laundering and to prevent financial transactions, which are illegal, relies on banks around the world. And the US has actually, because of the role of the dollar, because of the prominence of the dollar, and the relationships that we’ve developed as a result of the growth of the dollar, the US can rely on banks around the world to do what we call know your customer checks and anti-money laundering procedures. Now, that’s not a perfect system, and believe me, there’s a lot of money spent on that system, which probably goes to waste, but that’s the system we have.

When you talk about stable coins, as Howell said, there is an issuer. And so you can make that issuer do all those same things that a bank does. But the difference is once those stable coins are issued, they can be transferred without that issuer being involved. And that’s very different from our banking system. They can be transferred on these decentralized blockchains through what we call unhosted wallets, meaning someone who just keeps the stable coins themselves on their computer and they’re not working with any financial institution. So there’s no intermediate, there’s no centralized entity, there’s no bank like entity which can perform the checks that we expect banks to play in the traditional financial world. That’s what makes this hard. And that’s what people really around the world are struggling with.  

Howell Jackson: Let me just weigh in on this, ’cause this is clearly hard. And it’s hard in the same way cash is hard. You go to the bank and you get cash out and then I give it to Tim and no one can see it. Or I give it to a Russian oligarch and no one can see it. So the current system with cash particularly, but even with other transactions it’s hard to police and it’s wastefully overseen now. The interesting thing about digital assets, if you want to take a, you know, a positive view is there is all this information on the public ledger and there are companies like Chain Analysis and others that essentially use forms of artificial intelligence to kind of figure out where the dark holes are. And, that’s the sort of oversight you would wanna facilitate and the issuers might play a role in facilitating it. But it’s conceivable that we’ll learn something about monitoring illicit finance around digital assets. It could actually improve. The really inefficient system that we have in banking. So, people can have different views about it. And I super admire Elizabeth Warren and her concern in this area.  

But the bet that the Trump administration is making is that somehow these issues will be worked out. And I think that those of us working in this space ne need to take seriously what needs to be done to make this effective? And maybe we can learn something useful for other areas of compliance.  

Timothy Massad: Yeah, I would totally agree with that. I mean, it is a new technology that is challenging, in a sense we’re not used to it. But it does provide certain opportunities in terms of that public ledger, in terms of that information, that could be very useful. We could end up with a better system. We don’t know that yet.  

Ralph Ranalli: So can we turn to another Trump priority, which is the Bitcoin strategic reserve. Some crypto people don’t like it because, if Trump creates it by executive order as opposed to going through Congress, that’s a very ephemeral way to create something of that import and it could go away in the next administration. So what are the issues that you see with a strategic Bitcoin reserve? Adam Levitan, who I think you’ve sure known from TARP. He’s basically said that the Bitcoin Strategic Reserve is just a setup for a eventual federal bailout.  

Timothy Massad: Well, I would say it’s just a bad idea. Let’s start with why it came about. The federal government often seizes Bitcoin in criminal enforcement actions the same way they seize all sorts of stuff, stocks, bonds, houses, cars, jewelry, whatever. Generally, the federal government either returns the seized assets from the criminals that they got them from to the victims, if there are victims who, you know, own those assets. Or they sell them in public auctions, and that’s what they’ve done with Bitcoin and with all the crypto assets that they’ve seized to date. Well, people started looking at that and said, gee, if they had only held onto that Bitcoin, they would’ve made a lot more money.

So that’s where this idea of a reserve started. Then people went a step further and they said, “Well, gee, why don’t we also buy more Bitcoin because the price is gonna go up.” So you have two strands here. All the president has done so far is he’s issued an executive order, which says, we shouldn’t sell the stuff we’ve seized. He hasn’t yet said, let’s go out and buy more. Although he’s asked people to look at ways of buying more. So what’s the value here? Well, you could say it’s a bet on price. I don’t think that’s a good bet to make, number one, because I don’t think the government should be doing that. And frankly, if you were gonna do that, why aren’t you holding onto stocks? I mean, over time stocks have gone up a lot too. Number two, is there some other role that Bitcoin could play? Some of the advocates of this think so. They think somehow it’s going to be the basis of a new monetary system or something. I don’t think so, and I think it, that’s bad for the US and bad for the dollar to do that. So, I’m not a fan of the reserve in either the hold what we’ve seized and certainly not in the, let’s go out and buy more of it phase. I think it does just kind of support the price, which certainly helps those people who already own Bitcoin, but I don’t think that’s in the national interest.

Ralph Ranalli: Hal, what’s your take on the strategic reserve?  

Howell Jackson: Well, I totally agree with Tim and there are cases for certain commodities, and oil is one of them, where it does make some sense to have a strategic reserve, because if supplies were cut off you would wanna release the reserve because the asset is valuable. It’s just hard for me to imagine a situation where we need Bitcoin and it was great that we had, you know, Fort Knox was loaded up with servers with Bitcoin. So I think it’s unfortunate.  

The other thing I would say is, those liquidated assets that Tim was talking about, they come into the Federal Treasury, they reduce our debt, they fund the government if they’re not being returned to victims. And so there’s a cost of holding onto them and they may go down in value as Tim said. So I just don’t think we should be in the business of having the government buy assets the government has plenty to do as it is without speculating in commodities markets.  

Ralph Ranalli: So I’m not a financial regulator or an economist, or particularly an expert in Wall Street. But I see some parallels with the current situation with crypto- and especially mainstreaming crypto the way stable coins do by tying it to physical assets- with the run up to the financial crisis of 2008, which you’re both familiar with. And I wanted to know why I shouldn’t be investing in crypto default swaps, which there are now companies, like Percent Technologies that are, they’re issuing crypto default swaps. So tell me why this nightmare scenario is wrong.  

Howell Jackson: I guess I would say there, there’s a lot of differences between the situation that we are currently in and 2006-7-8, where you had a huge run up in housing prices, a lot of mortgage-backed securities that were based on inflated prices and really strained borrower balance sheets. And then a whole host of synthetics that were bets on those assets that were distributed throughout the financial system in the United States and around the world. And at least at this point, there’s not a lot of financial institution exposure to cryptocurrencies. Now this is beginning to change a little bit. People are sort of wondering what share of your portfolio should be in crypto. I speaking personally, I think the right share is zero.  

Ralph Ranalli: Right.  

Howell Jackson: But that’s beginning... there might be a little shift on that if it’s Bitcoin. I think though that’s different than the stable coin question, where there’s a use case and it’s not a speculative asset, and you sort of have to go through the classes of digital assets and asking: How big is it? How interconnected is it? But at the current point, you may want a short Bitcoin for other reasons, but I don’t think it’s because of a global crisis, right yet.  

Ralph Ranalli: Right. Our friend Larry Summers says there’s a high chance of a recession now because of Trump’s tariff regime that was just announced this week. Say that causes a crypto crash because high risk assets are generally the ones that are sold first. Which in turn causes a run on stable coins. And then all of sudden, investors are demanding the US dollars, which are backed by treasuries. Then that demand for treasuries raises interest rates, which makes a recession worse. What’s wrong with that scenario?  

Timothy Massad: Well, I, I’m very concerned about the tariff picture in terms of its consequences. But in terms of then thinking, what role does the digital asset world play in that? First of all, it’s still relatively small, all things considered. It’s an exciting technology to a lot of people. It’s a growing technology, but when you really look at the scale of this, it’s small compared to the global financial system or even the US economy.  

Ralph Ranalli: So you don’t think it presents the same systemic risk that the mortgage housing market did?

Timothy Massad: No, definitely not. What you worry about though, is, how much leverage is there built into all these interactions and transactions?  

Ralph Ranalli: Right. We were already starting to see derivatives based on Oh, sure there is, there is digital assets.

Timothy Massad: Yeah. And you worry about do we have enough knowledge of what the interconnections are, the connectedness between institutions and what’s the risk of contagion? And on that front, no, we don’t have much, in part because of the lack of a regulatory framework. So sure. If we had a recession, would I expect there to be some failures in the crypto sector? Yes, I would, I still don’t see that as a major driver of some global or even US financial instability. I think it’s still a relatively small sector from that standpoint.  

Howell Jackson: I think this is sort of an interesting area. In 2022 in the so-called crypto winter when we did have a lot of the failures, there was a deep concern amongst banking regulators about growing interconnectedness. And to some degree the SVB failure and the spring of 2023 had some elements of interconnection that created some difficulties. And the response was to completely segregate traditional regulated institutions from the crypto industries such that if you did a crypto business, it was sort of hard to get a bank account. And the Trump administration has very much reversed that policy and is more open to interconnections and we will see how they develop. But that’s a dimension you wanna watch, that you don’t move new risks into the regulated financial sector that could be problematic.  

Ralph Ranalli: So one thing I did want to circle back to was the central bank digital currency or CBDC idea. How does that fit into this and does it solve some of the issues that there are with other digital assets in any way?  

Howell Jackson: Central banks around the world, in Europe and the UK are looking at a central bank digital currency. And actually the United States federal Reserve began looking at it a couple of years ago. And some academics were quite enthusiastic about having a more public form of digital asset. And there are some advantages of it. It is politically a huge lift in the United States- issues of privacy and what the government’s role should be, what the private sector’s role should be, have really pushed a lot of people away from a retail digital currency in the United States.  

And I think that the stablecoin that we’ve been talking about is sort of the private analog. So in the Civil War, the government tried for a while to issue greenbacks and then it switched to the national bank system, issuing notes. You could think of stable coins as doing the same sort of thing; it’s private entities issuing digital tokens. Interestingly, they’re invested for the most part in Treasury securities, which actually is what the Federal Reserve would invest its assets in if it issued a digital currency. So there’s a kind of public-private component to the stable coins, which is, I think the American model that we’re going to pursue at least for the foreseeable future.  

Ralph Ranalli: But that’s the American model, because we are seeing the rollout of the digital euro this year. Tim, what does Europe know that we don’t.

Timothy Massad: I don’t think they know anything we don’t. I think it’ll be very interesting to see really where they go. I think, as Howell said, countries around the world quickly started looking at this after... actually, a lot of it was stimulated by Facebook, what was then called Facebook proposing, what they called a global currency, Libra.

Ralph Ranalli: It was called Libra at the time, right?  

Timothy Massad: Yeah, which was really a stable coin. And then central banks focused on it. But I think, as Howell said, when people really drill down, you say, well, what is it? It’s a digital dollar. It would be, in our case, a digital dollar. We don’t have that. All we have in terms of individuals is we have cash, right? Paper money. That’s the only obligation of the Fed that we can use. Otherwise, everything is what we call private money or commercial bank money. Banks already have effectively digital dollars because they have accounts at the Federal Reserve. And so when you talk about, should the Fed issue us to us as individuals, this digital token? That changes the role of the Fed pretty dramatically. It’s now interacting directly with citizens, and that’s what people don’t like, particularly for the privacy reasons that Hal pointed to.  

So I think what people are now focusing on is, well, okay, let’s just make sure that that relationship between the Fed and banks and maybe other payment entities is up to speed in terms of technology. Because if we’re gonna move into this digital world of tokenizing more things, then we gotta make sure that technology is really working properly. And you know, I think that is one area that the Fed is looking at, particularly with respect to cross border payments, and I think we probably do need some improvements there, but that’s the only sense in which I think we need to at this point move forward.

Ralph Ranalli: Well, we’ve reached the time in PolicyCast where we turn to policy. What would the top two or three, from each of you, highest priority regulatory measures that you would put today on the digital asset industry in order to advance it to a place where you think it is both more safe and has more utility to the public.  

Timothy Massad: Mm-hmm. Well, the first one would be stablecoin legislation and, I would prefer what we call the McHenry-Waters proposal as compared to the two bills that are being considered in Congress now, the STABLE Act and the GENIUS Act. But with appropriate revisions to either of those, I could be very supportive of those. And again, that’s because I think stable coins are a very useful potential application that could be very useful in payments generally. And we need a regulatory framework both to address their risks and to enable the private sector to explore those opportunities. And it’s not just fringe firms that are looking at that. PayPal has a stable coin. Visa is following this very closely. That would be number one.

And number two, I would address what we often call the market structure issues where we need to have a regulator of this cash market or spot market in the trading of crypto assets, and that would probably be the CFTC. And we need to bring some clarity to this question of when is it a commodity and when is it a security? But I would do that in a way that hopefully doesn’t undermine a lot of the good work we’ve done over decades in the securities law. So those would be the top two things. And then I would probably get rid of the Bitcoin strategic reserve.  

Ralph Ranalli: Howell, what would your top recommendations be?  

Howell Jackson: I certainly agree in terms of categories of legislative priorities with what Tim suggested. Let me just overlay some additional considerations that are relevant to them. I think this foreign component, and making sure that our regulatory structure reaches foreign entities that come into and interact with the United States is just super important. And it’s important for are regulatory system to work in the United States, because we can’t have a high quality regulatory system competing against an unregulated or less regulated system.

But more importantly, or as important, solving this digital asset regulation problem is a global phenomenon. And we need to be able to interact with other jurisdictions and have systems where we can assure ourselves that their regulatory systems are not just prudential for safety and soundness, but elicit finance; are up to our standards and we will have that impact if we are reaching foreign firms that come into the United States. And if we don’t, we’re gonna have much less influence. So I think recognizing that this is a global problem and, great that we’re doing stuff domestically now, but it’s gotta be a global solution because digital assets, even more than regular financial assets, can move around really easily, and that’s critical.

The other thing that I would say, stems from work that Tim and I have done with Dan Awrey. Domestically, digital assets are a new category that have components of, we’ve said commodities and securities, but also insurance, and of course banking, payments as a banking product. There needs to be a lot of coordination. And one of the weaknesses of the United States is we have such a fragmented regulatory structure and I don’t think we’re gonna change that overnight, but having working groups and coordination- probably its role of the Treasury Department to take the lead here but we’ve gotta be working in a coordinated way ourselves. And so that’s a super important policy dimension that we need to focus on. Not just adopting the bill, but making sure it’s implemented in a coherent way.

Timothy Massad: I would add one more thing if we have time, which is when you look long term- we’ve touched on this a little bit- this issue that what we often refer to as digital identity is going to be critical. In other words, how do we get comfortable with using this technology in a way that’s consistent with having knowledge, where we need it, as to who’s transacting and big transaction, but also respecting people’s privacy, and how exactly do you draw that line and how do you develop the technology to make that happen. A lot of people are working on this, but the government could get behind that. And I think the importance of solving what I call this digital identity problem is really critical.  

Ralph Ranalli: I guess my last question is. Do we need a new agency? Do we need a Digital Asset Regulatory Commission? We could call it DARC.

Howell Jackson: Yeah. Well, my immediate reaction is: anything but a new agency since, since we have so many of ’em. But it’s definitely the case that we’re facing a ton of cross-sectoral issues. And to me, I would say cybersecurity is a good example. Issues are common in business and in finance, AI is an area that’s just gonna permeate financial regulation and other areas. Digital assets kind of have this characteristic too, and we need a way to sort of, um, marshal our expertise and share it, whether it’s done through an agency or kind of ad hoc groups for particular issues, but, more and more things are coming up that are really not sector specific and we really weaken ourselves if we try to have every eight regulatory agency get up to speed on the latest new tech thing.  

Ralph Ranalli: Well, thank you both for being here. This was fascinating and enlightening, and we will be watching this new technology as it grows and becomes more and more a part of our lives. So, thanks again for being here.  

Timothy Massad: Thank you.  

Howell Jackson: Thanks very much.

Outro (Ralph Ranalli): Thanks for listening. If you liked this episode, please leave us a review on Apple Podcasts or your favorite podcasting app, and while you’re there, follow us so you don’t miss any of our important upcoming episodes. So, until next time, remember to speak bravely, and listen generously.