Dialogue with BitGo CEO: From regulatory game to market reconstruction, what is the next step in the crypto industry?

Source: This Is Bitcoin 's Turning Point: Custody, Stablecoins & The New Crypto Rules l Mike Belshe

Organize & compile: Daisy, ChainCatcher

Editor 's note:

In the United States, more than 50 million people hold digital assets, and debate continues on how to regulate them. With the change of political trends, the crypto industry has ushered in new legislative opportunities. BitGo CEO Mike Belshe firmly believes that this is a critical moment for the industry to promote reasonable regulation and establish a stable market structure.

In this interview, Mike and host Scott Melker discussed in depth the significance of SAB 121's abolition, stablecoin regulation, financial crime crackdown, the status of self-custodial wallets, and the construction of future market structure. He called on the government to adopt a clear, reasonable and open regulatory strategy to build a true long-term trust mechanism for the crypto industry.

****SAB 121 's political opportunity to abolish and encrypt the

regulation****

Scott: The abolition of SAB 121 allows traditional financial institutions to participate in the custody and transaction of crypto assets. How do you view this change? Does this mean it is a positive signal for the industry?

Mike: Absolutely. Now is a time of hope. We are finally in a political environment that has the potential to promote reasonable regulation and legislation.

SAB 121 was not a compliance process from the outset, and it was neither deliberated by Congress nor fully publicly discussed. It restricts many new institutions from participating in crypto hosting services. Although both houses of Congress passed a bill to repeal it, which was eventually rejected by the president, the industry as a whole responded strongly.

In fact, this suppression has prompted us to participate more actively in politics. Everyone realizes that to obtain reasonable supervision, we must actively participate in policy formulation. This is a turning point and a mobilization.

We hope all policy makers will join the conversation. If they have concerns about the industry, we are willing to help solve it. We are not fighting regulation, we want to participate in building a more mature system.

About financial crime and regulatory misalignment

Scott: You said that the problem is not entirely in regulation, but in the way the government deals with financial crimes, can we explain it in detail?

Mike: The problem now is that the US law enforcement system relies too much on the financial system itself as a "detector". Essentially, it is indirectly looking for crimes through the banking system, rather than directly dealing with the crime itself.

Take the fentanyl issue as an example. The real solution is to strengthen street law enforcement and strictly enforce the law against drug traffickers, rather than asking us crypto companies what they are doing.

Once, a regulator asked me, "How do you prevent fentanyl funds from flowing?" I said, this is not our responsibility. You shouldn't let the financial system take on the role of criminal law enforcement. What's even more ridiculous is that when I suggest that regulators collect information uniformly and conduct centralized investigations, they say, "That will invade privacy." But the reality is that they outsource this work to banks and crypto companies, resulting in fragmentation of information and worse law enforcement.

This approach is inefficient, poorly effective, and unfair.

Is encryption really a hotbed of crime?

Scott: What do you think about the outside world accusing cryptocurrencies of promoting crime? After all, illegal transactions mainly rely on cash.

Mike: It's totally correct. Real criminals have long been reluctant to use Bitcoin again because Bitcoin transactions are traceable and are easily exposed.

Data shows that 99% of illegal financial activities are still completed through US dollar cash. We should abandon the wrong idea that encryption is equivalent to crime. More and more regulators are gradually accepting this fact. More importantly, even in the traditional financial system, the problems of money laundering and fraud have not been well solved. This shows that the problem lies in the system itself, not crypto assets.

The current regulatory logic is to monitor everyone, including good people and bad people, and then try to find the suspect from it. This method is too far from criminal behavior and is inefficient at all.

****Self-custodial wallets and regulatory boundaries: the necessity of

policy protection****

Scott: Considering the possible changes in the political situation in the future, do you think it is necessary to protect the right to self-custody through legislation?

Mike: I fully agree that legal protection is needed. I represented BitGo at the White House Crypto Summit about a month ago, and there were about 30 industry representatives on the spot. When everyone took turns speaking, two-thirds of people expressed the same demands: thank the government for starting to value the industry, thank the government for its executive orders, but we need to turn these commitments into laws.

The current government is indeed very rapid, and the pace of policy implementation is surprising. They understand that time is tight, the midterm elections are approaching, and the political environment may change, so they seize the time to advance relevant reforms. Once the United States establishes a clear self-custodial protection mechanism, other countries will follow up, which will lay a long-term foundation for the global crypto industry.

Scott: You mentioned that you were also dealing with business and political affairs while on vacation. Has political participation become a part of your daily work?

Mike: That's right. In the past, we often said that business should not involve politics, and we were worried that it would alienate some people. But the crypto industry is different. Now we are facing tangible policy changes, involving fundamental issues such as stablecoins, market structure, and reserve transparency.

We maintain constant communication with regulators and they are willing to listen. For me, it’s not about going from a businessman to a politician, but about doing everything we can to ensure that good policies are correctly understood and adopted.

****The game between stablecoin regulatory disputes and traditional

banks****

Scott: Should stablecoins have interest functions, or should regulators overreact due to the Luna incident?

Mike: There is indeed fear, but a larger part of it is the intervention of traditional financial interests. Take the European MiCA regulations as an example, which requires stablecoins to deposit most of their reserves into banks and cannot directly invest in government bonds. On the surface, it is for supervision and security, but in fact it is the bank protecting its own territory.

There are similar trends in the United States. A senator told me that a bank CEO suggested that stablecoins should not buy Treasury bonds, but could only retain cash. But in reality, Treasury bonds are almost equivalent to cash -this is obviously just an attempt to lock funds back into the banking system. Of course, the return on stablecoins does bring new problems and also requires supervision. But this mechanism is not impossible to solve. We can refer to the development history of money market funds in the 1970s.

Scott: Do you think the real risk of stablecoin interest rate rebates lies in technology or regulation?

Mike: If we are talking about a 1:1 asset-backed stablecoin , rather than an algorithmic stablecoin, the core issue is transparency and auditing.

There are indeed several risks in terms of technology:

• Blockchain and smart contracts are still emerging technologies;
• Private key management is not yet mature and is prone to losing control due to human errors or fraud;
• Currently stablecoins are not protected by FDIC insurance.

In addition, some people are worried about a bank run on the stablecoin version. But I think this is an exaggeration. In the past, Tether was able to cash out quickly when facing a large amount of redemption and never failed to run. We cannot hinder technological progress due to backward regulation. Instead, we should guide the stablecoin industry to develop in a more transparent and secure direction through reasonable legislation.

Scott: Tether once paid $7 billion in one day, which was difficult for even big banks to do.

Mike: Tether did a great job. It was once questioned, but it gradually built trust. Many people ask: Why not seek Deloitte audit? In fact, the auditing agency is unwilling to take risks.

Large audit agencies today are reluctant to touch crypto projects because they are afraid of being held accountable. In the past, Andersen's collapsed due to the Enron case, which was one of the world's largest electricity, gas and telecommunications companies, has made the entire industry cautious. To address this, we need a clear regulatory framework that will allow auditing companies to participate with confidence.

I think Tether has enough scale and transparency now, and it's only a matter of time before the audit is completed.

****Regulatory capture: Is policy a competitive tool or an industry

guardrail?****

Scott: U.S. stablecoin issuers are using policy means to exclude overseas competitors such as Tether, which is beyond normal business competition.

Mike: This is a typical manifestation of regulatory capture.

The original intention of regulation is to protect the safety of the market and consumers, but in reality, industry giants often lobby the government to turn regulation into a set of "customized rules" to help them eliminate competitors. For example, in some draft legislation, it is clearly required that only US companies and holding US Treasury bonds can issue compliant stablecoins.

We, BitGo, itself is an American company. From a business perspective, such rules are beneficial to us. But I don't support this approach. An open market and international competition are the basis for the long-term development of the industry.

Scott: Overseas companies can also operate in compliance through cooperation with Bank of America, so there is no need to block the market.

Mike: Totally agree. Another case is that some banks hope to pass legislation: the liquidation of stablecoins must pass through the banking system and cannot directly use the blockchain network.

It sounds like it's for "safety", but it's actually to regain control of capital flows. But stablecoins on blockchain use Treasury bonds as reserves are safer than bank loan structures. What's more, they also have higher transparency and faster liquidation speeds.

Scott: Regulatory capture also appears in the market structure bill. What do you think of this game?

Mike: The “market structure” bill is an important issue that is being advanced, but I am worried that it will become a tool for interest groups to set rules. The bill should have clarified three things: compliance, investor protection, and basic market structure. But many industry participants began to take advantage of this legislative opportunity to tailor a set of favorable rules for themselves and exclude others. We cannot allow this kind of legislative approach. If supervision becomes a tool, not a guardrail, the result will be monopoly and innovation stagnation.

****Reshape the market structure: custody and transaction must be

separated****

Scott: You often say that exchanges should not host user assets, why is this important in the crypto industry?

Mike: This is related to systemic risks.

In the traditional financial system, stock exchanges (such as the New York Stock Exchange and Nasdaq) are only responsible for matching transactions , while assets are managed by custodial banks , and liquidation is completed by the clearing house. A clear division of responsibilities helps prevent single points of failure or moral hazard. In the crypto industry, many exchanges do everything: both custody assets, match transactions, and are also responsible for clearing and market making. This structure essentially concentrates all risks in one institution .

If there is a problem with this organization, such as FTX, the entire system will collapse. Many chain storm incidents in the past (FTX, Celsius, Voyager, etc.) are all due to structural design flaws.

Scott: In other words, the separation of custody and transactions should be the focus of regulatory reform.

Mike: Yes. Especially in the field of digital assets, custody responsibilities are heavier. Once the user's private key is stolen or lost, it cannot be recovered. Traditional financial assets can at least be remedied by court orders or reissuance of stocks.

We have seen too many platforms eventually collapse due to excessive leverage, confusing accounts, and unclear custody. If you want to build a robust and sustainable crypto financial system , separating custody is the top priority.

The gap between asset chain and real implementation

Scott: Reality Assets on the Chain (RWA) is very hot, what do you think? Is there any relevant layout for BitGo?

Mike: This is an important direction for the next stage of the crypto industry, but it is not as simple as imagined.

Blockchain technology certainly has many advantages, but it cannot be regarded as a master key. Many people mistakenly believe that as long as traditional financial assets are moved to the chain, they can automatically improve efficiency and reduce costs. But don't forget that the reason why traditional financial markets are complex is that they undertake huge capital flows and compliance needs for global circulation.

Taking the US capital market as an example, brokers may only earn a few cents, but their daily trading volume is extremely high, the system is stable and the risks are controllable. This cannot be replaced by a simple smart contract. We also saw the potential of RWA at BitGo, so we acquired a company called Brassica . It has complete functions such as issuance, custody, and transfer agents, and can build a compliant on-chain asset platform.

Who will dominate this track in the future? Traditional finance has the advantages of distribution channel, but technology companies have the advantages of speed and technology. The final winner may be someone who can find a path to fusion between the two.

But no matter who ultimately leads it, the beneficiaries of this change will be investors and users.

The regulatory environment is becoming more mature

Scott: Do you think regulation is more mature than in the past? Are the clear rules coming soon?

Mike: Going in that direction. We are seeing at least three positive signals now:

• Regulators are willing to listen to the voice of the industry rather than directly suppress them;
• The focus of law enforcement returns to fraud and information disclosure , which is no longer a general blow;
• Legislators began to understand the nature of technology and no longer simply equate it with a criminal tool.

We also need to continue our efforts, especially in the leveraged trading and derivatives sectors. If supervision lags behind, the next bull market is likely to explode. We now have the opportunity to do better and have the responsibility to seize this opportunity firmly.