The official ledger for bitcoin began more than nine years ago on January 9th, 2009.   While Satoshi Nakamoto is credited as the original author of bitcoin, there is a handful of other core develops which have contributed to the ongoing success of the cryptocurrency and blockchain technology as a whole since 2009.  Among those core develops is Bryan Bishop, who is working further to clarify the nuances around cryptocurrencies as they become commonplace in the market.

This week, Bishop, along with the former managing director of Morgan Stanley, Caitlin Long; e-commerce coding pioneer, Christopher Allen; the founder of Ernst and Young’s blockchain team, Angus Champion de Crespigny; and fund manager attorney, Gavin Fearey, composed a letter to the SEC.  In the letter, the finance leaders argue that adopting cryptocurrencies could actually corrupt some of the benefits which bitcoin brings to the table if it is not properly overseen.  In specific, the letter warns against practices employed by the Intercontinental Exchange, which owns the New York Stock Exchange.

The letter laid out several recommendations.  First, it recommended that the SEC partners with cryptocurrency engineers to develop regulations.  Importantly, the letter calls for a new kind of regulation that is customized for cryptocurrencies. Bishop and friends argue that restrictions should be put in place on how the proposed cryptocurrency exchange, which is known as Bakkt, will work.  According to Bishop, “Bitcoin is fundamentally a technological system with many nooks and crannies.  It’s the concept that rules can be enforced using software, math, and cryptography rather than policy.”

Another recommendation made by the letter encourages that regulations are placed which play on the strengths of the cryptocurrencies rather than following the traditional financial practice.  In this same respect, they warn against the practice of storing customer funds in a single account.  Putting the customers’ assets into one single account could devalue bitcoin by creating more liquidity than there are assets to back the cryptocurrency.  Critics of that process argue that such a devaluation would recreate many of the dynamics that led to the financial crisis in 2008.  According to the letter, “Digital assets are natively segregated, and maintaining this natural segregation at all times would best protect investors by conforming to the architecture of digital asset technology.”

The final recommendations in the letter recommend against honeypots and rehypothecation.  Honeypots are the process by which the bitcoin accounts of many different owners are piled into a single account.  The letter argues that this practice attracts hackers.  Rehypothecation is the practice of one organization claiming ownership of an asset on the balance sheet despite the asset being lent to another party.

In total, the letter concludes by saying, “ We believe that current SEC rules surrounding custody do not reflect the risks inherent in managing digital assets and do not use the technical strengths of the technology. These technical strengths have the potential to lead to a stronger, more robust custody environment. To better understand these possibilities, to build to strengths of technologies, and to not harm its advantages, we recommend that the SEC engage with those who are experienced with technology, such as cryptographic engineers, software developers, Bitcoin exchanges, smart-contract designers, blockchain developers, and existing digital-asset managers to ensure best practices are implemented.”

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