The past 12 months have been a vertiginous race for cryptocurrency. As coin prices benefit from a dramatic rise in prices, the press, major investors and governments have started to include cryptocurrencies in their everyday language. New York State licensed PayPal to facilitate cryptocurrency transactions, which means the payments giant’s more than 300 million users are able to buy, sell, and hold cryptocurrency. This came after its competitor Square generated substantial income after do the same thing in 2018, as well as the Announcement from the Office of the Comptroller of the Currency (OCC) that U.S. banks can hold cryptocurrency assets on behalf of customers. Since then there have also been rumors that the OCC may soon ban banks to discriminate against business customers in “legal but disadvantaged†sectors such as cryptocurrency. More recently, and more particularly, Kraken became the first US-based exchange to charter a bank.
All of these events underscore the momentum of cryptocurrency as it moves from the margin to the mainstream of finance as an asset class. But just as importantly, these developments show how cryptocurrency, like PayPal, Kraken, and other fiat-based fintech platforms, is now being integrated into the financial services industry. These developments underscore the need for U.S. government agencies to treat cryptocurrency as critical infrastructure.
What is critical infrastructure anyway?
Critical infrastructure is an official designation that the US government grants to specific “critical” sectors which, although primarily run by private companies, are so vital to the functioning of society that the government must take a particular interest in ensuring that they remain safe from attacks or other vulnerabilities. The U.S. government works with leaders in these industries to share best practices in security and risk management, collaborate to address threats, and discuss policies relevant to the continued security of the industry. The 16 sectors designated as critical infrastructure include communications, healthcare, energy, and, most relevant to cryptocurrency, financial services.
Why cryptocurrency should be included in critical infrastructure discussions
The financial services industry is made up of businesses that allow clients to deposit funds, make payments, access credit, or invest, and is overseen by the Department of the Treasury which manages the day-to-day needs of the industry. in critical infrastructure. Cryptocurrency companies, like exchanges, merchant service providers, various DeFi platforms, and the like all perform these same financial service roles, just with cryptocurrency rather than fiat.
Of course, cryptocurrency is only a fraction of the financial services industry today. Fedwire, the Federal Reserve-operated system that facilitates electronic payments between member banks around the world, processes more than $ 3 trillion in transactions per day. Total market capitalization of all cryptocurrencies, meanwhile, currently stands at $ 1.59 trillion.
Still, buying cryptocurrency keep increasing, especially among institutional investors looking for new safe haven assets. Additionally, the cryptocurrency ecosystem faces unique threats that deserve special attention from the government. Due to its pseudonymous nature, cybercriminals have adopted cryptocurrency as a tool for illicit transactions and money laundering, including some related to North Korea and Al-Qaeda. Cryptocurrency companies are also facing unique pirate challenges seeking to steal funds, which threatens not only the businesses themselves, but also the finances of their users.
While cryptocurrency may represent only a small portion of the financial services industry, its rapid and continued growth, unique concerns, and recent stint in the traditional banking arena, shows how cryptocurrencies have grown from a fringe technology to a critical component of the financial system that requires the attention of the US government.
What this would mean for the Treasury and the U.S. government
Critical Treasury infrastructure The activities, as the sector agency (SSA) responsible for the financial services industry, are designed to enhance the security and resilience of the financial services industry while reducing operational risk. They coordinate, on behalf of the US government, activities to ensure the integrity of the financial services industry. These include relationships with partners in the sector which allow the Treasury to have unique information on the functioning of the sector. This in turn gives the US government the ability to allocate the necessary resources to best protect the sector.
By including cryptocurrency companies in their discussions of critical infrastructure, the Treasury – and therefore the U.S. government – would exponentially increase their operational understanding of the current cryptocurrency landscape. This is important because it would allow the Treasury to create the most up-to-date and accurate picture of the financial sector, giving the U.S. government the awareness it needs to reallocate resources to better protect and defend the sector, ultimately strengthening the US national security.
Benefits for industry partners
At the very least, even financial institutions that remain hesitant will benefit from including cryptocurrency in critical infrastructure discussions by learning more about industry best practices in security and risk management, even if they don’t ultimately decide to get involved. In return, cryptocurrency executives can share what they have learned about security and risk management in their unique innovative field, which could lead to valuable insights for their fiat counterparts and business partners. government. In this way, adding cryptocurrency to critical infrastructure would be a win-win.
Eventually, we’ll likely see that the status of cryptocurrency’s critical infrastructure goes beyond financial services. Many see cryptocurrency as the driving force behind Web 3.0, which they see as a coming change to a more decentralized Internet with greater privacy and more power for individual users. In this new paradigm, cryptocurrency and its associated technologies will power businesses that overlap with other sectors of critical infrastructure. So, while cryptocurrency currently has its biggest impact on financial services, it’s easy to see how it could soon play a role in other pieces of critical infrastructure, which is all the more reason for the ‘include now.
Don Spies is the Director of Market Development for Chainalysis.