Carole House Addresses Digital Assets & Responsibility Among Decentralized Technologies

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to start our uh our afternoon off I'd like  to introduce Carol House Carol has recently   served as the Director of cyber security  and secure digital Innovation for the White   House National Security Council and she has led  Innovative initiatives at the Nexus of National   Security with cyber emerging Technologies and  illicit Finance enrolls with the U.S treasury   Senate staff the U.S army and two tours within  the White House and she's going to be talking   to us about the future of responsible development  of digital assets ladies and gentlemen Carol House a little stable so watch your totally fair warning  for anyone that knows me um   so good good afternoon um thanks so much for  that incredibly overly generous introduction   um and to GBA for inviting me to come speak  with all of you brilliant people today   um it's great to be here with all of you to  share some thoughts on shaping the future   of responsible development in digital assets  and distributed Ledger Technologies or DLT as   I'll call it later up until my recent departure  from the US government and from the White House   I was honored to support cyber and emerging Tech  issues across all you know legislative executive   regulatory offices and especially recently LED  crypto identity and cyber policy at the U.S   treasury's financial crimes enforcement Network  the primary regulator for anti-money laundering   purposes for crypto firms and then also at the  National Security Council supporting the deputy   National Security advisor for cyber and emerging  tech and neuberger and I think you'll note as we   discuss things later that working on issues like  cybercrime and identity and crypto it's not by   accident all of those three things really tie so  integrally together with each other so I'm very   grateful for the opportunity to come and speak to  you all about things that I care so deeply about   an incredibly complex landscape of policy legal  National Security issues economic technological   developments service the Strategic backdrop for  blockchain and digital asset development in this   moment in history there are critical challenges  today that continue to present themselves in   ecosystems around identity privacy discoverability  resilience and regulation these issues are also   not the responsibility of just one sector both  public and private sectors both inside the   United States as well as internationally hold  the capabilities and responsibilities to help   ensure the responsible development of these  Technologies and their related assets today   I'll share my perspectives on some of those most  critical capabilities and responsibilities that   can hopefully help Drive the best developments  in technology and policy for the future of this   ecosystem to Leverage The Incredible potential  but also mitigate the very present risks that   the space can also present so to set the stage  for the discussion first I'll just underscore   that my remarks are not aimed to point a finger  at either side for the purposes of assigning   blame while there certainly have been and remain  illicit actors maliciously leveraging digital   assets and targeting the vulnerabilities in these  platforms many actors in this space are totally   illicit trying to drive wonderful developments  for economic and technological purposes to serve   their businesses or even provide humanitarian Aid  so even in light of this recognition it's still   important for us to understand where there have  been challenges misunderstandings successes and   failures that have brought us to this current  state in time on the development and Adoption   of Technology standards and policies for for the  space so my final remark to set the stage before   diving into the issues is that I acknowledge that  many of the issues that I highlight will be framed   specific to or especially for digital assets  rather than more broadly blockchain Technologies   of course many of the Professionals in this  room and across USG are interested far beyond   just the financial applications of this of these  Technologies and their Associated tokens however   given the critical focus and the significant  challenges that exist in this space I think   it's entirely relevant for us to discuss some of  those challenges and what the current landscape   is for digital assets since I think that's  a consideration for anyone who's looking at   building DLT applications um and solutions for  blockchain are not just technical they're also   policy regulatory Frameworks and how they treat  assets and activities that can be supported by   these Technologies are are a part of Government  blockchain Solutions and I'll note that those   Frameworks do not necessarily imply a framework  that has to be or should be based on the form   of those Technologies so with that scene setting  today I'll discuss a couple of things first set   the stage on the critical importance of innovation  and competitiveness not only in blockchain and   fintech solutions but also in regtech Solutions  in order to support the responsible innovation in   this space and then finally I'll speak in a little  detail to some of the key substantive issues that   government and Industry are facing that I believe  that they will have to address in order to drive   the future of innovation and application of these  Technologies specifically those issues will be   illicit finance and other Financial crimes  and consumer exploitation cyber security and   resilience identity privacy and discoverability  and then finally decentralization and personhood   as I like to call it so if you take away just one  thing from what I'll say today let it just be that   getting Innovation right in the digital asset  space is something that requires partnership   and a recognition openly and understanding on  both sides of those responsibility abilities   and capabilities across both government and  Industry domestically and internationally   so an innovation Innovation is a core feature and  sits at the heart of the US economy Innovation   drives how we generate jobs and how we seek and  grow new Industries and markets how we maintain   global economic leadership and competitiveness  this Innovation benefits us Beyond just economic   purposes also in national security tools that  help to reinforce the effectiveness of sanctions   and anti-money laundering regimes as well as  provide us the various strategic benefits that   the United States reaps from being from playing  this Central role inside of the U.S financial   system and all of this is incredibly important for  us to keep in mind in the context of efforts by   certain authoritarian regimes to drive changes  in the digital world order and assert digital   authoritarianism and irresponsible behavior in  cyberspace at the recent special competitiveness   studies project global technology Summit I  think some of you are there I recognize you   um I was thrilled to hear National Security  adviser Jake Sullivan continue to emphasize the   critical work that the administration is striving  and work that must still be done to ensure U.S   competitiveness and emerging Technologies like  artificial intelligence biotechnologies and   clean energies to make sure that these critical  emerging Technologies work for and not against   democracies and security I fundamentally believe  that DLT and digital assets are a critical part   of that story of U.S competitiveness perhaps not  so coincidentally on the day of that Summit of  

the special competitiveness studies project  the White House released its fact sheet on   the US government's comprehensive framework  for responsible development of digital assets   however a key part of that Narrative  of competitiveness is that responsible   Innovation does not mean unchecked technological  advancement without regard to implications for   society security and Democratic Values to ensure  the advancement of responsible innovation in   blockchain Technologies and digital assets both  the US government and Industry must play a role   and have played a role on the government side  those capabilities and responsibilities often   take the form of them playing regulator and  enforcer against unsound and criminal practices   enabling broader industry and government  advancement through standard setting and   supporting research and development and promoting  trade education and adoption so each of these   roles is critical the Department of Commerce  spoke to each recently in their publication   for the report on the responsible advancement of  U.S competitiveness in digital assets they also   emphasized the critical importance of consistent  engagement between public and private sectors   so federal agencies for years have leveraged  some mechanisms to try to understand and enable   Innovation whether through the fincen's Innovation  program the sec's fin Hub lab cftc and also grants   that have been leveraged by NSF and others  to support development of privacy enhancing   Technologies as well as blockchain analytics  Solutions but especially exciting to me were   some of the announcements that were made recently  driven by the efforts underneath the White House   Banner where the US government has announced  supporting some r d efforts related to DLT for   example DARPA just announced a partnership with  Inca digital via the small business Innovation   and research program to map the impact of digital  assets so including how they're linked to illicit   Finance how they may affect or be affected by  a traditional Financial systems or Trad Phi   the National Science Foundation committed to  build a digital assets research and development   agenda very excited about this as well as to  back research to support digital systems that   are usable inclusive Equitable and accessible  and in this year's U.S government multi-agency   research and development priorities memo the  White House listed Financial Technologies   which they previously outlined in the critical  emerging Technologies list to include digital   assets distributed Ledger Technologies and digital  identity infrastructure as a priority for agencies   to collaborate on for research and development  efforts states have also embraced measures to   understand and enable its Innovation whether  through regulatory sandbox approaches like you've   seen in Wyoming and some other states or examples  like the New York Department of Financial Services   Tech Sprint on digital asset technologies that I  participated in in 2021 but I would be remiss not   to underscore that part of that responsibility of  the US government to drive Innovation is also to   make sure that the regulatory framework is one  that enables appropriate Innovation to thrive   all of these pieces must work together to be able  to complement each other to achieve these goals so   that means for optimal Innovation to be able to  thrive a regulatory framework would hopefully be   clear it would be understood it would be enforced  and complied with by the industry and it would   evolve based on a true understanding of the risks  and evolve to make sure that it was addressing   those really those those key issues that were  arising so a couple of key issues that often   come up in the context of a regulatory framework  meeting the needs of innovation um I often hear   criticisms on both sides one saying it's the wild  west this stuff is innovating without any regard   for Humanity um and for and for illicit Finance  concerns and fraud and consumers and on the other   side we're we're crushing and stifling Innovation  because of too much uh overly regulatory burden um   I think these are interesting that some view it as  a wild west since the U.S has a very comprehensive   regulatory framework that's been in place since  at least 2011 by fincen you have as you have   a sanctions framework you have a tax framework  you have Capital markets there's there's so much   coverage here the core issue tends to be around  opportunities for points of clarity or covering   certain Prudential obligations at the federal  level but for the most part the fragmentation   that exists in in the crypto regulatory system  in the U.S is the same as the fragmentation that  

exists in just the regular Financial regulatory  system so most of those concerns really are not   specific to crypto um on the other side of being  overly burdensome on the regulatory framework   um I think again many of the concerns that are  presented are the same are the same kinds of   obligations that exist for all Money Services  businesses that PayPal and Western Union also   face on having to get MSB licenses to operate in  50 different states so none of this means that   there's no point for opportunities for clarity and  for evolution it just points out that some of the   concerns that are raised in the U.S I think don't  necessarily come with appropriate type of context   for industry innovating especially on the  technology side is a role and responsibility   that they often naturally rise up to so  since originating research in cryptography   and distributed computing in the 1980s and  90s that led us to the Genesis block and now   to Innovative platforms like ethereum and  cardano Solana hedera all enabling higher   order developments in dapps and digital  identity and broader applications there's   incredible potential and incredible growth here  but this is also where industry must take steps   to sufficiently account for the risks that exist  in this space and where I expect industry to and   I feel that many many have already been driving  these Innovations to make sure that we are at the   Forefront of driving world-class Innovations  and reg Tech and the Security Solutions that   will make sure that these Solutions work for and  not against democracies in the American people   so this requires a sympathetic eye sometimes  from industry to governments to understand   that the government rightfully has has a duty to  understand and monitor and mitigate the key risks   that exist in this space and whether they're risks  related to climate impacts from computationally   intensive algorithms and protocols or entire  assets and holdings of consumers disappearing   from rug pulls or cyber crime these These are the  kinds of concerns that the government exists to   try to mitigate so we have to understand what  they're looking for and then look to Industry   to see where we can Implement solutions that can  address those core issues to make sure that that   agencies feel comfortable with the current  state and the future state of the industry so this is where industry can take a role to  ensure that keeping Pace with those Innovations   these developments can also innovate to address  those critical risks um and one and one more   point on the fact that it really requires a deep  understanding of the different implementations   in the technology and I know that that's often  brought up by industry these coins and platforms   look very different from each other the risks  and benefits are also unique to those specific   implementations some systems claim to be immutable  or decentralized those are typically not a binary   those are typically on a spectrum nothing is  completely immutable nothing is completely   decentralized at least so far as what I've seen  examples like proof of work blockchain systems   people love them for their potential decentralized  and democratized access to financial services and   systems but they present potential challenges  for climate implications and impacts however   when you look at proof of stake systems you might  get the benefit of not being so computationally   intensive but there's other Progressive values  that might that might be a cost there if you if   you leverage A system that potentially makes the  wealthiest wealthier some critics have pointed   out so there definitely has has to be Movement by  by industry and and they've definitely done a lot   to try to rise to the occasion to address some of  the critical issues through the space when you go   through the stack the kinds of technologies that  you can apply whether through technological or   governance controls vary they can be securing  mining Hardware tiering Version Control DNS   whitelists block headers and Fields to facilitate  information transfer and compliance with the   travel rule I hope all these things make sense to  the folks in this room they can be highly highly   technical or specific to the anti-money laundering  framework where I'm most learned on the regulatory   side creating Registries for a trusted dapps and  virtual asset service providers or building in   digital Identity or transaction thresholds there  are people in Industry that are building in all   of these things so it really just requires  looking specifically at the implementation   the risks and figuring out what's needed to  make sure that the system is built securely   so now that I've covered extensively some of the  views on responsibility and capability across   industry and government to support this to support  this responsible Innovation let me speak briefly   on a couple of those key issues that I think are  really going to shape the future of this space   first illicit finance and other Financial crimes  consumer exploitation I like focusing on this one   first because it was the first one really on  the international policy stage the financial   action task force standards to set the first ever  International standards related to digital assets   however illicit Finance remains a persistent  problem we have North Korea and other cyber   criminals that are stealing hundreds of millions  of dollars and then laundering it through this   system I hear Industries say well it's a public  Ledger like yeah but when it's not sufficiently   regulated so the key core issue of jurisdictional  Arbitrage still being a problem I can watch it on   a public Ledger go to a place and I can't do  anything about it because there's no identity   on the other side there because no one has  regulated and is properly enforcing that system   I believe that we can drive Innovations  in this space technologically as well as   as well as through policy and governance  to make sure that we could eventually dare   criminals to launder on these public ledgers  and to one day through the programmability   and other features of these systems make  sure that that digital assets are actually   less of a risk for money laundering  than traditional Financial systems   I know some people point to the fact that it's  a public Ledger and that you can support that   traceability to mean that it's already less risk  um that of course like you can see it so it's   better than cash but of course cash takes time and  space and physics to move from point A to point B   um crypto does not it's like sending a wire  transfer from my pocket to yours anywhere in   the world there's something that stops me from  being in Iran or you from being in North Korea   um so of course those features of global reach  instantaneous value efficiencies these are   great features that we want for for potentially  providing safe and affordable Financial Services   more broadly to people those are also features  that are incredibly attractive to illicit users   and that's why we have to figure out how to build  in the right protections and the right regulatory   framework that will shape that future for us so on  cyber security and resilience I know I've spoke to   that a little bit based on some of the targeting  that we've seen um just this year on hundreds of   millions being stolen from crypto exchanges and  blockchain platforms due to poor resilience and I   believe you already had a keynote speaker earlier  today speaking to some of those issues so that's   going to continue to be an issue that will drive  the future of the space that will drive trust from   consumers in this space willingness to actually  keep assets and hold them there will be critically   defined by if we establish the right standards  and build in these appropriate protections now for   the the really sticky stuff identity privacy and  discoverability so this is a tough issue identity   is key it's very sensitive and the reason why  it's so tough is because now with with blockchain   Technologies you have two pipes that traditionally  have been bifurcated information transfer in the   internet where there are technologies that allow  for establishing trust and identity but it's not   implicit a part of your information transfer you  don't have to have your identity attached to it   value transfer we're very used to having identity  attached to that in digital payment systems now   you have a platform that can facilitate both  happening simultaneously and if you put the   right encryption on top of it you can't even tell  if it was information or value transfer that's why   Regulators are concerned of course the future of  Technologies zero knowledge proofs and homomorphic   encryption these developments are going to help  us solve these problems but that is a core issue   that I think both industry and government  bodies have to be aligned to to understand   why it's so tough and why we have to get that  right and then finally the final tough issue   decentralization and pers and personhood like I  mentioned before most of these tough issues are   or these features that the assets are not are not  binary they're on a spectrum nothing's completely   one way or the other so far that what we've seen  um I think the cftc's recent action against a Dao   um decentralized autonomous organization um  that through a lot of a lot of the sector   um up in arms um was very interesting and  points to the fact that they view the adao in   this instance under these facts and circumstances  was a person underneath their authorities it will   be very interesting to see if fincen and under  the bank secrecy act also views daos or some   daos because it will be facts and circumstances  dependent to be a person I know much of Industry   ends up looking through the first letter in Dao  decentralized to say I'm not regulated I would   encourage them to think about the third letter  in Dao organization literally in the definition   of person under the bank secrecy act doesn't mean  that all dowels are persons does not definitely   depend depends on their organization  the level of centralization their role   Etc but it does mean that they need to think  very hard about what function you are serving   and whether you are operating and administering  a financial um a financial institution platform   so there's a lot of assumptions that have been  made about decentralization I hear industry   think about well if I can just efficiently  decentralize then I won't be regulated   right like if there's just if it's just people  totally peer-to-peer there'll be no regulation   I I don't think that's likely the future um  well first off I don't think that getting   rid of intermediaries is likely the future we  like intermediaries I don't keep all my cash   underneath my mattress for a reason I like having  an intermediary that I can go to and sue if all my   money gets stolen but I recognize that some people  will potentially like using this disintermediated   system however a regulatory framework is a living  framework the bank secrecy Act was a living   framework I would totally expect that if the  future really is totally decentralized finance and   there are in fact no intermediaries at least that  are currently defined as financial institutions   Regulators may look at others that are not FIS  like minors or they may consider if they have to   impose obligations on end users and consumers like  the cmir when you're on a plane and you have to   say if you're carrying 10 grand cash over a border  that's an obligation I place on Americans not on   a financial institution or sorry that I used to  when I was a regulator I'm not a regulator anymore   um but so I'm not saying that that's advisable  desirable or even likely and certainly not near   term I don't imagine that happening it's more of  an assumption that I hear industry make sometimes   that if you decentralize it there won't be  any regulation I don't think that that is   likely the future so instead the best steps  that everyone can take is try to figure out   how to build in these controls how to make  sure that Tech is evolving in a responsible   way and make sure that those risks never have  to be mitigated in such undesirable fashion so   thank you all very much this was a wonderful  opportunity to chat with you and thank you questions

2022-10-15

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