This week Bitcoin prices plummeted more Than three percent crypto Bank Silvergate questioned how it would make It through the next year and Illinois Weighed a new crypto regulatory regime [Music] Welcome to cnbc's crypto world I'm Jordan Smith digital currency prices Took a hit in the past week with Bitcoin Falling three and a half percent ether Dipping one and a half percent and Solana sliding seven percent markets Looked pretty steady earlier in the week But questions around silvergate's Ability to survive the next 12 months Hit prices hard especially today the Crypto Bank delayed financial documents And while telling the SEC about that Delay it said that all the money it lost In 2022 around a billion dollars meant The company was re-evaluating given the Regulatory and business challenges it Faced that left customers reevaluating Their Partnerships with silvergate Customers like coinbase and paxos fled The bank and investors fled silvergate's Stock which dropped at nearly 60 percent On Thursday worries about another round Of contagion hurt crypto prices this Week and they underperformed the S P 500 Which was actually up eight tenths of a Percent for the week as of noon Eastern Another big story this week continues to Be regulation now crypto prices seem to
Have withstood the recent Spate of SEC Crackdowns but crypto companies are Closely watching the changing regulatory Landscape across the U.S in Illinois Lawmakers there just introduced two Bills that would bolster consumer Protections and introduce a licensing Regime not unlike the one in New York to Talk a little bit more about how states Are pushing U.S crypto regulation Forward I spoke to David DeCarlo he's The regulatory Innovation officer at Illinois's Department of Financial and Professional Regulation that department Helped draft the Bills moving through The state's general assembly and he Explains why State collaboration could Benefit crypto and consumers alike All right David DiCarlo thank you for Being here this week I I kind of want to Start with sort of an overview of what Crypto is like in Illinois right now as You're moving these pair of bills to the General assembly can you walk me through What crypto looks like in Illinois what The industry looks like and the state of The crypto regulatory regime in Illinois As it stands right now So I'm sure as you know Jordan and by The way thanks for having me on this Today in terms of what's going on in Illinois I'm sure you know that Chicago Has always been a focal point for Financial Innovation
Um and so in Illinois that's one of our Strengths so we do see a very active Crypto and digital asset industry There's a number of stakeholders that When I came into the role as our state's First regulatory Innovation officer at The end of 2021 we we've had listening Conversations to understand what what Things look like on the ground and these Two bills are the culmination of a lot Of effort over the last year within our Agency and reaching out to uh Stakeholders and other Regulators to try To put forth something that's going to Promote responsible innovation in our State So let's back up for just a second and Talk about what your role is in this This regulatory officer job can you can You walk me through what some of your Responsibilities are how you you work With some of the industries in Illinois How do you operate Yeah so the uh we're not the first state To have an office of innovation at their Financial regulator not not the first Regulator overall there's Federal Regulators as well who have these Offices and and my role is similar to Some of those it's it's twofold one we Have an open door in terms of uh if There's innovators and consumer Advocates as well who would like to talk To us I'm I'm the central point of
Contact at our agency for trying to Understand some of these Innovations and The Technologies and how they interface With Existing regulations and then the second Part is really key and we can talk about This some more is the the existing setup Of financial regulation is it tends to Be kind of siled it's you've got banking Regulation non-bank regulations that Apply to Consumer Financial Services and So part of my role has been to uh within The agency and working with other state Agencies as well to coordinate and have A wider kind of outlook on what fintech And digital asset Improvements for consumers look like and Then also having the appropriate Safeguards in place so breaking down Silos within our agency has been an Important part of my job so let's talk About those bills then uh you hope crap Craft these bills in both chambers of The Illinois State Assembly and you're Establishing a licensing regime and some Consumer protections can you walk us Through why you thought these Protections were so important right now And and how you're addressing some of That siloing that you just mentioned That that might be prevalent really with Crypto and financial services The as you mentioned there's two bills And one of them is a Consumer Financial
Protection Bill the other is our fintech Digital asset bill I'll talk about Consumer protection bill first because What that bill is going to do is really Level the playing field in terms of Any type of financial services provider Making sure that there's basic Consumer Protections in place and and we've taken A cue from what's working at federal and State level in other states Um that's giving an agency the ability To look at what are some unfair Deceptive abusive practices monitoring Markets in real time and being able to React in real time uh when when those Complaints from consumers come in so That's that's really important and Actually underscoring the importance of States being the first line of defense For Consumer Protection is the Supreme Court actually just took a case uh this This week on again folks are trying to Challenge the constitutionality of the Federal Consumer Financial Protection Bureau so we think it's really important That states especially a state like Illinois be able to take the lead there In protecting our own residents then the Second Bill the fintech digital asset Bill is more focused on life sensing for Digital assets and we are talking with New York and uh let there's legislation In California to try to put forth a Regime that would complement what is
Happening in other states we're not Trying to reinvent the wheel we want to Be able to work with other regulators And then raise the bar nationally by Having in Illinois a digital asset Licensing program that would put in Protections for consumers in our state That are that are already working in a Place like New York Yeah I think I want to talk about that Collaboration between States first and Foremost because I think when people Take a cursory look at what's happening With crypto regulation in individual States to maybe say that it is as siled As some of the concerns you brought up Earlier or maybe it's in piecemeal how Much collaboration is happening with States with Illinois and with New York And California or others how much is how Much collaboration is happening there And Um how easy has it been to reach a Consensus on some of the rules that need To change So I can tell you there's uh you know we Have a direct line to each other in some Of these states where we're sharing Information On uh what is going on in these Industries fintech broadly and then Digital Assets in particular given Everything that's occurred in that Industry over the past year and then
Talking about what are some of the the Things that we could try to move the Ball forward together so that Um again we want responsible Innovation Where there's rules of the road for the Companies that are trying to do right by Their customers and then customers know That there's some basic uh common sense Safeguards that are already uh you know Working In New York where that with their Licensing program for virtual currencies And then even going back further you Know already working for In traditional Financial Services right so these are The types of things like investment Disclosure so people understand what They're getting into when they buy it And then uh another one is Safeguards for customer assets so that There's some confidence that when Customers have their crypto with a Company that that's their crypto and It's not going to be in a bankruptcy end Up in the companies Um you know sort of liabilities that Other creditors would get a chance to Have as well Can you talk a little bit more in Specifics in terms of what you took from New York's bit license uh regulatory Regime I know that it is it's a high Profile level of regulation in New York I think a lot of companies look at it
And they're either in favor of it or They have some questions and concerns About it I mean we've seen lawsuits as Recent as this week or last week where New York was cracking down on some Companies that were operating without a License in the state how much Inspiration did you pull from New York And um what do you think is working There that might work in Illinois Yeah we did take inspiration from Um from New York we took inspiration From our conversations where there is Legislation pending in California as Well so with some of the folks that are Working on that there Um but again it's kind of a Complimentary framework and I think what Is working we just talked a little bit About those basic uh consumer Protections the investment disclosures Customer assets safeguards even Customer service standards you know Having somebody who's available to pick Up a phone at a company and help someone Out when they're having a problem Um but then then getting to kind of the Risk management is really important and I think that's what's working well too These companies need to have the basic Financial Resources you know that's the Capital liquidity requirements that um That Financial Regulators talk about to Be able to operate effectively so if
There are Downturns in crypto asset markets or More broadly in the economy that those Firms are able to weather Those scenarios and then other risk Management around cyber security money Laundering uh fraud perpetrated against The company or against its consumers so We're taking that type of framework as Well where those types of plans and Procedures would be expected of Companies in order to operate in our State and I do want to mention one other Thing which is we've put into the bill The fintech digital asset bill And and on-ramp um so to speak for Companies that do have the virtual Currency license in New York so they'd Be able to apply for a conditional License in Illinois Um while their full license application Is pending and and we think that's That's good for a transition period Um because you know we're going from a Framework in Illinois where uh there's Not digital asset or virtual currency License and giving some of those Companies that are already uh in New York playing by those rules an Opportunity to ease into the Requirements that will happen in Illinois yeah I do think that goes to The point you make about being Complementary to some of the other
States if if they are properly Registered in New York being able to Sort of easily transition that Regulation or that license over to Illinois might prove beneficial for These companies I I am curious how much Support have you seen among crypto Companies that operate in Illinois have You have you worked with them on these Bills have you heard any sort of support Or pushback what is the industry saying To you We have gotten some support and you know In response to we had a press Announcement on this some social media And have seen some support uh we do Expect there will be you know folks that Will comment on some of the technical Aspects of the legislation as it's Moving through our general assembly Um you know that's part of the process So those conversations will continue to Take place with industry and consumer Stakeholders to make sure that we have Something that's Um that that could really be implemented Uh effectively on day one you know once It you know of the effective date of the Of the legislation What about support from Illinois Lawmakers do they do they clearly Understand the industry that they're Trying to regulate or vote on with these Bills and and how supportive have they
Been in moving this legislation forward Yeah so our sponsors on these uh bills In the house and the Senate are Um are are very knowledgeable about the Financial industry they're the immediate Uh past chairs of the financial Institutions Committee in each uh Chamber and uh they've made it a Priority working with us and we've had Conversations with them Um you know going back to last year to Share with them industry development so They're very well educated on what some Of the challenges are Um and what some of the opportunities Are so that we can better protect uh Illinois residents and and again take The best of what's working in other States with both of these bills and Package them together in a way that the Legislators and uh the the Administration and all these Stakeholders understand would really put Illinois at the Forefront of consumer Protection nationally yeah and speaking Of that national uh recognition I want To talk about the federal level for a Little bit I mean there's been a lot of Criticism launched at Federal Regulators If it's the SEC or the cftc or even Congress for a lack of regulatory Guidance for crypto and states are sort Of taking a leap here when it comes to Setting up regulatory bodies to handle
The space but do you feel a greater Sense of urgency because of the Conversations happening around FTX or Playing catch-up with some of the lack Of Regulation at the national level how Urgent do you feel to to get these rules Passed It's we've we feel it's very urgent we Had been working prior to uh last summer When some of these challenges and and You know more than challenges Scams collapses in the crypto industry Were were starting to occur That those events accelerated what we Were trying to do Um and really made it a goal for us to Put forth both of these bills in during This session uh so that we could get in Place as soon as possible some of the Basic protections and and since a Licensing program does take time to set Up the way that we're managing that is The Consumer Financial Protection bill Uh is really important so that On the effective date we'll be able to Especially for retail customers Take a look at some of the Um the Bad actors not just in crypto but In other Industries as well so that's Why that bill these bills really work Hand in hand is because we've got the Licensing creates Um you know it's kind of the long run Goal but since those programs do take
Time even with the transition period the Consumer Financial Protection bill is Really critical in order to have some Protections right away for a customer Yeah and I should point out that that's Not to say that the SEC doesn't have any Rules when it comes to crypto I mean Dr Gary Gensler he'll say that the rules Are pretty clear when it comes to Registered Securities and unregistered Securities and so forth but but in Illinois case or States broadly Is there collaboration or cooperation Happening with Federal Regulators to Sort of move both state and federal Rules forward or is this something that You're doing on your own regardless of What's happening with Federal regulators What we're trying to do is Take what the federal uh policy makers And lawmakers are acknowledging is that There's some current gaps in regulation Uh SEC cftc do have some important Authorities over crypto and digital Assets more broadly but there's there's Still areas where their authorities Don't go far enough to protect uh Consumers and so that's why it's Important for States like Illinois Especially where there's you know as we Talked about there's an industry here to Try to Put those Protections in place as soon As possible because we've all seen you
Know these headlines really every week Now where there's some scam some Collapse in Illinois there was one Recently as many as 7 000 residents uh Unfortunately were taken in by what the Federal authorities are saying is a Crypto Ponzi scheme now the federal Authorities are responding but it's it's After the fact it's to to the fraud that Has occurred We think we need these Protections in Place at the state level because we try To get in front of fraud by making sure It's very clear who's licensed and who's Just pretending to operate as a as a Legitimate company Um I also want to take the other side of It from from the industry perspective Are you concerned at all about a flight Of talent out of Illinois when it comes To rulemaking there's been some talk on On crypto World in recent days and weeks About you know crypto workers may look Abroad for jobs or for opportunities if They feel that the rules are too Restrictive here and as the regulatory Innovation officer in the state is is That a concern for you or are you Working on ways to attract Talent while Also controlling the industry for Consumer protection and for some of These licensing rules I think what we've seen and what we've Been hearing is that there are companies
That really would like to have some more Sense of of what the basic standards are You know they are doing there's some Industry groups that um you know I want To acknowledge they're trying to Approach approach it from a Self-regulatory standpoint but That is really just kind of a complement To having some basic regulation and in New York it has a thriving Cryptocurrency digital asset industry Similarly in Chicago we have that as Well and so I don't think we need to be Part of any sort of Race To The Bottom Here it's you know in in States like Illinois New York Others and and really we should all Across the United States hold ourselves Up as we can have both we can have Thriving industry and we can have common Sense Consumer Protections in place Um and and I think that's our approach Here is we're taking what is is Very normal to see in traditional Markets tailoring it in a way that will Make sense for crypto and digital assets Final question for me and this is more About financial services broadly there's A lot of concern about crypto contagion After FTX and some of the subsequent Bankruptcies we've seen in the space Um and most recently there's been some Question around silverdate Um that crypto bank and and how stable
It is over the next 12 months given all The money it's lost in the wake of FTX And the crypto Fallout last year How are you thinking about Banks getting Involved with crypto within the state or Or the custody of assets of crypto and Is that something you're thinking about In terms of possible rulemaking now or In the future to protect a sort of Contagion event uh with some of the Banks in Illinois We did something similar to what the Federal Regulators announced last year So our division of banking and I I Worked with the division banking on this We put out very similar guidance to the Federal government around if if a bank Is going to be engaged in crypto assets You know there's you need to look at the Legal permissibility of that particular Activity you need to be talking to your Regulator about what are the risks and The appropriate risk management amount Around that activity so That type of guidance is it's actually Very Tech neutral because all the Regulator is saying is very similar to All banking regulation is come come talk To us when you're engaged in a new Business activity so that we could take It take a close look bring a plan you Know around how you're going to manage These risks and then it's something that Can be discussed and that then that's
The starting point is to have those Types of conversations Um you know there was the more recent Guidance from the federal government Around some of the liquidity risks and I Think as you mentioned there's some very Clear examples of some banks that Um or at least one That has had some challenges because of How exposed uh its business was to Um to crypto all right well well thank You so much for taking the time today And explaining how the state is working To regulate crypto more and also work With the industry to get registered and Get licensed Thanks Jordan I really appreciate it All right that's all for crypto world This week but we'll be back again on Monday and we'll see you then Foreign [Music]
