Digital Assets, Regulation & VC

[Host] Justin Guilder [00:00:00] I have the pleasure of knowing that on a personal level, and I'm really excited to be able to talk with Matt today about everything from his background as a regulator, as an investor and his experiences, as well as his experience dealing with the current regulatory environment in the United States as well as internationally for digital assets and understanding how that impacts his you as an investor looking at early stage digital asset investments. So Matt, thanks so much for joining me here today. Love it. If you could give a little brief background on like, who you are and how you got to where you are today.

Matt Homer [00:00:43] Yeah. Well thanks, Justin, for the opportunity to be here. It's really it's really a pleasure. And yeah, I think most people who become regulators don't plan to become a regulator. I hate it. So suggesting that you fall into and I had always wanted to be a diplomat and through sort of some unfortunate timing, came out of graduate school during the great financial crisis and saw financial regulation as an area where I could have a much greater and more immediate impact. And so since then, my career is really focused on emerging technology and financial regulation in that intersection. So I've been a regulator twice FDIC earlier, like Prayer, and then more recently at the New York State Department of Financial Services, where I oversaw the division that was responsible for digital assets. I've worked in house and fintech firms first, the company called Cova, which was acquired by Plaid what where I then worked as well and have spent some time in emerging markets too and now for the last two years, have found that that sort of eclectic set of experiences has positioned me well to have a unique perspective as a venture capitalist.

[Host] Justin Guilder [00:01:51] Great. And so when you say emerging technology, I think of both blockchain digital assets and artificial intelligence. And so maybe we can tackle the AI as well if that's something you've spent any time What do you think about when you say emergent technology? What does that mean?

Matt Homer [00:02:13] Yeah. No, it's a good question. I mean, I remember so when I was I'll tell you a little story just kind of illustrate I want to. So when I was a lady early in my career, I sort of became I was in it kind of in the area that was focused on depositor consumer protection. And I sort of took it upon myself to be kind of the guy that would test new products that came out. And this is when you did it's not like today where like you coucan'tgn up for every new fintech. I mean, there's just like, no way you could do that. But back then, there weren't quite as many. The technology that got a lot of people excited within the FDIC at the time was remote deposit capture, and I don't remember that, but it is just the ability to open a mobile app and take a photo of a check. And then that check is deposited into your account. And at the time that was sort of revolutionary. So for me, emerging technology that was sort of my that doesn't seem as emergent anymore. And it's and it's not. But for me, emerging technology is just anything that significantly challenges the status quo. And I think that AI and blockchain-related financial services are for sure are kind of the two areas today that pose the sort of the greatest chance of dramatically altering the status quo.

[Host] Justin Guilder [00:03:26] Yeah, that's definitely at the precipice on which we all sit today. And so you experience as both a state regulator at the New York Department of Financial Services and as a federal regulator looking at consumer protection at the FDIC. So how do you think about state versus federal, if that's the right way to position the two today? Let's focus on blockchain technology and digital assets because there have certainly been some states that are leading the way and a lot of industries demanding a more comprehensive federal approach to create kind of a clear playing field, which doesn't seem like we're on yet.

Matt Homer [00:04:17] Yeah, yeah, I think that the federal-state dynamic is a really important one to understand, and it's, I think, somewhat unique to the American context. I mean, it does exist in some other places. I mean, Canada has a somewhat similar system, but I think it's it's still it's still pretty pretty unique in some ways. I think Europe is, it may even be starting to mimic more of a US approach. Right, with a kind of EU-level regulation and then subnational implementation of the regulation. But the so this is sometimes referred to as the dual like a dual regulatory system or dual banking system within the context of banking. And you kind of either love it or you hate it. And I think whether you love it or hate it depends on where you set right and what industry you work in. And sort of and I think whether you're industry is a recent industry or established industry. So my, my sort of personal view and I'll talk about what it is I'm talking about what kind of dual regulation means, but is that dual regulation is particularly beneficial for nascent and emerging areas. And then as industries become more commoditized, so to speak, are more standardized, that's when national approaches become more favorable. But so let's talk a little bit about kind of the difference between state regulators and federal regulators. So federal regulators have national coverage. You can cover the entire United States. They're typically very well-resourced or often independently resourced and not even reliant on appropriations or Congress, but they tend to have a very narrow mandate, right? So they can only do what kind of specifically instructed them to do. And they tend to be fairly slow-moving by design. In contrast, state regulators have subnational coverage, although, for states like New York or California, the influence is often beyond your state's boundaries, less well-resourced, and sometimes significantly less well-resourced. But you have often a much broader mandate within the boundaries of your jurisdiction. Big. In the state of New York, the Department of Financial Services has dozens and dozens of dozens of different categories of licenses for financial services, non-bank financial services, insurance, for just a whole host of things that are not regulated at all at the federal level and file in the states. And then the other kind of distinction at the state level is that when they want to, they can move quite quickly. And I certainly saw I mean, that's been that's sort of can be seen through several different examples, including the creation of the Bitlicense, which was contentious at the time, still contentious to some, although I think it has shown its value and sort of in the test of time. But so that's kind of the dual banking system. And the reason I mentioned the beginning that I think it's it's particularly relevant for nascent areas like digital assets, is because it allows emergent new areas of technology to emerge and to be regulated. To allow regulators to discover, right, the best way of regulating that. Another sort of colloquialism, so to speak, is that stage of the laboratory democracy. And that is certainly true. Around financial regulation. So I'm of the view that the banking system is very important and important to keep, because it is sort of an enabler of innovation, while at the same time protecting consumers by providing. Yes, to some degree, some redundancy. Right. Because you've got many different sorts of cooks in the kitchen, so to speak.

[Host] Justin Guilder [00:07:49] Yeah. Laboratories of experimentation is exactly where I was thinking as we're talking about it. And I don't know whether I should be happy that the notions of federalism may be migrating over to the EU, given their structure or not. I'm not sure if we're getting it right or wrong, but I also am a fan of the dual banking system, as you and I have previously discussed. You mentioned the Bitlicense, which of course is a New York license, and you have experienced the New York Department of Financial Services. Maybe. Could you share something that is one of those you had to be there kind of moments, right? Like you are at the cutting edge of regulation in a state that was leaning into. Emerging technology-led regulation came out with one of the first, if not the first, specialized licenses for digital assets. And I'm sure there were some challenges and unforeseen circumstances, and I would love to hear at least one of those stories.

Matt Homer [00:08:54] Yeah, I mean, I have a few I could share. You can cut me off when you decide to, but yeah, I wasn't there. I wasn't there when it was created. I came after it had been created. And so my job was a little bit different, which was to sort of figure out how to scale it and make it more accessible. And I think one of the things that I was particularly keen to try and solve was making it. We're making it more accessible for earlier-stage innovators. And I think that to be clear, there's still a lot of way to a lot a long way to go there. But that was something I felt I felt particularly strongly about. One of my approaches when I got started was just to like, listen to people. And I probably spent half of my time the first few months of the job, just letting people sort of vent. And it was quite effective in terms of clearing the air and also getting new ideas. And so I think that one of the big learnings I had is that when you're regulating a new and emerging area, you have to be in constant dialog, with industry. The aAnd give you kind of one specific example, and I think it also illustrates what made me sort of see promise in blockchain as sort of a I, I would say I was probably a little more skeptical of the space regulator, and being a regulator actued me kind of see the potential a bit, maybe, maybe sort of unusual. But if you remember, if you kind of remember the Covid years, you know, at the beginning of.

[Host] Justin Guilder [00:10:23] I do remember.

Matt Homer [00:10:24] I remember, I, I think that several regulators, including us, the DfES, were quickly trying to very quickly try to assess, well, what is the impact of this on the banking sector and like it and just financial services, and you kind of had to really kind of connect the dots and think through it. And we and we, we thought it was something of all sorts. I was like, hey, what about a small business that's paying rent to the owner of a building? And then you know that they no longer have customers and so they're no longer pay rent. And that, that that is there is there an impact on kind of the commercial real estate market and kind of mortgage lending there? And we realized that we needed access. We needed data, right? And as real-time data as we could get. And we sort of discovered all that we already knew at that, that most data regulators have had a significant time. And I mean, even for banks, it's not great, right? I mean, there's sort of its quarterly, but then there's a lag on the quarterly data. And then for Non-banks that can be even weeks. Sometimes it's even on the annual. So that type of data is not useful when you're trying to figure out how are you doing like right now. And so we put together kind of just like surveys. And you can think of them as or like Google form type surveys and like really just kind of like clunky stuff. But I sort of have this thought that blockchain is sort of interesting from a regulatory perspective because the data is public. And could there be a way to regulate blockchain that is better than the kind of prior forms of regulation, right? Or maybe regulate the wrong word, but like, is there a way to kind of take advantage of some of the inherent features? And so one of the things we did, we hosted a tech sprint, and we brought together folks from across the industry, from companies, from academia, from other sorts of vendors and firms in the space to focus on that problem and think through. Are there ways that we have better ways of conducting supervision in this space that are more effective for regulators and easier for industry actors? And it turns out that there were and I think that that type of collaboration is really important. And unfortunately, I think we haven't seen as much of it recently.

[Host] Justin Guilder [00:12:40] Yeah, the collaboration between industry and regulators is really important. And sometimes it's right, they get it right and sometimes they don't. Interesting to hear how that played out during COVID-19. You're talking a little bit there about how kind of innovative technology then has an impact on regulation. Let's talk about it the opposite way. And just like how does regulation or legislation have an impact on innovative technologies? So earlier you mentioned remote deposit capture, which my naive or perhaps uninformed view stems a little bit from legislation. Right. So there's an act, a check 21 act that enables this type of truncated copy of a chat to be useful, and then technology comes out and takes advantage of that. But there are a lot of people arguing that the lack of legislation, particularly in the digital asset space, is stifling innovation. Do you agree that it stifles innovation, or do you think that that is misplaced?

Matt Homer [00:13:53] Yeah, I think it probably is. I mean, I think that look, I think it's a challenge, whether it's legislation or regulation. Is that you it is, is sort of like timing. And how far do you go? Right. Because to some extent, the job of a regulator and I'd argue even sort of on the legislative side is to want to have you do your job effectively. You want to see kind of how the market is shaping up. Right, and you want to see what it's looking like so that you can write sensible rules. If you're sort of too early, right? You may write rules that are totally irrelevant or just totally kind of destroy an industry before it is allowed to exist. I think that so I mention that because I think where we're at now is the point where we we do need something. And I think that's been very clear through many different examples. And then, we talked a little bit about the dual banking system, but of course, there's also this concept of federal preemption, which we haven't talked about, and that is that the US Congress can preempt state law where, you know, where they pass laws to do so and where it's sort of permissible kind of within the framework of the Constitution. And, and, and so in the, in the security space, that's one example, right, where we're seeing a regulator that's very robustly and actively working to set the national standard, but doing so outside of a legislative context.

[Host] Justin Guilder [00:15:23] Regulation main force I think is what we're talking about there from the SEC. And so we're at this moment, particularly with digital assets, where we are perhaps in need of legislation, perhaps federal legislation to create a clear framework across the country. In May of this year, you testified before a subcommittee on the House Financial Services subcommittee focused on digital assets, financial technology, and inclusion. And you were talking there about stablecoins and potential stablecoin legislation. You tell us a little bit about what your position is on stablecoins where you think any legislation will ultimately land and when it will land. Will we get legislation on some of these topics?

Matt Homer [00:16:19] Yeah. Dear sir, I mean, stablecoins are such a no-brainer in my view. I mean, it's it's sort of like and my perspective has I mean, you'll hear some people talk about stablecoins as like it is just totally revolutionary. It's going to and it's just a dramatic sort of improvement. And while I well, I do see why I do sort of think that's true. I also think in some ways it's it's not it's actually quite iterative and it's just sort of a small incremental improvement on the existing movement of money. And I think that's particularly the case with, with the right, from a regulatory perspective. So from a form, from eBay, a consumer in the market, a history, an industry perspective, it can be quite transformative. But from a regulatory perspective, it's not that different from what regulators are used to. And so you put those two together and it has the ingredients to be just a huge win for everyone. But so regulation and so stablecoins you can think of them as, as I mentioned sort of almost like money transmission. So if you think about the big players in the money transmission space and I know it's space, you know, well, you've got players like PayPal and Block and they have money transmitter licenses in many different states, and they hold money on behalf of consumers. Consumers often do hold some type of balance right in those accounts, but they're intended mostly, for payments. And so the legislation that's been contemplated here is around payments stablecoins. This is important like so to highlight stablecoins that are fiat-backed. So very specific type of kind of stablecoin kind of the safest type of stablecoin. New York has had a regulatory framework for stablecoins for quite some time. And it's a framework that federal legislation has been modeled after. Chair McHenry has, has, has mentioned that publicly a lot recently. And there's sort of three key pillars. One is focused on reserve requirements, and that's requiring that any dollars that are held that first the stablecoins must be reserved on a 1 to 1 basis. So for every dollar that you have issued in a stablecoin, you must hold at least a dollar's worth of, cash instruments. And then those cash instruments can be cash. They can be government securities and things sort of that of that nature. The second big requirement is preemption rights. Right. The. Consumers or holders of these tokens must have a clear right to redemption on a 1 to 1 basis. And there are other things associated with that, such as clarifying the timeline for redemption. And then the third kind of big prong that you see an arc and you see reflected in the federal guide, the federal proposal, the proposal from Congress that passed the subcommittee recently is related to transparency. That is there are audits from independent third parties to verify the assets that you're holding. So it's not that complicated. And I think there's bipartisan recognition of that, that the underlying rules I think there's an I think there's like and rules should be that.