This is the second part of our International Women's Day special, where we are talking with Sheila Warren, Chief Exec of the Crypto Council for Innovation. Today we look at crypto criminal behaviour, the internet before the internet and the impact of crypto on the war in Ukraine.
Walter Jennings: Welcome back to Waves in the Finoverse. This is part two with our special guest, Sheila Warren, Chief Executive of the Crypto Council for Innovation. Continuing our conversation on the global impact of crypto today, we will be covering massive frauds, the unbankable and how crypto is being used in the war in the Ukraine. This woman has led the way in shaping the crypto data landscape in her roles at the World Economic Forum and on Wall Street. And now as Chief Executive of the Crypto Council for Innovation, Sheila Warren, welcome to the Finoverse. Okay, Sheila, you're talking about regulatory ambitions. Was the FTX episode a regulatory failure?
Sheila Warren: So I think it was actually not a regulatory failure, arguably. And the reason that I say that is because a lot of rules that were proposed wouldn't actually have specifically stopped that from happening, unfortunately. This was a case of one individual, or allegedly a small group of individuals, you know, tvd through the court process, perpetuating a massive fraud. And fraud is something that goes back, as long as human history. I'm pretty sure that there were, you know, cave people, cave dwellers who were like cheating each other. I'm pretty fairly certain that was a thing that happened, right? Can't confirm or deny, but pretty sure. And so this is a tale old as time. And so, yes, there was, what made this novel, I think was a couple of things that have to be acknowledged, which are not just about crypto, but about the culture and the time we find ourselves in.
And by that I mean we find ourselves in a time where someone like a Sam Bankman Fried, or frankly Elizabeth Holmes or any number of these, you know, kind of wonderkin folks can be anointed via authority under 30 list or can get seed money, you know, from an organization that's got a big brand name behind it or can wow a journalist or whatever it is. And we somehow proxy that for integrity and for honesty and for substance. Um, it's not to say that these people aren't geniuses or, or whatever, but we are kind of over-indexing on proxying and seeding our diligence responsibilities as consumers, even right, as users of products and services to these outside sources. Because of the nature of social media. It's the time, it's a product of the time that we're in. Cause when you look across a variety of industries, just recently, this story about this young woman who sold a company in JP Morgan and just faked a whole customer list, like invented email addresses.
I mean, this is happening in a lot of places and we have to ask ourselves, what is it about our society that is allowing some of these people to do these things and not immediately get caught, but also to just feel like they have the ability to kind of walk on water in this way. And we're kind of doing that as a society, right? So I think it's an important cultural note to kind of acknowledge that that's part of what I think that was about. Now what makes it really horrible beyond the horribleness of it as a general matter, is how many ordinary folks were taken down in this, right? And that is a differentiator I think, from early internet crashes and things like that. Cuz of course, part of what happened in this phase and what's happening over the last year is also an ordinary kind of boom and bust, right?
You've got projects that start and they just don't succeed. Um, that's not what obviously FTX was, but I think there's some of that happening as well in the industry. And the difference now is that everything is hyper-scrutinized on social media, on Twitter. It's torn apart. You have 24/7 journalism. You know, that wasn't the case back in the early days of the internet. So people are always trying to analogize like, what is crypto like? It's like the early internet. I'm like, well, the early days of the internet, there was no internet. So you didn't have the constant meta, if you will, commentary on what was going on, right? That just wasn't our world. So a lot of these failures, some of which would've been normal, some of which the result of allegedly, again, criminals engaging in criminal behavior. That is, you know, again, as old as time, are getting a lot more spotlight in some ways because of the nature of the society we live in today.
Walter Jennings: What's it mean for the average Joe? Because this might be their first losses and it looked like financial services and they didn't have the same experience with their, you know, fidelity portfolio. So what's going on?
Sheila Warren: So, there's a lot of discussion about consumer protection, right? And certainly here what you see is there, who was protecting consumers, you know, well, it certainly wasn't, you know, Sam and his cronies, right? And I clearly weren't protecting consumers, obviously. Um, just like it wasn't Elizabeth Holmes, her investors, right? Or the people that were taking these tests and getting bad results and then having, you know, God forbid, like thinking they had some horrible disease. It turned out they didn't have, or worse, I would say, not finding out they had a horrible disease they could have maybe, you know, cured, right? But didn't know. So, uh, there are average people who are affected by this kind of sociopathy, but I think that what we need to think about in the financial space is what makes it complicated. Unlike the blood testing space that I keep referring to, the difference here is that people should be allowed to decide for themselves, I feel what kind of risk they wanna take on for themselves and their families and their financial.
I firmly believe that consumer protection as a frame is a very paternalistic frame that I have challenges with because I think that has allowed us in the name of protecting people to deny them opportunities that actually could have served them well. Now, I don't wanna overcorrect, I think in this case there have not been adequate disclosures about risk, but I would call that more of a consumer education and empowerment issue than a consumer protection issue. And what I don't wanna see is a set of regulations that come in, what is our default? Whatever, we're like, oh, that seems complicated and challenging. It's not about how educated you are, it's about how much money you have. So unless you're what I call pre wealthy, you just don't get to engage in certain kinds of opportunities. Now, this happens informally every single day. The whole kind of a wealth advisor is a concept that presumes you have a certain amount of money that needs advising about, right?
No one's wealth advising a poor, you know, a woman impoverished single mom, you know, use this stereotype, right? They don't have a wealth advisor, you know, they could probably use a wealth advisor, right? So, or a non wealth whatever. It's a money advisor. So I think this idea of having to be pre wealthy, I find pretty offensive, frankly. And so what I wanna, what I really am trying to work on and talk to a lot of people in Washington and elsewhere about is how do we create a structure of reasonable disclosures that are focused on educating and empowering users to understand and figure out what are the differences in what I could be doing with my hard-earned dollars or whatever unit of currency it is or whatever fiat you're talking about, right? That is important and that's a critical frame that was lacking here. Um, and so that is a movement I think we need to be supporting. But that doesn't mean that we should be creating yet more stratification in our society to say, you there, you don't get to engage with the stuff at all. I find that that would be a big shame in my mind and not solve any of the fundamental problems we have are inequality in our system
Walter Jennings: Yeah. In Hong Kong under the licensed exchanges, therefore professional investors. But when we look at the volume on where the trades are occurring, it still seems as though the unbanked are driving out of some countries where there's perhaps less reliability in your currency. And if I want to guarantee my money fees, um, sometimes we needed banking. So, you know, it's a, it's a challenge not to overregulate.
Sheila Warren: And, you know, that's another term that I push on a lot is, is this term unbanked. Um, because you have to kind of unpack that a bit. Like why might someone be unbanked? Well it might be because the banks don't wanna serve them. So we call those historically excluded populations, right? They just don't get access in the United States. That's a lot of, you know, racism and, and, and a history here of denying certain communities, um, you know, access to bank accounts, right? Or making them cost prohibitive. That's in other parts of the world, in certain countries, it's about the banking system just leaving and creating a banking desert which got worse during the pandemic, right? Or it's about this process called de-risking, which is again, a very coded word that basically means that a bank can decide, well I don't really wanna engage with that country because it just is too risky and therefore I'm not going to, and I don't have to and no one's making them, right?
So when we talk about unbanked people, I think we have to look at what is the reason for that. Now, some unbanked people operate out on the fringes of our economy and they're just the poorest of the poor. So I wanna clarify, I do not feel it's responsible for crypto to be addressing at this point that community cuz that community is like no food, no shelter. There's just basic fundamental. Like that's not what we're talking about here. We're talking about folks that could be in the formal economy and are not for some reason, the other reason they might not be is they're choosing not to be. And they might choose not to for a variety of reasons. I can tell you, I co-founded a project called Cradle, the Crypto Research and Design Lab with, um, a friend and colleague Tricia Wong. And she had a bunch of ethnographers go out and do a lot of, um, research and excavation, ethnographic research in the black community United States to talk about like, why is crypto so attractive to that community?
And it all rooted back to stories of intergenerational trauma around financial services and stories of their grandmother or in their family of people being denied banking services or mortgages or whatever it was. Redlining as we call, like all these kinds of things. And that's a legacy that has a very real impact. So a lot of banks today will say to me, well, you know, we've fixed all that. We now don't have, you know, minimum deposit requirements, we don't have, you know, overdraft fees we don't have. And I'm like, that doesn't, that's great for like the folks who are already inclined to come in. They're gonna get a better level of service. But folks who are just mistrustful of that system for very good legacy reasons are still not gonna, that's not what's keeping them out, right? Anymore. So we have to talk about these systems and how they have evolved over generations and who they have left out and who they have actively solicited as customers and what that means for how our financial system has evolved.
Walter Jennings: And, and in many developing countries, crypto has been a tool not only for the unbanked, but those without identity, um, not maybe every village issues a birth certificate or you have, uh, refugees and migration changes and not everything follows. So, um, it does allow the anonymous user to get in and get active.
Sheila Warren: And this is another thing, right? Like, uh, I, in my own family, um, I have just one generation back. I have, um, a mother-in-law who was born in a refugee camp. And so, uh, identity is a challenge, right? When it came time for her to apply for Visa to come visit us in the United States, it's complicated cuz her papers have what they have on it, right? So it's, these things are challenging and we forget, I think in a place like, you know, the United States or even Hong Kong where there's, there's a mobile population, but it tends to be very, you know, high income workers who come in for certain reasons. We forget that there is a gigantic class of folks who are not in that category who just don't get the attention, who are migrant workers who come in for the season, uh, who might have crossed a border without documentation.
Like there's all kinds of reasons by people who need to, who still need to feed their families and, you know, put a roof over their heads and all of that. Still need to go get healthcare. You know, they still need a means of payment or a means of engaging in value transfer. And all those people we may like talk about them as if they're outside of the system cuz they formally are, but that doesn't mean they don't operate in an economy, right? And so there's so many people operating in economic ways and transferring value that are not recognized by our system, or cannot be to your point recognized. And they're not just in developing countries. This is everywhere. This is in the Middle East, this is in the United States, this is in Canada, this is in Europe. I mean, this is everywhere. Anywhere that you've got a movement of a migrant population that is performing service, wage jobs, I guarantee you have folks who do not have identification that they would need to get a formal bank account in most places, that is just a reality.
So I think we have to stop thinking about this as a problem relegated a certain parts of the world, like just the global south, and understand this is a problem that exists in every society in the entire world. It's just that these folks are not considered, they're called underbanked or unbanked, and we put a frame on it and say it's the job of the banking system to go get them or what? That's the frame, right? But that's not the solution. It's not going to, that answer's not gonna happen. So what do they do? And so I think this is something that I've spent a bunch of time in places like this and so just understanding, you know, what are the motivations? What is a realistic solution? And then we didn't even get into, Walter, you were alluding to hyperinflationary economies where nobody wants to be in that currency, right? It doesn't matter how wealthy or not wealthy, whatever. You're like, I don't wanna put my Argentina, I I don't wanna deal with that, right? I'm in Argentina and like $20 today is large.
Walter Jennings: Argentina, Venezuela, you name it. There's in many cases of hyperinflation. On the plus side, we've talked about how uh, crypto can help the, uh, refugees or the under bank, but the anonymity, uh, what role is crypto playing in the war in Ukraine?
Sheila Warren: Yeah, so this is something I feel very passionately about. Cause I think we have to look at the things that happened last year holistically. And so people who are kind of knee-jerk, anti-crypto or maybe anti-crypto for their own reasons, which may be well research, that's up to them, right? We all have different perspectives on things. Uh, they, they look at like Terra Luna, you know, to three hours capital to FTX. They're like, that is crypto. And I look at it and I'm like, yeah, those things happened, but they were the result of specific individuals who are known and named individuals who did terrible things and betrayed the trust of everyone, right? So that's those examples. And then there's the example of how crypto donations were able to catalyze a wartime defense in Ukraine, which I just find to this day, one of the most astounding things I've ever witnessed in my life.
Like just watching Vladimir Zalinsky and his ministers basically dock their own wallet and be like, this is a wallet that is owned by the Ukrainian government. Having that verified by the State Department and seeing donations instantly flood over that the Russian government could not stop, or Russian actors could not stop, was just incredibly powerful. And we have to remember that there are just as there are situations where the US government has a very legitimate policy interest in stopping the flow of funds. Lazarus Group, North Korea, great example. There are times that they want funds to flow to certain places, right? And Ukraine's a great example. Now it's not for me to speak for the government, and the government doesn't have like a monolithic voice by any means. And also, but you know, when you talk to people in the United States and certainly in Ukraine and, and many parts of Europe, they recognize how important that catalyst was. Now the amount that what people, well, the amount that went wasn't blah, blah, blah. And I'm like, but look at how long it took the national community to get the subsequent billions of dollars as aid that they had to get. There was so much process around that. By that time it's game over, right? You needed to have that bridge and crypto provided a rail to do that reliably, transparently, authentically, and safely. Right? And like, what an amazing validation of one of the core premises of what this entire industry and system could be about.
Walter Jennings: How, how are the regulators going to keep up? Because it seems the speed cycles are occurring on dramatically different pace. You know, we've got a yeah, you know, a, a formula one car racing around and getting things done into the crypto industry. And then I think it seems like we've got a bit of a, uh, of an older car trying to play catch up.
Sheila Warren: Yeah. And that's the nature of regulation. So something I, I was working on a lot. My last role before this was I founded the digital assets team at the World Economic Forum. And then when I left the forum, I ran all of tech policy. So I talked to a lot of governments about responsible innovation and what should regulation, what can policy regulation look like. And whether it's AI, whether it's drones, whether it's crypto, you know, technology is moving faster and faster and faster and faster. And the idea that you can regulate the pace of the technological innovation is absurd. You cannot, it's just, we have to just take that as a given. So that means you have to fall back on principles-based regulation. And there were a lot of models that got tried, none of which really made sense. One was same risk, same regulation.
Uh, that's a lot of times that's different risk, you know, as we can kind of see, right? So it doesn't really work. Same activities, same regulations seems to make more sense. And that's kind of where we've evolved as a community in the crypto space. If something, if the activity, if you're lending, for example, right? Or if you're issuing credit or if you're providing insurance, there are principles around how you do that. What safeguards should be in place. And there's at least a framework for how you think about consumer education in those spaces, right? If you're doing payments, like things like this, there's a lot of parts of the blockchain technology and its applications are built upon it that are novel that have not been done before. Be like trying to regulate social media before you, before it existed, you wouldn't even have an idea, right?
And we know that in the United States section 230 governs communication standards and things like this that worked for a little while. It's got some challenges in it, you know, but it was a pretty good stab at, at an effort to kind of say, we don't really know the technology around these things and what happens with it. We don't really get it. But we do know that if you are, for example, if you're gonna harass somebody, we have rules around that, right? If you're gonna, if you're gonna abuse children, we have rules around that. Like some of these edge cases you can kind of say, we know what to do in that instance, and you can almost back out, okay, what would that mean for a more ordinary case? And in many cases, the right answer is nothing. The technology in the market will assess and decide what's sticky and what's not, and then you'll be in a place where you can actually put into place some regulation around it.
Walter Jennings: Okay, well, looking back, we will remember 2022 for bad actors and perhaps slow regulation
Sheila Warren: Year of the Sociopath. Yes.
Walter Jennings: What do you think are the future threats, uh, to the crypto industry?
Sheila Warren: Yeah, so there's philosophical threats and there's kind of like actual threats, right? So, uh, frankly, I think there are more, you know, bad apples that should go. And I look forward to that, and I hope that that happens without taking down a lot of innocence, you know, in their wake, right? Like, I, I just hope that another mechanism emerges to, basically,
Walter Jennings: I would just make a side note and say, if you keep your assets on the exchange, please invest in a cold drive, uh, cold wallet and take it off.
Sheila Warren: There, you know, I just think we're at a time when you have to make your own assessment about what you think is gonna happen in this space or on some of these things, right? So that's one thing I'll just say. Um, but what I think would be the real tragedy here is kind of what I alluded to earlier in our conversation, which is if we just digitized our existing wealth stratification and opportunity stratification, if we just took that all and just moved it on to a different system that we called decentralized, but the regulation said that even though there is now, you don't have to worry about your data getting monetized by an actor that could then, you know, do horrible things with it that you didn't want. Whatever, regardless, you just are not wealthy enough, you know, or sophisticated enough or whatever we criteria we put into place to access and use that thing, because that is what has caused so many issues over time in our society, like over and over and over again, right?
And every time a new innovation comes in, it is the wealthy who engage in it first almost every time. The automobile is a great example of this, right? To go back all the way there. But, uh, stitched clothing, all these things are like, right? Like are just things that, that you can think about. That being said, um, there's such an opportunity here to build a more inclusive, equitable system. And to me that is such, it's what drives me despite people are like, how, how are you in that space after all of this, you know, stuff. And I'm like, listen, I think that I live in California, my state was founded on the back of the gold rush. Do I think the rando dudes who came across the country to mine gold were all wonderful people? I do not, I do not think, I think most of them were either outcasts, crazy or something was probably a little off, right?
With a lot of these people. But you know what? I love where I live. I love what we've become. I'm very happy with a lot of the things that, you know, there's always gonna be those early adopters who have a different vision. And so I think the goal here is to protect the average person while this innovation gets sticky and while it lands. And so the biggest threats to it, I think are things are gonna force it into a very narrow confine and really narrow the aperture of innovation. So if you're only allowed to use, this is terrible, this example would never happen, but let's say, as if we're, if you're only allowed to use crypto for payments and nothing else, right? No data, no anything, like that's a huge miss. If you're never allowed to use it for value transfer of that kind, that's a miss.
Right? And my concern is because we talk so much about this space now as if financial services is sum total of it, that's a problem because some of the regulation that's gonna come in that is actually suited to the financial services aspect or might be, is not applicable at all to decentralized data storage, digital identity, all these kinds of things that are gonna really revolutionize a lot of the ways that we engage with each other as a society, the way we do business, the way we speak to each other, the way we communicate, the way we share content. And I'm concerned that there'll be overreach on the part of financial regulators that cuts the aperture of innovation. It makes it so narrow. Some of those other projects that are just starting to find their feet are not gonna have time to thrive. And you can imagine if the internet was overly regulated around email and you only were allowed to do email, that was it.
You couldn't do anything else. Now, some could argue that'd be, I, I think email is horrible. So I would say that's terrible. But some people could say, oh, great, there'd be no social media. That would be a good thing. Maybe, maybe not. But the reality is the world would be very, very, very different. And I do think there are aspects of things like social media that are good and some that are bad, right? But the reality is that innovation has changed the democratization of content in a way that you cannot, I don't, I think is inarguable has allowed people to make a lot of their own decisions about things. Even those decisions are often, I would argue misguided. So that's the concern. That I think is the threat that is a bit existential in my mind, which is a word thrown around a lot in our industry, existential.
Walter Jennings: Sheila. Um, we're getting towards the end, but I wanted to ask you a personal question. You represent an industry that's in the crosshairs. Do you feel you're constantly fighting the critic? Do you lose sleep at night? I mean, what are the perils of your role?
Sheila Warren: Yeah, yeah. Do I lose sleep at night? Certainly, over all kinds of things. I mean, we're coming out of pandemic. There's all kinds of reasons why I lose sleep at night, right? But I think what keeps me going is in the feast of some criticism, some of which I think is actually quite legitimate, some of which I think is completely misguided, some of which I think is actually, um, deliberately maliciously flawed, right? Like based on bad facts and the people should know better, right? Um, is the fundamental belief that the systems we have built do not work for a lot of people. And it may be that this new system that we are building and people, whether people wanna acknowledge that or not, this thing is here, it is not leaving. So the system we are building now, and I mean that technically, I mean that financially in terms of governance, in terms of, you know, data management, that system could be significantly more inclusive and redress some of the historical inequities built into old systems that I think are very challenging to reverse and not because there has not been effort to do so.
So I think it's really important to harken back to an early part of our conversation where I said a lot of banks, right, they have, they've realized the inequity in things like overdraft or minimum balance or whatever it is. Nevertheless, you still have suspicion and mistrust on the part of a lot of the population who was historically excluded to use those systems. So it's not about just changing some of those parameters, which in many cases has been done. It's about once you lose trust, it's hard to get it back. And so building these new systems from the ground up, embedding democratic principles into their governance, all these things, I think they motivate me. I spent 10 years in civic technology thinking about how technology conserves civil society and the ways it can't, calling out some of the ethical issues, thinking about data responsibility, you know, um, I'm a lawyer by training, you know, I've done a lot of civil rights and civil liberties advising and work.
And so a lot of these things, I think for me, this is my generation's best chance to build something better. I'm not, you know, 20 years old, right? So for me, putting all my eggs here in a way and really spending my limited time and energy, you know, on this emotional energy and other energy, um, feels really important. And look, it may not wind up that way, but I feel like if everyone like me leaves the system to the sociopaths, then, you know, what are we doing here, right? Like, we can't just seed that. We can't just say, Sam Bankman-Fried. You know, people like that. Like that is not the right answer. It has to be that we are working actively to try to ensure that some of these principles get baked into the policy and the guardrails, uh, and also into the thinking around how this ecosystem evolves.
So that's kind of what I say to critics. It's why I remain committed. Um, but yeah, I, honestly, I think you'd have to be a sociopath to not take a look in the mirror and say, um, you know, I went through this in December. I have a podcast called Money Reimagine, and my co-host and I, we joke about, we had this joint therapy session on our pod, right? Just like, what's, what's going on? You know, that we've, that we, that we released in January. But you, you, you, I think we all had to take a hard look at like, what is it that we're doing here and what is it we're enabling? What is it we're trying to do? And what are we trying to do? What are we actually doing? But I remain, at least for now, I remain convinced that this is a path forward to a better world. And so, uh, that's what let me sleep at night, frankly.
Walter Jennings: I wanted to ask our guests if there is any song that kind of powers them through their journey, um, in this field, uh, what song would you take with you into the Finoverse?
Sheila Warren: Oh my goodness. And there's so many great choices. I've been listening to a lot of seventies protest rock with my kids lately, and we've been talking about like Kent State and the Vietnam War and all this kind of thing. But I've had a song in my head for the last two weeks, um, which I don't think is that well known. It's by a band called System of A Down. They were a huge band, um, in the United States in like the nineties. And it's a song called B Y O B. And B Y O B stands for Bring Your Own Bombs. But they don't say that. Uh, and there's a line in it that, uh, they repeat over. It's kind of a metal song. So it's probably surprise people that I listen to this kinda music, but I love this kinda music.
There's a line in it says, why don't presidents fight the war? Why do they always send the poor? And the lead singer just says it over and over and over again. And I've just had that, I've been waking up with that in my head for, I don't know exactly why. Clearly I'm working something out, but I've just been thinking so much about how our systems, all of our systems, right, they just, they just leave so many behind our political system, our technological systems, our financial systems. And I think that is such a shame and such a tragedy. So that's a song that it's also just like got a great beat and it really pumps me up. So I've listened to that a lot lately. So that's my answer.
Walter Jennings: Well, thank you Sheila Warren, the CEO of the Crypto Council for innovation. It's been great having you on Waves in the Finoverse. We really appreciate it. Thank you so much.
Sheila Warren: Thank you, Walter. It's great to be here.