Matt Orso of Troutman Pepper on The 5 Things That Can Be Done To Improve and Reform The Cryptocurrency Industry
Better cybersecurity safeguards across the industry. The crypto industry can be improved by the adoption of better cybersecurity safeguards industry-wide to protect customer assets from both external and internal threats. We see repeated examples of cybersecurity failures in the industry — for example, the security engineer at Crema Finance who stole $8.8 million in assets and was charged criminally in the U.S. While it may run counter to the underlying premises of defi, adoption of base-line standards either via a self-regulatory organization or some other form will benefit the overall industry.
As part of my series about the “5 Things That Can Be Done To Improve and Reform The Cryptocurrency Industry,” I had the pleasure of interviewing Matt Orso.
Matt is a Partner with the law firm Troutman Pepper and a member the firm’s White Collar + Government Investigations practice group. He represents a broad array of financial services companies in matters involving regulatory enforcement, investigations, and compliance. Matt is particularly well-versed in Bank Secrecy Act / Anti-Money Laundering compliance and is an informed resource for clients in this and other financial services legal areas.
Thank you so much for doing this with us! Our readers would love to “get to know you” a bit more. Can you tell us a bit about your “backstory”?
I started my career teaching high school before making the decision to attend law school, an experience that has served me well in “teaching” and counseling clients on legal and compliance issues. After clerking for a federal judge, I joined a large law firm to work in its government investigations practice, representing clients in the financial industry from the start. This legal practice has kept me for years at the forefront of regulatory enforcement trends and government agency priorities. With the immense regulatory attention in the digital asset space over the past several years, it was a natural place for me to dive into so I can help clients facing regulatory scrutiny and help them avoid and defend enforcement actions.
Can you tell us the story of how you got first involved in blockchain and the cryptocurrency industry?
I was first introduced to crypto by my older brother. His infectious excitement and repeated lectures about blockchain, Bitcoin, and other digital assets piqued my interest. I was quite skeptical at first. But the more I learned about it, the more intrigued I became. Eventually, I had the opportunity to work with fintech clients that intersected the industry or that were considering holding or taking custody of digital assets. My interest and engagement in the industry blossomed from there.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?
I’m grateful to many people who helped me get here. The judge I clerked for and the law partner who mentored me both come to mind. But the one I’m most grateful to is Jenny, my wife of 19 years. We married when I was teaching high school, and on our honeymoon, I announced to her that I thought I wanted to go to law school. Her response (with no hesitation): “Well then you should.” Since that time, she has supported my career and endeavors every step of the way, often at the expense of her own experiences, all while nurturing our six crazy kids.
Can you share a story of a time when things went south for you? What kept you going and helped you to overcome those times?
We lost my father after a long battle with Alzheimer’s this past February. That was as south as it gets for me. What kept me going was my faith and my family. I was able to focus on the gift of my father’s life and the outpouring of love and support I received from so many, including family, friends, and colleagues. I also keep a Spotify playlist of my father’s favorite songs that he played for us growing up, which I listen to when I want to connect with him.
In your experience, what are the top strategies that blockchain companies should consider to have a stronger competitive edge?
Blockchain companies can gain a competitive edge by working to comply with existing regulations and agency guidance, without compromising the core model that makes a company attractive to its customers and users. Government enforcement and cybercriminals can pose existential threats to young crypto companies, and users will increasingly take these risks into account before placing their assets on a given platform.
This means adopting a strong BSA/AML and sanctions compliance program and having robust cybersecurity defenses. In many cases, it also means operating in line with the governing registration rules and agency guidance for the relevant jurisdiction. In the U.S., we have a recent example in EDX Markets, the crypto exchange backed by Citadel Securities, Fidelity Investments, and Charles Schwab. In choosing not to custody customers’ digital assets, they are trying to comply with SEC guidance suggesting the broker-dealer and exchange functions should be separate. This apparently compliant structure could give people confidence and create a competitive advantage.
Finally, key information-sharing among industry participants, including around cybersecurity risks and defenses, should give the industry as a whole a stronger competitive advantage, whether centralized or decentralized.
What are the 3 things that most excite you about the blockchain industry in general? Why?
The tokenization of assets. Tokenization will have immense future impacts on everything from investing and liquidity to programmable assets to everyday purchases. I’m excited to see how this develops over the next several years and how it has the potential to make everyday life easier.
The possibility that digital assets could expand access to cost-effective financial services, especially for those who are historically underserved by the conventional banking system.
The immutable traceability of transactions across blockchains for use in countless ways, from business recordkeeping and contracting to recouping ill-gotten gains from bad actors.
What are the 3 things that worry you about the blockchain industry? Why?
Weak cybersecurity practices by some crypto companies. Where bad actors are able to access customer keys and assets, it leads to loss for these individuals and often costly litigation and enforcement actions for the company. This also perpetuates the false assumption by some that the cryptocurrency industry is a haven for money launderers.
Speculative investing, leading to financial losses for those who fail to conduct proper due diligence. Like any investment, making an informed decision based on due diligence is key with digital assets. But it seems many people invest in digital assets simply after seeing an interesting social media post.
I worry that the significant social promise the blockchain industry holds may not be realized. This is an industry that can improve access to services for the unbanked and marginalized if creative minds work toward this goal. I hope this promise materializes in concrete ways in the coming years.
Ok, thank you for all of that. Here is the main question of our interview. Can you please share “5 Things That Can Be Done To Improve and Reform The Cryptocurrency Industry”? If you can please share a story or example for each.
Better cybersecurity safeguards across the industry. The crypto industry can be improved by the adoption of better cybersecurity safeguards industry-wide to protect customer assets from both external and internal threats. We see repeated examples of cybersecurity failures in the industry — for example, the security engineer at Crema Finance who stole $8.8 million in assets and was charged criminally in the U.S. While it may run counter to the underlying premises of defi, adoption of base-line standards either via a self-regulatory organization or some other form will benefit the overall industry.
A regulatory framework in the U.S. that is appropriate in scope. The industry would benefit from clear regulatory frameworks that aim to allow the industry enough leeway to operate in an innovative and responsible manner. For example, the UAE has established the Virtual Assets Regulatory Authority (VARA), an independent regulator for virtual assets. VARA this year issued its Virtual Assets and Related Activities Regulations 2023, which provide a comprehensive framework covering seven licensed virtual asset activities. While it may not be perfect, this is the type of clear guidance the industry needs to see more of in other jurisdictions. Alternatively, the U.S. has been slow to the draw in this area, although the government is starting to move forward with draft legislation and items like a recent Treasury Department risk assessment.
Pausing of the SEC’s crypto enforcement in the U.S. until clear laws and rules are in place. It is a huge distraction and difficult to do business when you operate a crypto exchange and are facing the possibility of an enforcement action because the SEC believes it runs afoul of U.S. securities laws. Even U.S. lawmakers have criticized the SEC for its aggressive enforcement posture in this space when the law isn’t clear whether certain digital assets are securities or commodities. The SEC’s action against Coinbase is an example of this continued “regulation by enforcement.” This issue is playing out in the courts and will continue to do so until clear crypto laws are in place.
Improved and simplified user experience. This is not a new issue, but it is very important if widespread adoption and access are to become a reality. Many in the industry have made strides in this area and are continuing to work on it, but we still have a long way to go until the average person with a mobile device is able to easily obtain and transfer digital assets.
Industry adoption of AML best practices standards. Financial regulators are already passing new laws and applying existing money laundering laws to the crypto industry. Aside from government mandated measures, proactive adoption of best practices for anti-money laundering will further legitimize the industry and help it gain more widespread adoption. This might include things like robust customer due diligence reviews via blockchain analytics to identify potential money laundering and sanctions transactions before the relationship begins — an advantage that is unique to the crypto industry.
How have you used your success to bring goodness to the world? Can you share a story?
I have represented many clients in pro bono matters over the years. These have included obtaining domestic violence protective orders for abused individuals, representing the elderly in sensitive legal matters, and helping individuals obtain expunctions of their criminal records. To this end, I worked with two lawyer friends in Charlotte to hold multiple clinics at the homeless shelter to help residents determine if they were eligible to have their criminal records expunged. For some, an expunction can mean the difference between obtaining work/housing and remaining unemployed/unhoused. Like any service-oriented activity, this work has always benefitted me as much as the person I am representing, and it is a privilege to serve in this way.
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
“Always return something in better condition than you received it.” My father often said this when referring to borrowing tools from friends. A variation of this quote helps guide me in all facets of life: “Always leave things better than you found them.” It can apply to family, the workplace, friends, and almost any situation.
How can our readers further follow your work online?
Readers can find me through various Troutman Pepper outlets, including multiple blogs, The Crypto Exchange podcast hosted by Ethan Ostroff, and The Consumer Finance Podcast hosted by Chris Willis. Following my LinkedIn page at https://www.linkedin.com/in/mattheworso/ is also a good way to follow my work.
Thank you so much for this. This was very enlightening!
