From the headlines, you would think that the end of the crypto industry is here. It isn’t.
While it’s true that the last year in crypto has seen fraud, meltdowns, and layoffs that triggered sequential failures of crypto companies, that’s largely of those failed companies’ own making.
The biggest players in the industry promised self-regulation, but the actions of numerous bad actors of the past year — the ones who failed — extinguished any chance of that happening.
However, the crypto survivors — those with legitimate businesses — are still looked at like zombies, able to move forward but with little hope of life. But the phenomenon of narrative gravity, when the media, public, and influencers agree that a narrative is correct without question or examination, is happening throughout the digital asset sector.
As it stands, the Securities and Exchange Commission (SEC), influenced by narrative gravity instead of the 30,000-foot view of the promise of blockchain technology, is regulating crypto aggressively through overreach and enforcement actions rather than contributing to thoughtful policymaking. This is the wrong approach, full stop.
The stakes are too high, as crypto has become woven into too many parts of the global financial system. Blockchains have created a new internet and crypto is a foundational layer to the future of global commerce and banking, communication, and individual ownership.
Hundreds of millions of people worldwide use crypto for various purposes and believe in its potential. The SEC’s inability to both use the past as a prologue and see how crypto is inevitably part of our future means that the U.S. is lagging behind the rest of the world when it comes to this frontier technology.
The EU, U.K., Japan, Singapore, UAE, and even China have introduced or are introducing permanent regulatory frameworks for crypto. Notably absent from this list is the U.S., which is arguably the world economic power that is farthest from a cogent regulatory framework — at least at the federal level.
The stakes are too high, as crypto has become woven into too many parts of the global financial system.
The outcome? The industry is moving offshore, rapidly. According to a recent Electric Capital report, the United States was home to 42% of the world’s open source blockchain developers in 2018. By 2022, that dropped to 29%.
As the engine of the global economy, it is unlikely the U.S. will go against the global trend of crypto regulation. It would be unprecedented for the EU and U.K. to have a fully regulated financial market that is relatively illegal in the U.S.
It’s not how the global economy functions. Plus, the risk of losing crypto to other world powers is too dire. What if Google or Twitter had been founded in China? What would the internet look like today?
Simply put, the lack of a fully regulated financial market in the U.S. contradicts the global economic interdependence seen in other major economies.
The U.S. has historically met the moment when it comes to thoughtful regulation of frontier technologies. That’s why it’ll happen again now. Most states in the U.S. have created permanent regulatory frameworks for digital assets, and it is completely within their mandate to do so. California and New York even issue BitLicenses, which further codifies web3 activity in the two largest state economies in the United States.
The U.S. federal government might be moving slower than ever, but we’re starting to see signs that a clear regulatory framework is coming. A recent draft bill offers a pathway for digital assets that begin as securities to eventually be regulated as commodities.
Tokens offered as part of an investment contract would remain in the SEC’s remit, while those that qualify as commodities would be overseen by the Commodity Futures Trading Commission (CFTC). And there are important conversations happening about whether an asset is considered a commodity if a blockchain network is decentralized.
Knowing that there will eventually be a path forward at the federal level, let’s talk about what that looks like.
- The U.S. government should be at the forefront of investing in blockchain R&D. There are countless examples of the U.S. incubating world-changing technology. Why stop now?
- Policymakers should be using the technology. How can anyone regulate what they fundamentally don’t understand? Other governments around the world, including the European Commission, are doing this.
- The U.S. government should run a sandbox and come up with compliant — even mutually beneficial — ways to engage with the private sector and the technology itself.
Predicting the death of crypto is a convenient but inaccurate narrative. The U.S. will get there. It always does. The industry will get stronger as meaningful regulations — not strong-arm enforcements — are put into place.