Regulation
A little regulation is just what cryptocurrencies need
(Bloomberg Opinion) – Sometimes industries want to be regulated. It’s not that I’m in favor of all the associated restrictions, but that regulation means empowerment. The simple act of enacting laws circumscribes certain activities as deserving of legal protection.
Which brings us to cryptocurrencies. Currently, if a U.S. financial institution issues cryptocurrencies, there is a high risk that the Securities and Exchange Commission will declare them as securities and regulate them accordingly. Ideally, the SEC would provide a formal definition of what is and what is not a security, and the cryptocurrency industry would seek to circumvent those rules. Instead, through inaction, the SEC has allowed a de facto ban on most cryptocurrencies. In the long term, this undermines democratic ideals of transparency and the rule of law.
The good news is that last week the House of Representatives passed a bill that would establish regulation for digital asset markets. It is not common for libertarian elements of the American political system to support new laws, but in this case they do. Whatever objections one might have to the details of the bill, it would put the cryptocurrency industry on solid legal footing and allow it to grow in the United States. The bill would also place much of cryptocurrency regulation under the Commodities Futures Trading Commission, which is likely to be friendlier than the SEC.
Until now, no significant legislation related to cryptocurrencies had been passed by either house of Congress. It remains to be seen what the Senate will do, although the bill is unlikely to reach the desk of President Joe Biden, who opposes it, by the end of the year. It is notable, however, that 71 of the 279 votes in support of the bill in the House came from Democrats. This indicates that cryptocurrency regulation is a bipartisan issue, if only because so many Americans say they hold cryptocurrencies, 12% by one estimate.
As for the details of the policy: is it a good bill? Mostly yes. Without a consistent regulatory framework, the US cryptocurrency industry will not be competitive with those of other nations. This harms America’s innovation potential, encourages some entrepreneurs to take their businesses abroad, and could possibly limit the integration of cryptocurrencies with major financial infrastructures, which would put the U.S. financial sector at a disadvantage.
The bill includes the key provision of requiring crypto infrastructures to be sufficiently decentralized, at least if such infrastructures are to fall under the jurisdiction of the CFTC rather than the SEC. These decentralized crypto infrastructures, which would include Bitcoin and the Ethereum network, are considered “digital commodities” and enjoy greater freedom. Such assets are not like Apple shares, where the buyer expects a very particular type of corporate responsibility and predictable financial reporting. Therefore the bill establishes that, for many crypto assets, the initial issuance must involve more rigorous disclosure and regulation, with a role for the SEC. Over time, as the blockchain for that asset became more mature and established, regulation would loosen.
Any particular proposal for such rules will necessarily involve some ambiguity and will be susceptible to being misled (by companies) or abused (by regulators). What counts as “adequate” decentralization, for example, is ultimately a subjective matter. However, this bill seems like a reasonable starting point for regulating cryptocurrencies.
The bill also makes crypto assets explicitly subject to current regulations designed to prevent money laundering.
The bill identifies stablecoins, which promise redemption for a certain number of dollars, and establishes that they can be exchanged through appropriately regulated intermediaries, although the details of this regulation are explicitly assigned to future legislative and regulatory acts.
This is a disadvantage, since stablecoins are the form of cryptocurrency most likely to be fully integrated with major financial infrastructures, due to their ease of use for payments. However, passage of this bill would increase, not decrease, the possibility that stablecoins will be addressed in a meaningful way next.
What are the broader lessons here? First, Congress has been very slow to pass meaningful cryptocurrency legislation, and thus many industry innovators have a low opinion of the United States as a place to operate. Second, when Congress finally gets around to writing a bill and moving it forward, the results can actually be reasonable rather than crazy.
Third and finally: it’s not too late. Cryptocurrency is still in its infancy and it is unclear which of its services will prove lasting. But the opportunity to find out was not lost.
Elsewhere in Bloomberg Opinion:
- Bitcoin is growing, but the future of money lies elsewhere: Lionel Laurent
- With a little help from Congress, cryptocurrencies can go pro: Aaron Brown
- Cryptocurrencies Go Mainstream, Which Means It’s Over: Allison Schrager
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This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist, economics professor at George Mason University, and host of the blog Marginal Revolution.
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