Regulation
America requires regulatory clarity before blockchain brings its bounty
(Photo by Joan Cros/NurPhoto via Getty Images)
NurPhoto via Getty Images
Innovation is essential for economic growth and higher standards of living. Better tools and techniques that make us more productive are requirements for wealth creation. However, innovation attracts its fair share of skeptics whose fears about where new technologies might lead are ripe for exploitation.
Leading regulatory agencies in Washington today are many who seem to prey on fears about the nefarious misuse of technology or how innovation will send our jobs and way of life into obsolescence. Yet with each new wave of technological adoption, the U.S. economy has created more and better-paying jobs than before, thanks to the growing abundance produced and invested. Such progress would be impossible without entrepreneurs and their innovations.
Consider blockchain, one of the most important innovations to emerge from the financial technology revolution of the last two decades. Blockchain is most commonly associated with cryptocurrencies – digital currencies that users exchange across decentralized computer networks – and is prized for its ability to reduce the time, cost and security risks of transactions. But new and evolving applications will amplify blockchain’s utility across a wider variety of industries, unless regulators nip it in the bud.
The early application of the technology by pioneering companies operating in the financial sector has created links in the public mind between blockchain and cryptocurrencies. Additionally, it gave U.S. financial regulators the initial right to determine who can control crypto companies and how. The experience is a pedagogical moment.
Securities and Exchange Commission Chairman Gary Gensler has been aggressive in the cryptocurrency industry, which he says is “full of hucksters, scammers and scam artists.” Gensler considers cryptocurrencies to be securities, and his agency has the power to regulate them (as well as the websites and apps on which those assets are bought and sold).
The SEC has taken actions against numerous crypto companies, including Coinbase, Binance and Ripple, which operate platforms that see billions of dollars of digital assets traded or used every day. The agency’s “regulation through enforcement” approach casts a wide net, which Gensler says is necessary because writing laws and regulations can’t keep up with new industry practices and products. This power grab is similar to inserting square pegs into round holes.
Should these companies be regulated? YES. But are their assets securities? Do companies’ activities fall within the domain of the SEC? Are these activities required to be regulated by the Commodity Futures Trading Commission? Are they something else that needs to be regulated under a different authority by a different agency?
While the SEC considers most cryptocurrencies to be the same type of investments classified as securities for decades, the industry believes that securities law is not suitable for digital assets and seeks new laws and regulations. In fact, most of the current financial rules were created before cryptocurrencies came into existence, yet the Biden administration is not even considering a new regulatory framework. Meanwhile, the lack of regulatory clarity continues to impede investment and development of US blockchain applications.
A 2023 decision from the Southern District of New York in the SEC’s lawsuit against Ripple offered some clarity. It ruled that the digital token XRP does not meet the definition of a security when traded on public exchanges. This would appear to place the majority of XRP activity outside the SEC’s regulatory purview. But the decision also states that Ripple’s sales of XRP to the company’s institutional investors meet the definition of security, preserving the SEC’s oversight role, however tenuously. One option might be to appeal this and other rulings to the Supreme Court, which has expressed growing distrust of the excesses of federal agencies.
Ultimately, Congress must return to legislating. It must write and pass new statutes to provide new authorities for new and more appropriate regulations. While several bills have been introduced to this effect, they remain stuck in a divided Congress, prolonging the absence of regulatory clarity needed to encourage innovation not only in the cryptocurrency sector, but in supply chain management and logistics , in healthcare and in real estate transactions. , election integrity, and other areas and applications where intermediaries or intermediate processes create inefficiencies. Meanwhile, Bitcoin and XRP are the only digital assets that have achieved some regulatory clarity.
Innovation is critical to economic development and higher standards of living. It is often greeted with trepidation due to the inconvenience it can cause. But there are pioneering benefits to developing and adopting new technologies. Jurisdictions that embrace innovation first as a catalyst for evolution tend to gain an investment advantage. The fusion between artificial intelligence and blockchain will, for example, be a hotbed of innovation. But for these and other technologies to take root and enable activities that were once much more expensive or difficult – and plant the seeds of spin-off technologies that will comprise a thriving ecosystem of technologies that improve life and reduce cost applications: it is necessary establish regulatory frameworks. While regulations, even well-intentioned ones, can stifle investment in innovation, so can the uncertainty that comes from a lack of regulatory clarity.
In 1997, as the promise (some, at the time, would have said “threat”) of electronic commerce was emerging and terrorizing brick-and-mortar businesses, the Clinton administration offered a bold vision of regulatory clarity. He dictated pioneering rules of the road with the publication of his “Framework for global e-commerce.” At the time, Amazon.com was a loss-making online bookstoreNetflix was just getting started offering DVD rentals by mail to compete with major video rental stores, and the Internet has been portrayed in much of the business media as a fad or a haven for criminals and scammers.
After the issuance of the rules on e-commerce, everything began to change. Investments flowed into pre-existing companies that were using the Internet to reduce costs, increase sales and earn more profits. Technology has also improved a lot: the Internet has become faster, bigger and has become wireless; devices have become smaller, more powerful and cheaper. Wealth has created increased incomes and standards of living in the United States and around the world. This is the nature of innovation.
The economic success stories of American technology demonstrate that if we are to reap the benefits of innovation in our economy, we must provide early regulatory clarity to allow the technology to develop and bear fruit. It was true for e-commerce 30 years ago, and it’s true today for innovations like blockchain and cryptocurrencies.