Regulation
Sensible Regulations Vital for Cryptocurrencies
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It’s time for the United States to adopt sensible regulation for the cryptocurrency world.
Blockchain technology that underpins digital assets and decentralized “Web3” applications has been in development since 2008. Through many ups and downs, the ecosystem has matured. Alongside financial trading, stablecoins are gaining traction in payments, while startups are innovating decentralized solutions in a variety of industries. We don’t know which will succeed, but we do know that success will require trust.
Regulation is an important mechanism for building trust in new markets. It will help distinguish companies that are willing to take responsible steps to protect their customers and others from those that exploit loopholes or engage in shady conduct.
Concerns that such barriers will inevitably dampen market activity, dampen innovation, or drive industry participants to flee to less stringent jurisdictions are unfounded. Market participants want guidance on how to meet common-sense obligations. This does not mean rewriting all financial regulation from scratch. However, it has become clear that some legislation is needed.
It is also wrong to think that regulating cryptocurrency means legitimizing abuse and unsustainable speculative activity. Protections against market manipulation, fraud, money laundering, and other illegitimate conduct are essential. Today, offshore actors with a history of violations and other questionable behavior are in the same boat as U.S.-based companies with a solid reputation for protecting customers. Only when bad actors are forced to change or driven out of the market can there be a solid basis for trust. This requires regulatory boundaries.
While there are still important details to negotiate, several promising bipartisan bills on digital asset markets and stablecoin regulation have been introduced in Congress over the past two years. The substantive differences between the parties are not that great; what has been lacking is the political will to move forward.
New technologies and market activity have often necessitated an update to financial regulation. The Great Depression, the Global Financial Crisis, and other crashes provided blueprints for new guardrails that supported renewed growth and innovation. With proper regulation, the United States could be the world leader in blockchain-based financial markets and innovative applications based on them. Regulators can help prevent illicit activity while allowing legitimate transactions to proceed smoothly.
There are some aspects of blockchain-based markets that are functionally identical to traditional ones, just with different technologies. In other cases, however, concepts that worked before no longer make sense in a blockchain environment. Regulators need to focus on principles or goals and then challenge the industry to show how it can meet them.
The global nature of digital finance creates a conundrum for national enforcement. Yet we have understood similar challenges with the Internet. Enforcement actions have already shown that we can do this for cryptocurrencies as well.
History teaches us that innovation is compatible with reasonable limits. The growth of the Internet industry exploded when the United States provided a clear regulatory roadmap. This meant adding some new requirements, removing others, and providing guidance when there was ambiguity about how to apply existing rules. The rest of the world watched as the United States built a massive ecosystem of technological innovation. Other countries eventually contributed their own regulatory ideas in areas like privacy where the United States lacked. We need something similar for blockchain.
With thoughtful regulation, we can create a future where cryptocurrency innovation takes off, risks are controlled, bad actors are excluded, and users are protected.
Kevin Werbach is a professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania..
The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of Lehigh Valley Business or its editors. Neither the author nor LVB guarantees the accuracy or completeness of any information published here.