Crypto Regulation—Let’s Start and Start Slowly

Now that cryptocurrencies are thriving, with tens of thousands of mainstream investors and blue chip companies adopting blockchain technology, policymakers are starting to talk more seriously about creating regulations to protect investors. I share their concerns about consumers being buffeted by volatile Bitcoin prices and nightly crypto investment scams. At the same time, we have to be careful how much we regulate such a nascent market. We need some regulation to protect investors, but not so much to stifle entrepreneurship, innovation and investment.

Like the internet in the early 1990s, the crypto sector is still in its infancy. We don’t know what a Flash-in-the-Pan will be (Google Reader, anyone?) And what will be fundamental to our lives, like social media or the iPhone. Too expansive regulation would be like regulating the internet before we understood how online commerce would work in the world. In the early days of the internet, Congress couldn’t predict the role personal data mining and political disinformation would play, let alone how to protect consumers from it. At that time, the industry was pushing for an open Internet where anyone could set up a website.

Recently, the crypto industry teamed up to call their senators about the current language in the infrastructure law. The language that defines “broker” in general would surely kill the industry if miners to software developers had to take care of know-your-customer management (KYC). The intent is to tighten tax enforcement, but it would have serious unintended consequences if the language was left unchanged. This bill could be voted on as early as August 9th. The entire industry is watching what is happening with this language. It is hopeful that a compromise can be made in language to better enforce tax payments without killing an industry with a poorly constructed definition of what a “broker” is in crypto.

Part of the difficulty with regulating crypto assets is that they can evolve. There are times in the life cycle of a crypto asset when it’s more like a security and others when it’s more like a commodity or even something entirely different. For this reason, there is a lack of clarity about which authority is responsible for regulation. Another aggravating factor: Many have the impression that crypto assets are all the same, but that is wrong. There are several different classes and models that range from cryptocurrencies to governance tokens. Each has unique risks, governance, uses, opportunities to add value, and role in the larger ecosystem. Cryptocurrencies were designed as a store of value and a medium of exchange. An investor can buy, sell, buy, and lend with them to get a return through an interest rate similar to national currencies. In contrast, governance tokens give the holder a vote on how a crypto network is administered, updated, and administered. Regulators need to recognize this complexity and tailor new rules to the different types of crypto assets.

One idea that regulators are considering is temporality – the concept that an asset could start out as a security and then turn into a commodity over time. I support this approach.

A physical banknote and coin imitations of the cryptocurrency Bitcoin.
OZAN ​​KOSE / AFP via Getty Images

The US Securities and Exchange Commission (SEC) has announced that tokens from an Initial Coin Offering (ICO), where the builder seeks investment in advance before building the product and network, should be viewed as security. However, if the crypto network is in place and the token is “sufficiently decentralized”, this is not the case. That direction came in the form of interpretations of opinion from two no-action letters from the SEC in 2019. These distinctions have far-reaching implications and should be enshrined in law. Regulatory statements can change with each administration.

If light regulation is the best way to get started, we should support HR 1628, known as the Token Taxonomy Act. The bipartisan Token Taxonomy Act, introduced by Rep. Warren Davidson (R-Ohio) in March 2021, aims to provide clarity for businesses, consumers and regulators operating in the burgeoning US blockchain ecosystem. Davidson recognizes that if the US fails to put in place a proper regulatory structure, many companies and entrepreneurs will try to relocate their businesses.

The law excludes digital tokens from the definition of a security under federal securities laws, for example, defines a “digital token” as a token that is created under rules for which creation and provision is not controlled by a central group or individual, alongside other requirements.

HR 1602, known as the Eliminate Barriers to Innovation Act of 2021, was introduced by Representative Patrick McHenry (RN.C.) with the same goal: clarity. HR 1602 would require the SEC and the Commodity Futures Trading Commission to set up a joint working group to study the properties of digital assets and publish a report with recommendations. I like this approach along with the Token Taxonomy Act because it introduces regulation from the legislature that sets the direction the industry needs without being overly cumbersome.

The Senate’s Economic Policy Subcommittee on Banking, Housing, and Urban Development invited several digital banking experts to testify on the issue of a central bank digital currency (CBDC) in the United States, the director of the Digital Currency Initiative at the Massachusetts Institute of Technology.

“The potential promise of a CBDC goes beyond payment efficiency and financial inclusion. The digital currency is an opportunity for a fundamental redesign of our legacy payment systems. If properly designed, a system for creating and supporting a digital dollar could grow. ”Competition and the standardization of different data models, which leads to more interoperability and creates a platform for innovation in payments, just as the Internet has created a platform for innovation in addition to information transfer “Narula admitted the potential drawbacks of such a system.

Former CFTC chairman Christopher Giancarlo, aka Crypto Dad, has also voiced the importance of a digital dollar several times, saying that the Fed needs to “wake up” to see the need for the digital dollar.

Good crypto regulation should reflect US values, including privacy, security, freedom, and sovereignty. If we leave it to other countries like China, we could be locked into a system based on entirely different values ​​- persecution, surveillance, central authority, and a lack of public transparency.

I understand the impulse to be tough – the cryptocurrency world is confusing and volatile. I don’t particularly enjoy watching new Bitcoin investors take huge losses every time Elon Musk decides to tweet. However, it is critical that policymakers slow down and examine our markets much more closely before they rush to legislate or regulate. We have to find the right balance between consumer protection and the inhibition of innovation.

Jake Ryan is the author of Crypto Asset Investing in the Age of Autonomy and Chief Investment Officer at Tradecraft Capital.

The views expressed in this article are one’s own.

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