Introduction
Despite recent headlines suggesting the demise of the crypto industry, it is far from over. While there have been instances of fraud, meltdowns, and company failures, most of these can be attributed to the actions of those specific companies. The surviving players in the industry are facing challenges, as they are often viewed with skepticism and negativity. However, this negative narrative is not reflective of the potential and importance of crypto in the global financial system.
Key Takeaway
The U.S. is lagging behind other countries in terms of regulatory frameworks for the crypto industry. It is crucial for the U.S. to adopt a thoughtful and proactive approach to regulation in order to prevent the industry from moving offshore and losing its position as a global leader.
The Need for Proper Regulation
Crypto has become an integral part of the global financial system, with blockchains acting as a new internet and crypto serving as a foundational layer for various sectors including commerce, banking, communication, and individual ownership. Millions of people worldwide use crypto and believe in its potential. However, the U.S. Securities and Exchange Commission (SEC) is taking an aggressive approach to regulation through enforcement actions rather than contributing to constructive policymaking.
Compared to other major economies like the EU, U.K., Japan, Singapore, and the UAE, the U.S. lacks a comprehensive regulatory framework for crypto at the federal level. This has resulted in the industry moving offshore at a rapid pace. In fact, the U.S. has seen a decline in the percentage of open source blockchain developers from 42% in 2018 to 29% by 2022.
The Risk of Falling Behind
Given its status as the engine of the global economy, it is unlikely that the U.S. will defy the global trend of crypto regulation. If the EU and U.K. have fully regulated financial markets while the U.S. lags behind, it would be inconsistent with the interdependence observed in the global economy. There is also a risk of losing crypto innovation to other world powers, similar to the impact that the origins of major tech companies like Google or Twitter in China would have had on the internet.
However, it is important to note that several states within the U.S. have established permanent regulatory frameworks for digital assets. California and New York, in particular, have even issued BitLicenses to further solidify the legitimacy of web3 activities within their respective economies.
A Path Forward at the Federal Level
Although the U.S. federal government may be slow to act, signs are emerging that a clear regulatory framework is on the horizon. A draft bill proposes a pathway for digital assets that begin as securities to eventually be regulated as commodities. The SEC would oversee tokens offered as part of an investment contract, while the Commodity Futures Trading Commission (CFTC) would oversee those that are considered commodities. Additionally, discussions are underway regarding the distinction between decentralized blockchain networks and determining if an asset should be classified as a commodity.
The Importance of Government Involvement
For the U.S. to stay at the forefront of the crypto industry, the government should actively invest in blockchain research and development. The U.S. has a history of incubating world-changing technologies, and it is important to continue this tradition. Policymakers should also familiarize themselves with the technology in order to regulate it effectively. Taking a cue from other governments, such as the European Commission, the U.S. government should create a sandbox environment to engage with the private sector and the technology in a compliant and mutually beneficial manner.
Conclusion
The narrative predicting the death of crypto is convenient but inaccurate. The U.S. has a track record of adapting to new technologies through thoughtful regulation. By implementing meaningful regulations that support the industry’s growth rather than relying on heavy-handed enforcement, the crypto industry will become stronger. The U.S. cannot afford to stifle this innovative sector; it must embrace the opportunities presented by crypto and position itself as a leader in the global digital economy.
