Crypto Needs Sensible Regulation, Not Regulation Via Lawsuits

By Sean Stein Smith, Contributor

The cryptoasset industry continues to grow and mature, and the regulatory approach needs to keep pace.

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Regulation and compliance efforts are nothing new to the cryptoasset sector, but the recent action by the Securities and Exchange Commission (SEC) against Coinbase highlight a troubling trend in this fast moving space; regulation by enforcement. Regulation, rule-making, frameworks, and establishing consistent guidelines for how individuals and institutions should operate are integral aspects for any sector seeking to move to the mainstream.

That said, there is a difference between proactive and reasonable regulation and policy-making, and a somewhat aggressive approach that seems more aligned with cracking down on organizations versus fostering an innovative and creative economic environment.

One aspect that the current conversation around regulation and enforcement seems to overlook is that, by default, blockchain and cryptoassets are a truly global sector and are not tethered to any one specific geographic or jurisdictional area. In other words, this is a sector that an overly aggressive regulatory perspective could undermine and potentially impair if not handled appropriately. The United States is one of many nations vying to become the future hub and home of blockchain and cryptoassets, and reasonable regulation is essential to this development.

Let’s take a look at a few considerations that should be taken into account as policymakers seek to further develop blockchain and crypto regulation.

Do not reinvent the wheel. It is tempting, especially when dealing with a new and (still) emerging area such as blockchain and cryptoassets, to think that any regulation or policymaking has to be just as new and ground-breaking as the technology itself. This is simply not the case; there are numerous examples and templates that policymakers can and should use to help establish regulations and frameworks for cryptoassets.

For example, the state of Wyoming has taken the lead with regards to blockchain and cryptoasset regulation by passing over a dozen laws specifically connected to how these technologies can be integrated within the existing financial and legal framework. Regardless of whether or not this approach would work on a national level misses the point; the hardest work around regulation and policy has already been addressed. At this point it is simply up to policymakers to 1) become educated and informed on the issues linked the sector, and 2) be willing to experiment and engage with private sector actors to push this conversation forward.

Regulate, don’t dictate. A trend that is increasing common among regulators the world over is to regulate and attempt to establish the rules of the marketplace via edict and enforcement actions rather than robust analysis and conversation. Tempting in the short term, such an approach leads a rigid, inflexible, and ultimately fragile regulatory framework; robust and durable regulations require input and dialogue from all interested market actors.

Attempting to regulate the blockchain and cryptoasset space via edict, lawsuits, and compliance-oriented activities is likely to result in the following outcome. Given the global and decentralized nature of both blockchain and cryptoassets, the industry, associated organizations, and capital that accompanies it will likely move to jurisdictions more amendable to its future growth. Regulation by edict rarely works, and is unlikely to work in an industry so fluid and dynamic as crypto continues to prove to be.

Opportunity versus threat. A common, and misinformed, opinion that continues to permeate the regulatory conversation around blockchain and cryptoassets is that this technology represents an existential threat to the incumbent financial system and order. While it is true that these technologies do represent a paradigm shifting technology in terms of how individuals and institutions will interact and engage with each other, that does not mean that these technologies are incompatible with the current regulatory framework.

To the contrary, as stablecoins, central bank digital currencies, and other more centralized cryptoasset options enter the marketplace, it is increasingly apparent that cryptoassets are situated to become an integral aspect of the financial system. Rather than viewing these innovations and assets as a threat, they should be viewed as an opportunity for further development.

Regulating a space like cryptoassets was never going to be an easy or short-term project, and any individual or institution that stated as much was either ill-informed or deliberately spreading misinformation for ulterior motives. Blockchain and cryptoassets represent the single largest breakthrough in technology and financial innovation in decades, and it is perfectly natural for regulatory bodies to be highly interested in the space. That said, simply because a technology is new and innovation does not mean regulation should be heavy handed. Rather, policymakers and rulemaking agencies should be both aware of the opportunity aligned with crypto, and willing to make rules to help foster its future development.


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