Crypto Regulation Let’s start and start slow

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Now that cryptocurrencies are booming, with tens of thousands of traditional investors and blue chip companies integrating blockchain technology, policymakers are starting to talk more seriously about creating regulations to protect investors. I share their concerns for consumers who are rocked by volatile Bitcoin prices and on-the-fly crypto investing scams. At the same time, we have to be careful how much we regulate such an emerging market. We need regulation to protect investors, but not so much to stifle entrepreneurship, innovation and investment.

Like the internet in the early 1990s, the crypto industry is still in its infancy. We don’t know what a flash-in-the-pan (Google Reader, anyone?) Will be and what will become fundamental in our lives, like social media or the iPhone. To regulate too broadly would be to regulate the Internet before understanding how online commerce would work in the world. In the early days of the Internet, Congress could not have predicted the role that personal data mining and political disinformation would play, let alone how to protect consumers from it. At the time, the industry was pushing for an open Internet where anyone could create a web page.

Recently, the crypto industry rallied to call their senators about the current language of the infrastructure bill. The language that broadly defines “brokers” would certainly kill the industry if miners to software developers had to worry about knowledge of customer management (KYC). The intention is to tighten up law enforcement, but there would be costly unintended consequences if the language was left as is. This bill could be voted on as early as August 9. The whole industry is watching to see what is happening with this language. Hopefully, a compromise in language can occur in order to better enforce tax payments while not killing an industry with a poorly constructed definition of what a crypto “broker” is.

Part of the difficulty with regulating crypto assets is that they can scale. There are times in the lifecycle of a crypto asset when it looks more like a security and there are times when it looks more like a commodity, or even something else. For this reason, there is confusion as to which body has jurisdiction to regulate it. Another complicating factor: Many feel that crypto assets are all the same, but this is incorrect. There are several distinct classes and models, ranging from cryptocurrencies to governance tokens. Each has unique risks, governance, purpose for use, ways to increase value, and a role in the larger ecosystem. Cryptocurrencies were designed to be a store of value and a medium of exchange. An investor can buy them, sell them, buy items with them, and lend them to generate a return through an interest rate similar to that of sovereign currencies. In contrast, governance tokens give their holder the right to vote on how to manage, upgrade, and govern a crypto network. Regulators need to recognize this complexity and adapt new rules to the distinct 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 evolve into a commodity over time. I support this approach.

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

The United States Securities and Exchange Commission (SEC) has indicated that tokens in an initial coin offering (ICO), where the builder seeks an upstream investment, before the product and network are built, should be considered security. However, when the crypto-network is built and the token is “sufficiently decentralized”, it is not. This direction has come in the form of opinion interpretations of two SEC no-action letters in 2019. These distinctions have broad implications and should be enshrined in law. Regulatory notices may change with each jurisdiction.

If light regulation is the best way to start, then we should support HR 1628, known as the Token Taxonomy Act. Introduced by Representative Warren Davidson (R-Ohio) in March 2021, the bipartisan Token Taxonomy Act aims to make things clear for businesses, consumers, and regulators operating in the emerging US blockchain ecosystem. Davidson understands that if the United States does not establish a common sense regulatory structure, many companies and entrepreneurs will look to locate their businesses elsewhere.

The law excludes digital tokens from the definition of a security under federal securities laws, for example, defining a “digital token” as a token created under rules the creation and provision of which are not controlled. by a core group or a single person. , among 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 in mind: clarity. HR 1602 would require the SEC and the Commodity Futures Trading Commission to establish a joint task force to study the properties of digital assets and issue a report with recommendations. I like this approach, as well as the Token Taxonomy Act, because it initiates regulation from the legislative branch, which provides the direction the industry needs without being overly burdensome.

The US Senate Banking, Housing, and Urban Affairs Economic Policy Subcommittee has invited several digital banking experts to testify on the issue of a central bank digital currency (CBDC) in the United States. They gathered testimonies from a series of experts, including Neha Narula, 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. Digital currency is an opportunity for a major overhaul of our existing payment systems. If designed the right way, a system to build and support a digital dollar could increase competition and standardize disparate data models, leading to more interoperability and creating a platform for innovation in payments. just as the Internet has created a platform for innovation in addition to information transfer, ”said Narula, acknowledging the potential drawbacks of such a system.

Former CFTC Chairman Christopher Giancarlo, aka Crypto Dad, has also repeatedly voiced the importance of a digital dollar, saying the Fed needs to “wake up” from the need for the digital dollar.

Good crypto regulation should reflect American values, including privacy, security, freedom, and sovereignty. If we leave it to other countries, like China, we could be linked to a system built on totally different values: tracking, surveillance, central authority and lack of public transparency.

I understand the push to crack – the crypto world is confusing and volatile. I don’t particularly like watching new Bitcoin investors take huge losses every time Elon Musk decides to tweet. But it’s essential that policymakers slow down and study our markets in much more detail before rushing to legislate or regulate. We need to strike the right balance between protecting consumers and stifling innovation.

Jake Ryan is the author of Crypto Asset Investing in the Age of Autonomy and Director of Investments at Tradecraft Capital.

The opinions expressed in this article are those of the author.

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