It’s time for regulators to take cryptocurrency seriously

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Because no one seems quite sure how to deal with cryptocurrency, proposals to regulate it tend to pop up in unexpected places. The most recent is the federal infrastructure bill that is making its way to Congress. The bill includes a provision that would give federal regulators the ability to impose new tax reporting obligations on cryptocurrency brokers. This particular provision may or may not be the right policy, but if we are to think about how we finally regulate cryptocurrency, we should take the issue head-on and develop a real regulatory framework.

It starts with understanding what we expect from crypto. The knee-jerk reaction of the left tends to be, “Capitalism is bad, banking is bad, so crypto has to be really bad and we have to regulate it out of existence.” Not surprising. The instinctive reaction of many on the right is also not: “Crypto represents the personal freedom to choose whether or not to participate in the traditional financial system and we are not going to restrict those rights.” No wonder either.

But here’s maybe a better way to put it: Like all forms of investing, crypto comes with risk and exposure to some bad players. But crypto resonates with many millennials and Gen Z as well, and it’s here to stay. So either we can capture this industry to keep as much wealth and income as possible in the United States, or we can drive it out. Keeping it here doesn’t mean all is well. It just means thinking about how we regulate.

Various federal and state agencies have embarked on an uncoordinated and largely reactionary attempt to regulate crypto. The SEC continued fraudulent initial coin offerings, while the CFTC shut down unregistered crypto derivatives trading platforms. The OCC has granted a handful of conditional banking charters to crypto-focused financial institutions. But no one has tried to offer a bigger picture. As Congress, the Biden administration, and various states begin to accept the need to regulate crypto more robustly, here are some ideas they should consider.

1. Crypto needs a regulator

By definition, crypto enthusiasts are wary of government. Since cryptocurrencies like Bitcoin are sovereignless, adherents might choose to ignore the U.S. regulatory approach if they think it is unfair. The more they are subjected to a dispersed and seemingly arbitrary bureaucracy, the less likely they are to take it all seriously. Therefore, the creation of a single regulator for the industry would go a long way towards creating a coherent and common sense legal framework. This regulator must be able to offer both clear guidelines on what is acceptable and what is not and to offer a refuge to the actors of the space who are not entirely sure of the rules. . The regulator must also view crypto as more than a puzzle – if that was all, it wouldn’t have so many adherents. The SEC, because of its traditional focus on protecting retail investors from scams and ensuring market integrity, seems like a natural fit. But more importantly, Washington just needs to name someone in charge.

2. This regulator should bring the world of cryptography into the fold

Rather than treating them like weirdos or outlaws, acknowledge that they’ve built something tangible and give them the recognition they deserve. The SEC is expected to approve crypto ETFs and create a framework to encourage responsible innovation in the DeFi space. Federal regulators should also demand more transparency and accountability for stablecoins, or better yet, seriously assess the merits of a digital dollar backed by the Federal Reserve.

3. The tax policy around crypto should be deliberate

That means it shouldn’t be enacted into law just because members of Congress are looking for extra revenue to help fund an infrastructure bill. We should have clear tax policies for crypto based on the needs and interests of the people participating in the crypto market itself. For example, rules should be developed to take into account specific crypto situations, such as fair and clear rules for taxing crypto generated from the validation of transactions. Additionally, while stock market investors can pay a lower capital gains rate on their investments, crypto investors should be able to do so as well.

4. More states need to get involved

Some states regulate crypto in different ways: New York requires BitLicense for crypto exchanges, while Wyoming has created a banking framework to accommodate crypto-focused businesses. But most states have done very little, without even adjusting the basic fund transfer licensing rules and insurance requirements to accommodate this new industry. This means that there is a lot of uncertainty for crypto companies as to what requires compliance, as the laws predate the existence of the technology. However, one of the great advantages of state government is its ability to serve as a laboratory for new political ideas. States can encourage the crypto community to invest, to associate, to trust each other. State governments could stimulate genuine innovation in areas of traditional state regulation, such as insurance and banking, by fostering a safe regulatory space for experimentation.

These ideas would require seeing crypto as a way to capture a larger share of global revenue. If we want more wealth in this country, we must help Americans and American businesses become leaders in this growing space of financial and technological innovation. And given that part of cryptocurrency mining is currently a huge drain on already limited energy resources, federal and state governments should work with the crypto community to incentivize and promote the growth of proof-of-stake protocols. , which are cleaner alternatives to energy-intensive protocols like Bitcoin.

Crypto isn’t an inherently American innovation, but it’s a perfect fit for us. New ideas, new risks, new markets and new frontiers – that’s what we do best. Yes, protecting retail investors from bad actors is essential, but our regulations and policies can do much more than that. They can be judiciously designed to encourage the development of a new industry.

There are risks at hand with crypto, but there are also opportunities. So let’s take the time to treat crypto thoughtfully and regulate it with both consumer protection and growth in mind. The bill’s infrastructure provision is certainly not a complete answer to the regulation of crypto. But it does provide an opportunity to debate how smart policies could help make the United States a crypto powerhouse in the years to come.

Bradley Tusk is a venture capitalist, political strategist, philanthropist and writer. Jon Sabol is Managing Director of Tusk Strategies, where he focuses on regulatory issues in the fintech, blockchain and crypto industries.

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