The Crypto Crackdown Could Be The Best Thing That Ever Happened To The Industry

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US regulators appear to be on a collision course with crypto. Soon, many issuers and intermediaries may be forced to close their doors or at least leave the country.

It might be the best thing that ever happened to the industry.

There are a lot of things not to like about crypto. Celebrity touts and the promise of wealth have tricked people into buying a myriad of tokens with no intrinsic value; of more than 40,000 issued last year, an estimated one in four were genuine pump-and-dump scams. Investor protection is lacking even among the most established intermediaries, as demonstrated by the demise of the FTX trading platform. Blockchain-enabled payments have facilitated all manner of criminal behavior, from aiding human trafficking to funding North Korea’s nuclear program. Had the market not imploded last year, it could have become large enough to threaten the entire financial system.

Now Securities and Exchange Commission Chairman Gary Gensler is about to deliver the final blow. He said he views most tokens as securities, which means issuers and intermediaries, unless they register with the SEC and meet all of its requirements, which most don’t. cannot or will not do, engage in illegal activities. The agency sued one trading platform (Bittrex) and signaled plans to do the same with Coinbase, the largest in the United States. Aggressive enforcement could virtually shut the door on crypto, eliminating the main channels through which Americans enter and exit dollars.

Good riddance? Not enough.

Markets have a way of turning irrational exuberance into social advantage. Investors in the broadband boom of the early 2000s, for example, suffered heavy losses, but also bequeathed valuable fiber infrastructure to future generations. Crypto, for its part, may yet lead to better forms of currency, more convenient cross-border payments, more efficient financing, new ways of governing mutual businesses. With proper identification requirements, blockchain networks could even be much more transparent and less prone to crime than the existing banking system. (Authorities are already using them, for example, to track down North Korea’s ill-gotten gains.)

As distant as that brighter future may seem, regulators should at least allow it, as the European Union has sought to do with new rules in crypto markets. To this end, the United States should create legal space for the issuance and trading of instruments such as Bitcoin and Ether that do not fall into categories such as securities or derivatives. Requirements (among others) for disclosure, security, soundness, governance, and protection of client assets could come from Congress or from an industry-funded overseer, such as the Financial Industry Regulatory Authority.

Such a framework would grant the SEC and the Commodity Futures Trading Commission sweeping powers to quickly rid the market of thousands of bad actors, without getting bogged down in definitional details and diminishing their authority in traditional jurisdictions. Speculators would always make bets that go wrong, as they do in any market. But reducing the scam across the board would provide true innovators with the best possible chance of achieving something meaningful. True Crypto believers could hardly ask for more.

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