It’s time to take crypto from chaos to order

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Many believe that blockchains and cryptography are revolutionary technology that enables creativity and entrepreneurship, and some view these tools as just internet fad.

Regardless of your stance, there’s no denying that consumers and entrepreneurs in the booming crypto and web3 industry are facing enormous regulatory uncertainty, which is stifling the legitimate industry and allowing bad actors to thrive.

This tension was on full display yesterday when a federal district court issued a long-awaited summary judgment in the Securities and Exchange Commissions (SEC) lawsuit against Ripple Labs and two of its founders.

The ruling considers Ripples’ direct sales of their XRP digital asset to institutional investors to be securities offerings, which is in line with previous cases applying securities laws to initial coin offerings (ICOs) that dominated the industry. in his early years. But in a blow to the SEC, the ruling did not extend the application of securities laws to Ripples and its founders’ sales of XRP to individuals through certain digital asset exchanges.

While a potentially big win for crypto and a denial of the SEC’s ongoing war against it, the decision results in a confusing set of results that highlights the long-running uncertainty. date that afflicts an industry that is crying out for stability.

What should entrepreneurs think of the decision? For one thing, the decision is not the final word on the matter and can be appealed. This means that entrepreneurs can choose to continue current industry practices, where issuers of digital assets primarily rely on the useful, but incomplete, SEC decentralization framework from 2019, a process that mitigates many risks. that digital assets pose to consumers. But even some members of the SEC tried to distance themselves from this framework and it turned out that it was not sufficiently clear or robust enough to be effective.

On the other hand, the ruling opens up an entirely different path for issuers of digital assets, as it establishes that sales of digital assets on exchanges are not governed by securities laws. But the decision is also directly at odds with very recent actions by the SEC against several major digital asset exchanges, including Coinbase.

Ultimately, what the Ripple decision makes clear is that the rules are anything but clear. And without clear rules, the SEC’s current regulatory-by-enforcement stance on crypto hurts and doesn’t help American innovation.

This uncertainty has long acted as a brake on the pace of innovation and a breeding ground for bad actors. The responsible players have been subject to questionable regulatory actions in the United States, while ill-intentioned companies are launching products that flagrantly violate long-standing rules often beyond the reach of US authorities until it is too late.

Unfortunately, it is likely to get worse before it gets better. Unless Congress acts quickly.

The consistent application of 80-year-old precedents to new technologies presents significant challenges. The unique benefits and risks of blockchain and crypto require a new regulatory approach. Legitimate innovators and consumers of new products need clear rules of conduct to create useful products that are safe to buy and use and for use cases that go well beyond financial speculation.

The only way forward at this point is through thoughtful, well-calibrated legislation that protects consumers from scams and conflicts of interest while continuing to embrace innovations in blockchain technology. Other countries around the world have already come to this conclusion; the United States is lagging behind.

So how do you not fall behind while avoiding further confusion and uncertainty? We recommend that U.S. lawmakers do three things:

First, ensure that consumers and investors are protected by requiring centralized business registration and supervision. Regulators should probe the risks arising from custodial relationships, conflicts of interest, and the use of digital assets in illicit finance. We have already seen many examples of these regulatory failures.

Second, any legislation should provide entrepreneurs who have built non-centralized networks and legitimate businesses despite this uncertain environment a path to compliance.

Finally, laws and regulations should properly incentivize decentralization and community ownership and use, the key features of crypto and blockchain technology that generate the real benefits for the public and the new Internet. generation offered by this technology.

There are some encouraging signs: Progress is being made in both the House and the Senate on such legislation. We commend Presidents Patrick McHenry (R-NC) and GT Thompson (R-PA) and Senators Cynthia Lummis (R-WY) and Kristen Gillbrand (D-NY) for attempting to create meaningful consumer protections through legislative frameworks that promote responsible innovation. We urge Congress to quickly consider and pass such legislation before it is too late.

Miles Jenning is general counsel and head of decentralization at a16z crypto and a former partner at Latham & Watkins. Brian Quintenzi is global head of policy at a16z crypto and former commissioner of the US Commodity Futures Trading Commission.

The opinions expressed in Fortune.com comments are solely the opinions of their authors and do not necessarily reflect the opinions and beliefs of Fortune. Disclosure: a16z manages funds with investments in Ripple Labs.

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