Washington Needs a Smart Approach to the Blockchain Industry
The rapid growth of blockchain technologies has raised many questions regarding how governments should regulate this relatively new sector. Some policymakers are concerned that overlooking the industry may put the financial system at risk, including Democratic Rep. Juan Vargas, who has gone on record as saying “Most of the people that I know that have invested in cryptocurrencies (have done so)…because they think they can get rich quick. We’ve seen this before, unfortunately, and it led to the financial crisis.”
He is correct that, as blockchain-based financial instruments become more widely adopted as an investment class, there is a greater risk of financial instability that could result from the unregulated use of such assets in U.S. financial markets. However, an adequate set of regulations compiled smartly could ensure both a high level of investor and consumer protection while ensuring market integrity and promoting innovation. We’ve seen this in the past century when considering the various regulations covering brick-and-mortar financial institutions and Wall Street.
As blockchain assets continue to integrate into the global economy, many countries have already developed laws and regulations on the national level. For example, the European Union recently announced a set of new regulations for the cryptocurrency sector – the EU’s Markets in Crypto-Assets (MiCA) law. The legislation covers issuers of unbacked crypto-assets, and stablecoins, as well as the trading venues and the wallets where crypto-assets are held. The MiCA law protects both consumers and investors, standardizes actors, and supervises the energy consumption of crypto assets.
Another positive example is South Korea where they passed legislation on anti-money laundering and combating the financing of terrorism. The regulations implement mandatory requirements for a wide range of virtual asset service providers. This step creates a safer economic environment, with financial regulators gaining access to data regarding crypto transactions, which due to the technical nature of the blockchain protocol are helpfully preserved with each additional transaction.
The United Arab Emirates has established the Dubai Virtual Assets Regulatory Authority (VARA) which aims to protect and regulate the stakeholders in virtual asset services. VARA’s mandate includes monitoring trading activities in virtual asset services to prevent price manipulation and establish high standards of protection of personal data.
It is certainly worth leveraging the most beneficial regulations from other successful frameworks for the U.S. blockchain ecosystem. This would bring the industry in line with similar regulations legacy financial institutions have been subject to for decades without changing the inherent benefits of decentralized finance (also known as DeFi). A set of laws regulating digital assets would also bring greater stability to the U.S. economy while consumers would enjoy greater protection. This would help ensure that the government and U.S. citizens would get all the benefits that crypto and blockchain are offering.
However, overly tough restrictions would run the risk of stifling growth, development, and innovations. This would put the U.S. behind near-peer competitors such as China, creating economic and national security issues. Washington is inarguably behind our European and Asian partners when it comes to a blockchain strategy.
Regulation shouldn’t change these technologies’ fundamental nature in any way, they should only make users safer. Rules on asset classes should concentrate on making them safer and simpler to use, rather than erecting ersatz obstacles in the name of “protection,” which the industry would circumnavigate regardless. In sum, U.S. blockchain success will depend on a regulatory policy environment that provides clarity, allows for growth, and keeps the industry accountable.
The will to create this policy environment exists. The serious and legitimate voices in the blockchain industry all agree that it is high time for regulation and a significant number of legislators on both sides of the aisle, including the bi-partisan Congressional Blockchain Caucus, recognize the benefits. A balanced set of regulations would ensure a higher level of investor and consumer protection, and market integrity in this sector in the U.S. and will help to push fly-by-night crypto operations as well as fraudsters out of the market.
Going back to Rep. Vargas and other legislators, hopefully, our leaders in Washington will seize this occasion to deliver the right kind of regulation to help the U.S. stay on top of this critical, innovative, and developing industry.