Regulation
A little regulation is exactly what crypto needs
(Bloomberg Opinion) – Sometimes industries want to be regulated. It is not that they are in favor of all the associated restrictions, but this regulation means legitimization. Simply passing laws limits certain activities as deserving legal protection.
Which brings us to crypto. Currently, if a US financial institution issues crypto assets, there is a high risk that the Securities and Exchange Commission will declare them to be securities and regulate them accordingly. Ideally, the SEC would provide a formal definition of what constitutes and what does not constitute a security, and the crypto industry would attempt to circumvent these rules. Instead, through inaction, the SEC allowed a de facto ban on a large portion of cryptocurrencies. In the long term, this undermines democratic ideals of transparency and the rule of law.
The good news is that last week the House of Representatives passed a bill that would establish regulation of digital asset markets. It’s not common for libertarian elements of the American political system to support new laws, but in this case they do. Whatever objections one may have to the details of the bill, it would give the crypto industry a solid legal footing and enable its growth in the United States. The bill would also place much of crypto regulation under the Commodities Futures Trading Commission, which is likely more user-friendly than the SEC.
Until now, no major crypto-related bills had passed either house of Congress. It remains to be seen what the Senate will do, although it is unlikely that the bill will reach the desk of President Joe Biden, who opposes it, by the end of the year. It’s worth noting, however, that 71 of the 279 votes in favor of the bill in the House came from Democrats. This indicates that crypto regulation is a bipartisan issue, if only because many Americans claim to hold crypto assets, 12% by one estimate.
As for the details of the policy: is this a good bill? Above all, yes. Without a consistent regulatory framework, the U.S. crypto industry will not be competitive with that of other countries. This harms U.S. innovation potential, encourages some entrepreneurs to expand their operations overseas, and could potentially limit the integration of crypto with traditional financial infrastructure, putting the U.S. financial sector at a disadvantage.
The bill contains a key provision that requires crypto infrastructures to be sufficiently decentralized, at least if such infrastructures are to fall under the jurisdiction of the CFTC rather than the SEC. These decentralized crypto infrastructures, which would include Bitcoin and the Ethereum network, are considered “digital commodities” and enjoy greater freedom. Such assets are not like Apple stock, where the buyer expects a very particular type of corporate responsibility and predictable financial reporting. Thus, the bill states that, for many crypto assets, initial issuance must involve stricter disclosure and regulation, with a role for the SEC. Over time, as the blockchain for this asset became more mature and well-established, regulations eased.
Any particular proposal for such rules will necessarily contain some ambiguities and will be susceptible to manipulation (by companies) or abuse (by regulators). What is considered “adequate” decentralization, for example, is ultimately a subjective question. Nonetheless, this bill appears to be a reasonable starting point for crypto regulation.
The bill also explicitly subjects crypto assets to existing regulations intended to prevent money laundering.
The bill distinguishes stablecoins, which promise redemption for a specified number of dollars, and states that they can be traded through properly regulated intermediaries, although the details of this regulation are explicitly assigned to future legislative and regulatory acts.
This is a drawback because stablecoins are the form of crypto most likely to be fully integrated into traditional financial infrastructures, due to their ease of use for payment. Nonetheless, the passage of this bill would increase, not decrease, the chances of stablecoins being dealt with in a meaningful way in the future.
What are the broader lessons here? First, Congress has been slow to pass meaningful crypto legislation, and many crypto innovators therefore have a low opinion of the United States as a place to operate. Second, when Congress finally manages to write a bill and move it forward, the results may actually be reasonable rather than crazy.
Third and finally, it’s not too late. Crypto is still in its very early years and it is unclear which of its services will prove sustainable. But the opportunity to find out was not lost.
Elsewhere in Bloomberg Opinion:
- Bitcoin is on the rise, but the future of money is elsewhere: Lionel Laurent
- With a little help from Congress, crypto can go pro: Aaron Brown
- Crypto is going mainstream, which means it’s over: Allison Schrager
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This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist, professor of economics at George Mason University, and host of the blog Marginal Revolution.
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