Regulation
Reasonable regulation is essential for cryptocurrencies
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The time has come for the United States to adopt reasonable regulations for the cryptocurrency world.
The blockchain technology that underpins digital assets and decentralized “Web3” applications has been developing since 2008. After many ups and downs, the ecosystem has matured. Alongside financial trading activity, stablecoins are gaining traction in payments, while startups are innovating decentralized solutions in various sectors. We don’t know who will succeed, but we do know that success will require trust.
Regulation is an important mechanism for building trust in new markets. It will help distinguish between companies willing to take responsible action to protect their customers and others and those that exploit market failures or engage in questionable activities.
Fears that such safeguards would inevitably dampen market activity, stifle innovation or cause industry players to flee to less stringent jurisdictions are unfounded. Market participants are seeking guidance on how to comply with common-sense requirements. This does not mean rewriting all financial regulation from scratch. However, it has become clear that legislation is needed.
It is also wrong to think that regulating cryptocurrencies means legitimizing abuse and unsustainable speculative activity. Protections against market manipulation, fraud, money laundering, and other illegitimate behavior are essential. Today, offshore actors with a history of violations and other questionable behavior are in the same boat as U.S.-based companies with a strong record of protecting customers. Only when bad actors are forced to change or excluded from the market can a solid foundation of trust be established. This requires regulatory limits.
While there are still important details to negotiate, several promising bipartisan bills on digital asset markets and stablecoin regulation have been introduced in Congress over the past two years. The substantive differences between the parties are not that great; what is lacking is the political will to move forward.
New technologies and market activity have often necessitated updates to financial regulation. The Great Depression, the global financial crisis, and other crises provided the foundation for new guardrails that supported growth and innovation. With the right rules, the United States could become the world leader in blockchain-based financial markets and the innovative applications that flow from them. Regulators can help prevent illicit activity while allowing legitimate transactions to flow smoothly.
Some aspects of blockchain-based markets are functionally identical to traditional markets, but with different technologies. In other cases, however, the concepts that worked before no longer make sense in a blockchain environment. Regulators need to focus on the principles or goals, and then challenge the industry to show how it can achieve them.
The global nature of digital finance creates a headache for national law enforcement. Yet we have seen similar challenges with the internet. Enforcement actions have already shown that we can do this for cryptocurrencies as well.
History teaches us that innovation is compatible with reasonable limits. The growth of the internet sector exploded when the United States provided a clear regulatory roadmap. This involved adding new requirements, removing others, and providing guidance when there was ambiguity about how existing rules applied. The rest of the world watched as the United States built a formidable ecosystem of technological innovation. Other countries eventually brought their own regulatory ideas to areas like privacy where the United States was lacking. We need a similar solution for blockchain.
With thoughtful regulations, we can create a future where crypto innovation soars, risks are controlled, bad actors are excluded, and users are protected.
Kevin Werbach is a professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania..
The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of Lehigh Valley Business or its editors. Neither the author nor LVB guarantees the accuracy or completeness of the information published here.