I recently attended the ETH Denver crypto developer conference, a gathering of thousands of energetic young minds fueled by the desire to build a new world. The atmosphere was like the Renaissance, where innovation and creativity flowed freely, and the negativity of last year never happened. However, upon returning to the US, I found the regulatory crackdown on the crypto industry to be like the Dark Ages, stifling progress and growth.
Regulation of the crypto industry was always inevitable and desirable, much like how the Renaissance was a time of great advancement in art, science, and literature. However, the current state of regulation in the US crypto industry is like the prohibition era, where instead of sensible regulation paving the way for growth and mass adoption, we have a hodgepodge of uncoordinated actions leading to a counterproductive outcome.
The American crypto industry is like a child that needs guidance and nurturing to mature, but instead, it’s being thrown into dangerous corners like a baby bird pushed out of the nest before it can fly. For instance, federal bank regulators have forced the industry to rely on smaller state and regional banks for basic services, which increases the risk of runs, like the one that happened at Silvergate. However, now those same regulators are telling small banks to limit their exposure to crypto, forcing companies like exchanges and stablecoin issuers to look offshore.
Similarly, most institutional investors are not allowed to custody their own assets and have been relying on fully-regulated state-chartered institutions to store their coins. However, the SEC is now saying that those custodians may not be good enough, leaving institutions to go offshore for compliant custody.
Stablecoins are arguably the killer app of crypto, offering a win-win where foreigners get access to digital dollars and the federal government gets a new source of demand for its debt. However, American regulators keep trying to kill them. For example, New York-based Paxos, the pioneer in issuing fully-regulated and generally trustworthy stablecoins, is being investigated by both the New York Department of Financial Services and the SEC, forcing it to abandon BUSD, the 3rd largest dollar coin. This has resulted in Tether, the unregulated offshore issuer, laughing all the way to the bank while established payment providers like PayPal are being ordered to stay away from stablecoins.
Governments in Europe, the Middle East, and Asia have created classifications for different kinds of digital assets to regulate each smartly, taking into account unique features and risks. In contrast, America keeps applying a broad analog brush to anything that lives on a blockchain, which is absurd. American projects have a harder time raising money, American developers have a harder time finding work, and American users are blocked from new products.
It’s a shame to see such a promising industry hamstrung by bureaucratic red tape and conflicting regulations. The potential of blockchain technology and cryptocurrencies to revolutionize the way we conduct transactions and build trust in digital spaces is immense. However, the current regulatory environment in the U.S. is stifling innovation and driving businesses offshore.
This is not the first time that America has struggled to keep pace with emerging technologies. History is full of examples of once-prominent industries and technologies that fell out of favor due to a lack of foresight and innovation. The automobile industry, for instance, was dominated by American companies in the early 20th century. However, a lack of investment in new technologies and infrastructure caused American automakers to fall behind their foreign competitors.
Similarly, the U.S. was once the leader in the field of semiconductors, but a combination of protectionist policies and a lack of investment in research and development caused the industry to stagnate. Today, the majority of the world’s semiconductors are produced in Asia.
If we do not take action to create a more favorable regulatory environment for the crypto industry, we risk falling behind once again. As the author of the original post notes, an ecosystem that began as an American phenomenon will succeed elsewhere, taking all of its jobs, tax revenues, and influence with it.
It’s time for policymakers in the U.S. to recognize the potential of the crypto industry and work to create a regulatory framework that promotes innovation while protecting consumers. We need a coordinated approach that takes into account the unique characteristics of blockchain technology and cryptocurrencies. This may require a shift in mindset from viewing the crypto industry as a threat to the established financial order to recognizing it as an opportunity to create a more equitable and efficient financial system.
In conclusion, the future of the crypto industry in the U.S. is at a crossroads. We can either continue down the path of regulatory confusion and uncertainty, or we can take decisive action to create a more favorable environment for innovation and growth. The choice is ours to make, but we must act quickly if we want to remain a leader in the global economy.