Crypto’s Biggest Regulatory Challenge Is That It Hasn’t Been Regulated Yet
The US can be a huge long-term Crypto investor market, but not until the government makes rules
Crypto solves money’s problems, but can global currency be regulated?
If you’re reading this, you probably recognize that blockchains are going to revolutionize the world. A well-designed blockchain can solve nearly all the problems of a fiat currency at the same time: it can be irrevocably deflationary, globally liquid, contractually nimble, and completely sovereign all at once. There is one big thing standing in the way of that promise. That is the US government.
Blockchains are often decentralized, international entities, but no international framework exists to regulate them. Instead individual countries are attempting to address what the law and crypto require from each other. Some countries, such as Portugal, are taking a welcoming approach to cryptocurrency, allowing virtually anything and taxing nothing. Other countries, China, for example, are allowing virtually nothing, and seek to dominate digital currency with a centrally-controlled digital Yuan. This chaos within the international community is in part because the United States has yet to make any specific regulatory commitments about Blockchain technology, but at the same time it has made it clear that it eventually intends to. What the world’s largest economy decides about crypto is going to affect the rest of the world.
Once the US government has coherent rules for the crypto industry, long-term investors all over the world will feel more comfortable investing, volatility will be reduced and floor prices of compliant assets will rise.
As I write this, the cryptocurrency market has a case of the doldrums. One major reason for this is that the US has not solidified the rules that American investors who might otherwise be interested in crypto would have to follow. This regulatory vacuum affects the market in two related ways. First, conservative investors (think boomers) are going to avoid risking their money in a project that has irregular, double-digit-percentage price variance and also could be declared illegal tomorrow. Second, and maybe worse, less risk-averse investors view the entire crypto industry as a smash-and-grab: you get in, you profit, and you get out. An industry dominated by that kind of short-term behavior will have extreme volatility. People building crypto projects which they hope will endure have to contend with huge fluctuations in price and very large movements of assets within the ecosystem.
Sensible regulation would allow for safer, more responsible, long-term-focused investment, which will give crypto technology the price stability it needs to become the basis of the world economy.
Businesses that run exchange platforms are legally exposed to the dangers of providing financial products without a clear legal definition. Coinbase, one of the largest crypto exchanges, recently attempted to develop a crypto lending program, a fairly common offering for crypto custodians. Coinbase worked with representatives of the US SEC to attempt to be compliant with their rules on lending, but when it came time to actually launch the product, the SEC informed Coinbase that they would be sued by the SEC if they did. Imagine running a multibillion-dollar business in this murky legal environment. Clear laws will help defend businesses from arbitrary or inconsistent attempts at enforcement by any legal authority.
Some types of investor are mutually antagonistic. We have to choose one.
Long term investors are rightfully suspicious of a class of assets with frequent swings of over 70% in value. As long as crypto has that characteristic, most people aren’t going to bet their money on it. So why is the industry as a whole so unstable? One major reason is that coin prices are affected by short term trends which are often completely irrational, and there are people who like it that way. While most investors who “ape in” to the hot token of the week are going to lose money, the people who identified the trend early, often including the initial investors, are going to use that influx of cash as exit liquidity. In order to create an environment that will be hospitable to people’s retirement funds, more tools that separate junk investments that don’t have utility value from the good projects that do are needed. One good tool for that would be rules against the junk in the first place. This might mean the organizing of a token project would have to follow laws that protect retail investors. It might also mean that there are limitations on wash trading, dumping, advertising, etc. You can be sure that some investors wouldn’t be happy to see rules like that, but the rules may be needed anyway. Regulation of that kind would have the benefit of discouraging investors from putting money into projects that aren’t ever going to produce an actual product, to pick a too common example.
“We need a comprehensive, all-of-government framework to address the emerging risks and opportunities that digital assets pose.” Brian Deese, current director of the National Economic Council and former Head of Sustainable Investing, BlackRock.
Crypto needs US government regulation so that long-term investors will get involved, short-term investment will be de-emphasized, and the industry can grow in a healthy way. The ultimate goal of crypto should be stable growth over the long term. This can only happen after the US government makes crypto rules clear. Until then, the crypto industry will continue to operate in a piecemeal fashion, and many investors will either be focused on short-term investments, or else they’ll avoid blockchains altogether. Businesses will just have to keep trying to innovate and see who comes after them for it. It’s unusual for a trillion-dollar industry to operate in this kind of legal limbo.
When the rules actually appear, Many projects will almost certainly be ruined overnight. Some of these projects shouldn’t exist because they were built to rug retail investors or have some other serious flaw, but others will be innocent victims of a frustrating lack of guidance. While we can certainly hope that the eventual legal framework for Cryptocurrencies will be consistent, clear, fair, and thoughtful, we’re better off in the long run with imperfect rules than no rules at all. even if they’re bad, formal rules will allow blockchains and their financial instruments to be evaluated in terms of their compliance with those rules, and new projects will be confident that they are being built to fit them.
