BankThink

Blockchain, crypto tech need clear rules of the road

It’s not regulation itself that acts as a barrier to innovation, but the lack of clear regulations that is impeding progress for digital currencies and blockchain technology.

I know from experience. Last year, I invested in a blockchain startup that was forced to shut down six months after launching. Its founders were acting in good faith and following the regulatory direction that was given to them in 2018. But by mid-2019 that direction took a drastic turn when the U.S. Securities and Exchange Commission notified the company that airdrop tokenization falls within its purview.

This is partly why leaders in the blockchain and cryptocurrency space are so vocal with their frustrations regarding the need for clear regulations. Lawmakers are also beginning to recognize this urgency.

In June, Rep. Warren Davidson, R-Ohio, criticized an SEC official during a hearing for what he called the agency’s “third-world” approach in formalizing crypto regulations. The result, Davidson warned, is a business climate where innovators are forced to move offshore to locales more welcoming of digital currencies.

Sure enough, Circle’s CEO, Jeremy Allaire, told the Senate Banking Committee during a July 30 hearing that his company had begun moving “international-facing products and services into a licensed Bermuda entity.”

This is due, in part, to the fact that countries such as Bermuda, Switzerland, France, Japan and Singapore are crafting policies — or already have such policies in place — conducive to crypto and blockchain innovation.

During the July 30 Senate Banking hearing, which focused on how to regulate digital currencies and blockchain, international trade and finance specialist Rebecca Nelson listed a slew of concerns that continue to haunt cryptocurrencies. Among these are crypto’s high volatility, its lack of consumer protections and its association with illicit activities, such as money laundering.

The panelists who testified also raised concerns that legitimizing digital currencies could create larger disparities for the financially disenfranchised — those classified as unbanked or underbanked consumers.

These are all valid concerns and only reinforce the need for concrete, clear regulations.

Building a solid regulatory foundation now — while cryptocurrencies are still in their relative infancy — is the only way to ensure market volatility is mitigated, illicit activities snubbed out and financial inclusion is mandated.

As one panelist reminded Senate Banking members, bitcoin — the first established cryptocurrency — emerged from the ashes of the 2008 financial debacle because its founders wanted “to offer a more efficient, confidential, and accessible payments system than the bank-operated payments system.”

“The problems of inequality and inefficiency that bitcoin and the cryptocurrency industry has set out to solve are not problems of technology, they are problems of policy,” Mehrsa Baradaran, professor of law at the University of California, Irvine, said in her testimony. “And it is in this chamber, and not in a tech startup office or anonymous white paper, that these problems must be addressed.”

Baradaran makes a good point. Unfortunately, the Senate Banking Committee already has a full plate, to put it mildly. In addition to overseeing the banking and payments sector, the committee oversees mortgage and deposit insurance, public housing, nursing homes, urban development and transportation, government contracts, export controls and more.

Even the 85-year-old SEC, which the Senate Banking Committee also oversees, still relies on laws that date back to the Great Depression to shape policy on digital assets and cryptocurrencies. These outdated laws are inadequate to address the roughly 2,200 cryptocurrencies now in circulation, or to govern technologies that are evolving daily.

Modern regulatory guidance is needed to ensure the cryptocurrency landscape is inclusive and honest, that innovative technologies can flourish, and innovators are not tempted to migrate overseas to do business.

As with every entrepreneur in any sector, one can only succeed if they clearly understand the rules.

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Bitcoin Blockchain Fintech regulations Fintech SEC Senate Banking Committee Cryptocurrency
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