The fundamentals of our financial system have remained relatively unchanged for over two centuries since the U.S. dollar was first minted in 1792. This has resulted in deeply entrenched rules and regulations surrounding money in our country. The Securities Act of 1933, created as a response to the Great Depression, is still in action today. Many companies in the cryptocurrency space are working under the assumption that soon cryptocurrency and decentralized finance products will be considered a security.
The Securities and Exchange Commission rightfully wants to create oversight in an effort to protect consumers. However, effective regulation requires we completely rethink the existing framework for our financial system, rather than simply classify decentralized finance as securities under the current guidelines.
First, it is critical to take a step back and look at what decentralized finance is. Essentially, decentralized finance — or DeFi — allows for the global community to lend or borrow funds, speculate on shifts in prices using derivatives, trade currencies, insure against risks and earn interest in savings-like accounts.
DeFi is revolutionizing the way people engage in these activities by removing intermediaries. Rather than relying on a central bank or institution, in DeFi actions like lending, trading and borrowing are automated through “smart contracts” — self-executing contracts that fulfill transactions through code. This is made possible by decentralized blockchain technology, which is growing fast.
It could be argued that regulations will stifle growth, but I, on the other hand, welcome the opportunity for smart regulation that will promote more innovation and allow our industry to flourish.
While scaling my DeFi company, Conduit, I chose to launch in markets like Latin America and Africa first. One of the biggest factors in this decision was the fact that the U.S. has notoriously lacked clear guidelines and rules in this industry. To date, the approach of American regulators has been to act on a case-by-case basis, setting the rules via fines and litigation.
For a startup with a culture of compliance, growing in a market takes too much time, capital and talent to bear the risk of suddenly receiving a letter telling you to pack up. For the good of the industry, we invite regulators to provide a framework that we can work and thrive in — but that framework needs to be smart.
It’s important to understand that digital assets come in many forms and use different structures. There cannot simply be one approach to governance. For instance, we could make a case for fiat-backed stablecoins to fall under the purview of the Federal Reserve because they are tokenized versions of existing world currencies, while highly volatile cryptocurrencies and their markets resemble commodities more appropriately regulated by the Commodity Futures Trading Commission.
As we saw in the
If regulators want to have an open discussion with businesses in the industry, they must create a path for collaboration. Fines and enforcement hinder innovation by creating barriers for businesses and force companies to experiment at their own expense in order to get clarity on what’s permissible.
Kristin Smith, the executive director of the Blockchain Association called the BlockFi settlement of $100 million in penalties to the SEC, a step forward because new clarity emerged for other companies in the space. Yet there are other, better methods for communicating to the industry what can and can’t be done. Other governments,
Lawmakers at every level need to understand how globalization is changing the financial system and the implications of these shifts. Rather than fear these instruments — like those in the European Union discussing a
We must create a space for communication so policymakers know they can reach out and rely on experts in the space, including those from the private sector, to support them with information. Most important, those who represent the people must understand the real benefits cryptocurrency products can offer their constituents and grasp the potential upside for U.S. citizens and our global economy.
