Amid the intensifying debate in Washington about what the rules of the road should be for cryptocurrency, and who should police it, something important has been missing: a process for getting there.
It seems that nearly everyone has an opinion on how crypto should be regulated, but perhaps what’s needed right now isn’t the final regulatory framework, but rather the right approach for arriving at that outcome. What are the tools lawmakers, policymakers and regulators should use to educate themselves and develop new rules?
The stablecoin
New York’s crypto regulator, the New York State Department of Financial Services, was among the first to introduce a regulatory framework for crypto over six years ago and has had a front-row seat to the industry’s rapid evolution ever since. Regulating a fast-moving and constantly expanding industry like crypto is a challenge, but there are lessons to be learned from state regulators.
First, the pace of change makes it impossible to ever know everything there is to know about crypto. One needs to embrace a beginner’s mind, or the idea that deep expertise can actually be a hindrance rather than an asset when first learning something new. Deep curiosity about the underlying technology and economic structures is essential.
Second, thoughtfully defining the regulatory problem to be solved is an essential precondition to crafting a solution. With a mold-breaking industry like crypto, it’s important to ground oneself in first principles and the underlying risks posed by new technologies but to remain open to any range of solutions — old and new — to addressing those risks. Additionally, in the case of New York, the regulatory solutions that have emerged as a result of genuine engagement with the creators and end users of crypto assets have been far better than those initially considered by the regulator on its own.
Third, don’t try to solve everything at once. Despite its rapid growth, crypto is still young and may look very different five or 10 years from now. Start with the areas of greatest risk and build a system that allows the overall regulatory framework to grow and adapt over time. Flexible approaches like no-action letters, conditional licenses and safe harbors or sandboxes are needed.
Fourth, embrace the possibilities that emerge with greater availability of data. As a digitally native technology, crypto opens up new opportunities for regulators to supervise the space. In theory, regulators should be able to spot issues — and take action — much earlier than in traditional finance.
Fifth, there’s no substitute for hands-on experience. Can one really develop a legal or regulatory framework for something they haven’t experienced themselves? Reading disclosures, analyzing data and reviewing business plans can only take you so far. Rather than being treated as a conflict, direct experience in crypto should be a precondition to participation in building the regulatory crypto framework. Ideally those drafting recommendations, like those issued this week by the president’s working group, would have direct experience using cryptocurrency to ground their perspectives in the real world. Imagine if someone said 90 years ago that anyone who owned securities couldn’t be involved in creating and implementing the Securities Act of 1933 and the Securities Exchange Act of 1934.
It’s easy to criticize any potential new regulatory rule put forward for this nascent industry. It’s moving so fast that no matter what one does as a lawmaker, policymaker or regulator, it’s impossible to ever get it completely right. It’s simply too early to fully predict the trade-offs or unintended consequences that may emerge. But this is precisely why the tools and process matter so much at this stage and are vital to ensuring the best potential solutions emerge.
