Blockchain regulation, clarity, necessary or America will fall behind, experts say
Despite a major down year for cryptocurrencies in 2022, blockchain – the underlying technology that enables cryptocurrencies as well as other emerging technologies – suffered no real harm. In fact, the European Commission announced on Wednesday the launch of the “sandbox” test site designed to promote 20 blockchain-based projects per year. Industry experts say several factors still give the United States a huge opportunity to take the lead in blockchain applications. But there is an increasing risk of squandering that opportunity, they say, unless relevant regulations are quickly clarified.
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Blockchain: Not a Fringe
Blockchain performs a variety of functions, underpinning a wide range of technologies other than cryptocurrencies and NFTs (non-fungible tokens). But cryptos give blockchain its highest profile exposure. And it is not an unimportant role to play.
“This is not a fringe asset … about a fifth of Americans, it’s estimated, use or hold crypto,” according to Maude Wilson. She is a political advisor at the decentralized financial firm Uniswap Labs. Wilson was a speaker on the “Making America #1 in Blockchain and Financial Innovation” panel at CES 2023 in Las Vegas.
“For people who live in places where there’s less trust in their government, less trust in their financial institutions, those numbers are even higher,” Wilson said. “We see that up to a third of people living in Argentina use crypto.”
Argentines have embraced cryptocurrencies as the country’s inflation nears 100% and currency evaporates. El Salvador embraced Bitcoin as domestic legal tender in September 2021. It began buying one Bitcoin per month in November, following the FTX-triggered crash. In January, the country’s legislature legalized the use of bonds backed by cryptocurrency.
The EC’s European Blockchain Regulatory Sandbox launch on Wednesday gave the region an aggressive stance in developing the technology. First announced in 2020, the project connects regulators, academics and corporate innovators with a goal of moving projects forward quickly and with oversight.
It is facilitated by a consortium led by London-based law firm Bird & Bird, along with its consulting arm OXYGY, and blockchain experts from WBNoDE, a Czech-based website builder. Sandkassen is aimed at 20 projects per year, starting in 2023.
Decentralization and Web3
In the US, advocates say cryptocurrency payments can help eliminate credit card fees and cut out middlemen. That, Wilson says, offers little benefit to consumers.
Blockchain also enables the decentralization of Web3 – the next revision of the internet. Exactly what decentralization might offer and look like is not yet entirely clear. But experts believe we will start to see that expansion in the coming year. Sasha Moss, social policy manager at Coin base (COIN), said Web3 will offer customers “more privacy by design and cross-platform interoperability.”
Blockchain technology will also appear in more mainstream use, according to Moss. Artists and venues will start using non-fungible tokens for tickets. In addition, brands of all kinds will use NFTs for rewards programs or other digital collectibles.
Web3 will also offer “more ownership control among users for their data.” Also, a more decentralized system that is more robust, less concentrated to the power of large, multinational corporations,” according to Jacob Hample. Hample is the head of US government affairs at the Filecoin Foundation. The Filecoin Foundation supports and provides grants to decentralized startups.
America lags behind
Still, the US’s lack of crypto regulation means it lags behind many competing nations. The European Union launched its draft crypto asset regulations in June. The rules, which are expected to come into effect in December this year, hold providers liable for the loss of consumer crypto assets.
“Europe has been way ahead of the US on trade, especially market recognition,” Hample said. The EU’s regulatory framework, Market in Crypto-assets Regulation (MiCA) will roll out this year after expected formal approval in April. It was originally scheduled for February, but was delayed in translating it into Europe’s various languages.
On Wednesday, a tweet from Coinbase CEO Brian Armstrong called for swift legislation from Congress after Hong Kong announced it will make the buying, selling and trading of crypto fully legal for its citizens starting June 1.
However, America has a huge opportunity to take the lead in the industry, according to Lizzy Fallon, political adviser to the US House of Representatives. Especially after China banned all cryptocurrency mining and transactions at the end of 2021, Fallon says.
Clarifying the basics of crypto
As the first step in this process, regulators must first define the basics.
“We still don’t have regulatory clarity about which digital assets are securities, which digital assets are commodities, and which digital assets are currency,” according to Fallon.
“And what we’re hearing from crypto developers is that it’s hard for them to develop in this country,” Fallon said. That’s because they can’t offer their token to US citizens as payment, as it could be considered a security risk.
The current federal framework, the Securities Act of 1933, simply cannot be properly applied to crypto or the blockchain, some say. “We’re talking about legislation that’s almost 100 years old … we just want the regulation to be fair and apply specifically to the technology we’re talking about,” said Wilson of Uniswap Labs.
The regulation may resemble internet laws
Proper regulation of the industry may need to resemble Internet laws, analysts say, rather than focusing on the economic aspects of the technology. Policies need to avoid swallowing the technology, but also to reflect American values of privacy, individual sovereignty and free markets, House Policy Advisor Fallon said.
The current crypto framework is “more of a state-based framework that’s fragmented,” according to Fallon. And at the federal level, there is competition for jurisdiction, making the system very difficult for market participants to navigate. Congress needs to define “who has jurisdiction over what, when and why, and go from there,” she said.
“Most people in the industry are really looking for laws that are specific to the United States — laws that take the nuances of the technology into account,” Fallon said. “This is a space that wants to be regulated. It just wants to be regulated thoughtfully and in a way that makes sense.”
Cryptocurrency, blockchain regulation ahead
Regulation is likely to focus on centralized exchanges, such as FTX, which have stayed outside the US regulators and initiated many of the recent crypto crashes.
Fallon points out that the technology anticipates many of the problems that regulation seeks to solve and mitigate. She noted that the blockchain’s transparency allowed crypto-watchers to track some FTX funds during the crash and helped reveal certain aspects of FTX and Alameda Research’s intertwined relationship.
Much financial regulation aims to address custody risk and information asymmetry – those who have access to information exploit those who do not. Decentralized finance naturally addresses these issues, says Wilson. DeFi never takes custody of assets, meaning there is no custody risk. And everything is permanently recorded on the blockchain, meaning filing disclosures and other transparency measures from traditional finance are not relevant, she said.
So regulators need to be aware of these discrepancies. Meanwhile, public centralized exchanges like Coinbase maintain their transparency via securities filings and compliance with US financial laws, Moss noted.
Jake Chervinsky, CEO of the industry group Blockchain Association, says Congress, rather than the Securities and Exchange Commission, will likely have to step up to regulate blockchain.
“In recent years, key government agencies like (The Financial Stability Oversight Council) and (President’s Working Group) have said that Congress — not the agencies — must decide crypto regulation. That hasn’t happened, and now we have a divided Congress,” Chervinsky said in a tweet on February 14.
2023: The Year of Blockchain Oversight
But Congress is clearly on the move, and House Republicans in particular are pushing the issue.
“There are a lot of pieces of legislation on the table that have a lot of bipartisan support and that have a lot of support from stakeholders that will be affected by it. So, to a large extent, what’s needed,” Fallon said, “is to put it together in a way that makes sense.”
Discussions about stablecoin regulation began back in August, and those bipartisan talks are ongoing, she said. And in light of recent events, we are likely to see market structure legislation emerge as a priority for the 118th Congress.
Fallon expects “a lot of great crypto developments” from the Financial Services Committee, now under the leadership of Rep. Patrick McHenry (RN.C.).
“2023 is the year of oversight,” Fallon said. She expects Republicans to flex their “subpoena power,” forcing the Securities and Exchange Commission to take a more active stance in engaging with cryptocurrency and blockchain regulation.
“It’s the year (SEC Chairman) Gary Gensler should get a crib,” Fallon said, “because he’s going to be testifying a lot more in front of Congress.”
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
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