Ten ideas for how Congress can effectively regulate the blockchain sector

The great German-American architect Van der Rohe once said, “God is in the details.” The same is as true for legislation as it is for architecture.

Advocates of the blockchain sector have made “protect investors without stifling innovation” a creed. Republicans and Democrats, progressives and conservatives all agree.

Now, what are the details?

Many smart people in government and industry have worked on attractive legislative proposals. Here is a compilation of the best proposals formulated so far.

This list is not exhaustive, but it represents a good start on how Congress can deliver both in terms of protecting citizens and a climate of innovation.

First, we suggest that Congress should provide funding for blockchain research and development on the scale of the National Quantum Initiative. In October 2019, Chinese President Xi Jinping, the leader of America’s main rival, threw down the gauntlet. “It is necessary to strengthen basic research, improve the original innovation ability, and strive to let China take the leading position in the emerging field of blockchain, occupy the innovation heights, and gain new industrial advantages,” Xi declared. America must rise to this challenge!

Second, we recommend that designated funding be provided for robust staffing within the White House Office of Science and Technology Policy, the National Economic Council, and the National Security Council for blockchain specialists to advance federal policy. President Joe Biden’s March 2022 executive order, Ensuring the Responsible Development of Digital Assets, has had a good effect on focusing the national conversation.

Third, it is important to see the establishment of federal primacy over state regulation of money transfers. One of the foremost thought leaders on the House Agriculture Committee, ranking member Rep. Glenn Thompson (R-PA), has presented a blockchain legislative blueprint that deserves attention. His proposal states that “Trading venues will choose the CFTC Digital Commodity Exchange regime or remain regulated under individual state money transmitter licenses.” This will promote consumer protection and, by reducing compliance costs, provide a major boost to innovation.

Fourth, the government would benefit from creating a proof-of-stake blockchain platform to distribute federal disaster relief funds. Fraud and misappropriation of federal disaster relief funds is all too common. After Hurricane Katrina, a National Disaster Fraud Center was established. However, a better solution would be to prevent fraud in the first place. Blockchain is tailor-made for that.

Fifth, we encourage financial rating agencies to engage in rigorous risk assessment of the blockchain sector. As two of our staff recently recommended in a commentary for RealClearMarkets: “The American way is to empower investors to protect themselves…Meanwhile, rating agencies, which are part of the market, will modulate compliance costs, while providing potential investors with what they need to know to intelligently assess risk.”

Sixth, we recommend chartering a self-regulatory organization (SRO) for the blockchain sector. Many classic financial agencies are regulated by self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). This has proven to be effective in protecting the public while avoiding many problems associated with public regulatory bodies, such as lack of funding or stifling innovation with compliance costs and red tape.

Seventh, the blockchain industry will benefit from tax deferral on crypto-to-crypto transactions (eg BTC to ETH) until gains are realized in a legal tender currency such as the dollar. This will be akin to the Internal Revenue Service’s 1031 exchange provision for real estate.

Eighthly, we strongly recommend that there is no taxation of effort before gains are realized through a sale. The ripening of a crop is not a taxable event and realization only occurs when the crop is sold.

Ninth, it is important to note that typical non-fungible tokens (NFTs) are no more securities than baseball cards. Some high-profile investors, such as Canadian entrepreneur Kevin O’Leary, are on record as seeing billions of dollars of potential NFT investments crippled until legislation or regulations make it clear that ERC-721 tokens will not be treated as securities.

Finally, we suggest that Congress pass a law that clearly states that utility tokens are not securities. All companies from Google to Guardian that have Internet-facing application programming interfaces (APIs) must protect their services from denial-of-service (DoS) attacks and have protected them with tokens for the past twenty years. Upgrading this network security measure to use cryptographic tokens issued from a blockchain makes excellent sense.

These are some appealing recommendations that will better protect the public without unduly burdening the blockchain sector with compliance costs and red tape that stifles innovation. We invite the Congressional Blockchain Caucus, chaired by Representative Tom Emmer (R-MN), Representative David Foster (D-IL), Representative Darren Soto (D-FL), and Representative David Schweikert (R-AZ) to convene thought leaders from the blockchain sector to evaluate these suggestions and add their own.

Adelle Nazarian is the executive director of the American Blockchain PAC, which was created to protect current and future blockchain and digital asset innovation in the United States and oppose legislation that would limit the growth of cryptoassets. She regularly speaks about the importance of crypto and blockchain in revolutionizing the future of economics, governance and culture, including its ability to uplift the most vulnerable members of society.

Alex Allaire is CEO of the American Blockchain Initiative.

Image: Reuters.