The Voice of Layer 1s is needed in Washington
The policy environment for crypto in 2022 began in full swing. The industry had grown significantly, institutional adoption was growing by leaps and bounds and decision makers had taken notice. Many of the players in the financial side of crypto, including exchanges and those building financial products on blockchain, increased their involvement in the policy conversation in Washington, DC
Policymakers who had been historically skeptical began to see the value of the technology and the growing impact it could have on traditional financial markets. Critics were increasingly sidelined, given the perception of huge opportunities in the space, and friendly regulation appeared to be on the horizon. With regulatory certainty, the industry can flourish. In May 2022, this positivity in the political community stopped.
Chris Hayes is a senior government director with a focus on financial regulation. He previously led global government relations for a Tier 1 blockchain. This article is part of CoinDesk’s Crypto 2023 series.
The collapse of Terra’s UST stablecoin (which, behind closed doors, some in Web3 talked about as inevitable) as well as of many centralized lending platforms in the crypto space sent the industry into a cold winter and gave a strong narrative to skeptics about not only the crypto industry, but even worse, the utility of the blockchain technology itself. The implosion of FTX in November has added fuel to this narrative, with significant implications for policy-making. An organization that presented itself as the poster child for responsible management and consumer protection turned out to be a house of cards, even worse than the Enron example.
For all the losses to depositors, customers and damage to the industry’s reputation, the FTX implosion has surprisingly also resulted in an opportunity. There now appears to be some bipartisan consensus in the US Congress that new digital asset legislation is needed to protect consumers. The 118th Congress, which begins its work in January, is likely to adopt some sort of regulatory framework for crypto and blockchain technology in 2023 or 2024. This framework will shape the way the industry operates for years to come. This is why it is critical that the entire Web3 industry is involved in that conversation, and most critically, Layer 1 blockchains and the builders of those platforms.
I often hear from those new to Web3 or blockchain technology (including my old TradFi world) that they “see the value of the blockchain technology, but that crypto is worthless.” Unfortunately, these comments are common by those who don’t realize that a blockchain needs native cryptocurrency to process transactions, incentivize validators, and secure the network. Those less familiar with the technology, including many policymakers hostile to crypto, still haven’t heard about the job creation and economic growth potential of the companies that build on top of blockchain infrastructure. Layer 1s, as the building blocks of the entire industry, must bring these founders and companies to the forefront to tell the story of the technology and its potential for real-world application. A technology-forward message is needed now, not an economic message.
See also: The End of Crypto Twitter as We Know It? | Opinion
Any new crypto legislation or Securities and Exchange Commission (SEC) regulation must provide clarity for Tier 1s and their native tokens while ensuring adequate consumer protection. This means finally addressing the lack of clarity surrounding the application of the Howey test to these types of digital assets, including delineating whether they fall under Commodity Futures Trading Commission (CFTC) or SEC jurisdiction. Should certain Tier 1 native tokens ultimately be considered securities, any legislation or SEC regulation must provide safe harbor for the existing blockchain tokens in circulation and must provide for an updated SEC registration regime that addresses the technological differences presented of digital assets. If the SEC does not want to initiate a rulemaking process using its existing authority, Congress must require the regulator to do so.
Industry-leading Tier 1 blockchains need to collaborate on policy engagement, delivering a unified message that regulatory clarity is needed beyond Bitcoin and Ethereum. Only this will allow this important technology to continue to develop here in the United States, and drive the technology companies of the future.
