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Following China’s decision to make cryptocurrency transactions illegal, the West needs to think carefully about its own approach to crypto regulation. Crucially, this moment could represent an opportunity for the West to lead the crypto-sphere – but this can only be achieved with the right kind regulation. What might this look like?
Last month, Gary Gensler, the chair of the US Securities and Exchange Commission, warned that cryptocurrency trading platforms are putting their own survival at risk unless they follow his call to work within the country’s regulatory framework.
Speaking to the Financial Times, Gensler stated that while he remained “technology neutral” about crypto assets, they should be treated the same as any other assets in the sphere of public policy imperatives such as investor protection, protection against illicit activity and maintaining financial stability.
He went on to state that “at about $2tn of value worldwide, it’s at the level and the nature that if it’s going to have any relevance five and 10 years from now, it’s going to be within a public policy framework…History just tells you, it doesn’t last long outside. Finance is about trust, ultimately.”
We are only in the infancy of the understanding and adoption of blockchain and crypto on a global scale, and the global market capitalization of cryptocurrencies is only likely to increase exponentially from its present volume of $2tn, with Bitcoin alone worth just under $1tn as things stand. Mr. Gensler is therefore right to stipulate that it is important to begin to think seriously about what the future of public policy looks like when it comes to crypto.
At the Institute for Emerging Technologies and Social Impact, we believe that cryptocurrencies have the potential to lay the foundations for a more open and inclusive global financial system, while blockchain technology can empower civil society through unmediated and verifiable contractual obligations.
By the same token, Central Bank Digital Currencies might accrue the capacity to increase state control over individual citizens and quash civil liberties. It is therefore our responsibility as a society to ensure this groundbreaking technology serves the good of the people.
When Mr. Gensler states that finance is about trust, what he really means is that good financial practice is characterized by trust. So it is important to acknowledge that one of the driving forces behind the adoption of cryptocurrencies is a lack of trust in established financial institutions, especially the ability of central banks to inflate away the value of personal savings by printing money on an unlimited scale. Indeed, many new users have turned to cryptocurrency to preserve their savings in the face of currency devaluation.
Realization of the benefits offered by cryptocurrencies has been especially marked during the pandemic, as everyone from private investors and public companies to underbanked individuals have taken stock of the instability of the traditional financial system. Unsurprisingly, regulators have struggled to keep up with this growth, and the danger is that knee-jerk regulation will be adopted that may limit financial inclusion by applying rules to crypto markets that are not fit for purpose.
The Global Future Council on Cryptocurrencies recently published paper on navigating cryptocurrency regulation which shows how past eras of innovation, such as the early days of the internet, could help meet this challenge.
The big challenge for regulators is that open-source cryptocurrency networks such as Bitcoin and Ethereum are computer protocols available to the public directly via the internet. They are permissionless interfaces for the issuance of tokens, self-hosted wallets and other decentralised finance (DeFi) services without the need for an intermediary.
Therefore banning cryptocurrencies or enacting other blunt regulatory instruments will not prevent adoption – it will only limit regulators’ abilities to steer market activity around these networks and address their unique potential risks. Regulations should be informed by actual use cases and consultations with technology innovators in order to discuss important policy objectives such as economic inclusion, competition and growth.
Regulating crypto appropriately is therefore critical to ensuring its global legitimacy. Ultimately, we need to regulate with efficacy, which means legislation that is applicable to digital assets specifically and does not hinder the market. Traditional forms of regulation from the fiat world do not reciprocally apply to every aspect of crypto or to the fundamental nature of blockchain technology.
In short, the regulatory oversight we need can’t just be the old-fashioned way of doing things, copy-and-pasted onto blockchain transactions. Instead, it needs to be oversight that helps fight criminal activity while boosting investor confidence in the ecosystem which makes crypto a desirable financial investment in the first place.
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