This week marked a sharp escalation in the long-standing conundrum of how to regulate cryptocurrency.
After long hinting at the prospect, the Securities and Exchange Commission (SEC) finally brought charges against two of the biggest cryptocurrency exchanges in the world, Binance and Coinbase, for operating as unregistered national securities exchanges, brokers and clearing agencies, as well as engaging in unregistered securities offerings through their staking-as-a-service programs.
The Coinbase charges were filed just hours before the House Agriculture Committee held a hearing to discuss a 162-page discussion draft released last week by Republican chairmen of the House Financial Services and Agriculture committees that would set a comprehensive framework for crypto regulation. Both Binance and Coinbase have pledged to fight the charges, so absent congressional action, the crypto industry will have to wait, perhaps years, for their long-sought “regulatory clarity.”
The U.S. is not alone in grappling with the thorny regulatory issues raised by cryptocurrency and blockchain technology. Last month, the U.K. Parliament’s cross-party Treasury Committee issued a report that called for consumer trading in unbacked cryptocurrency to be regulated as gambling in the U.K. due to the “absence of intrinsic value.” In the same report, the committee chastised the U.K. government for pitching a Royal Mint non-fungible token, warning that “it is not the Government’s role to promote particular technological innovations for their own sake.”
Compare the members of Parliament of the Treasury Committee’s approach to crypto to that of Republicans on the House Financial Services Committee. In addition to endorsing an overly complex bill that would split crypto oversight between the SEC and Commodity Futures Trading Commission, the latter introduced a four-page resolution last month “expressing support for blockchain technology and digital assets.” Behold the sight of U.K. politicians wanting the government to butt out of private sector innovation while House Republicans seek to coddle it.
Blockchain and cryptocurrency may very well transform the basic structure of the internet and financial services, but this outcome is independent of congressional action (absent an outright crypto ban). However, if you listen to the crypto industry and their supporters in Congress these days, you get the impression that the only thing stopping crypto from fulfilling its full potential are obstinate regulators and a lack of “regulatory clarity.” Indeed, the resolution in support of blockchain denounces as “not fit-for-purpose” the Securities and Exchange Commission’s process for determining whether a digital asset is a security.
This approach reveals a misunderstanding of regulation’s role in fostering technological adoption. Yes, effective regulation can facilitate trust and make consumers more willing to engage with crypto, but regulation cannot transform the fundamental essence of new products and services.
To better understand this point, it is helpful to compare crypto’s plight to that of another innovative product that came shortly before — ridesharing. When Uber first launched, its business was illegal in almost every new city it entered. The company overcame this hurdle with one enormously powerful weapon — a product that consumers enjoyed. By solving the frequent problem of unreliable taxi service, Uber quickly developed a large and vocal constituency of riders and drivers. These ultimately forced policymakers to accommodate a business model that forever changed the way we get around. In sum, a great product compelled regulatory change.
The crypto industry seems to think the opposite — that regulatory change will compel a great product. This notion has led the industry to become mired in endless policy debates and fitful legislative efforts that only benefit their lawyers and lobbyists. The truth is that crypto is not a kitchen table issue because, at present, it fails to solve real problems that ordinary people face. In fact, politicians are far more likely to hear from constituents who have suffered losses in any one of the numerous crypto-related failures over the last year. This is not a recipe for legislative success.
If the crypto industry wants regulatory change, it should focus less on Capitol Hill and more on building products and services that people enjoy and benefit from. Delighted customers become vocal constituents, and vocal constituents beat the best lobbyists any day of the week. Recent events suggest that the industry has plenty of time to get to work.
Lee Reiners is a lecturing fellow at Duke University’s Financial Economics Center.
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