In recent times, the crypto industry has found itself at a crossroads where regulators and industry leaders must reconsider their strategies. The Securities and Exchange Commission (SEC), under the stewardship of Gary Gensler, appears to have chosen litigation over policy to steer the crypto sector. It has initiated lawsuits and other enforcement actions against entities involved in initial coin offerings, stablecoin issuance, utility tokens, non-fungible token creation, and trading activities categorized as unregistered securities. This approach, however, raises concerns about the contentious stance taken against crypto exchanges, including Coinbase, the only registered and publicly traded crypto broker-dealer in the US. Even stablecoins, considered by some crypto advocates as both dull and middle ground, have come under increasing scrutiny.
Simultaneously, there's a curious phenomenon unfolding in the crypto marketplace. On one hand, entrepreneurs and innovators are advocating for the relocation of workforces and economic activities overseas, with Ripple CEO Brad Garlinghouse stating that 80% of new hires will be based outside the US. There's mounting evidence that other regions are benefiting from the slow pace of US government regulation, both by enacting more comprehensive rules and marketing themselves as friendlier destinations for ambitious crypto firms. However, on the flip side, Traditional Financial (TradFi) institutions and even some state legislatures are making concerted efforts to create, issue, and capture financial benefits directly tied to the crypto space.
Given this apparent dichotomy, it becomes evident that US crypto regulation needs to evolve.
Crypto Firms Must Prioritize
While some optimistic entrepreneurs may not welcome this news, the regulatory outlook in the crypto marketplace has soured for legitimate reasons. The recent collapse of FTX, thrust into the spotlight as Samuel Bankman-Seared's trial approaches on October 3, garners most of the attention, but it masks a more significant issue. Almost every day, since crypto gained mainstream awareness, there have been numerous hacks and breaches resulting in losses of billions of dollars for both US and other investors.
Given this backdrop and the regulatory response in the US, crypto firms must emphasize transparency, accountability, and practical business use cases like never before. Investors and regulators will not blindly trust innovation or creativity when business models are unclear, regulatory environments are questionable, and management teams lack expertise in financial markets to handle customer assets and market volatility.
Reflecting the rise of stablecoins, the next wave of crypto leaders is likely to be characterized less by a move-fast-and-break-things ethos and more by planning and implementing the fundamental business elements necessary for long-term success.
Regulation Should Be Adaptable
Not all regulatory requirements need to originate at the federal level, and the rampant partisanship that permeates many US government debates is often unproductive. No-action letters, a fallback approach employed by the SEC, are at best a temporary solution that has unfortunately turned into an inadequate substitute for substantial policy discussions. Fortunately, some positive developments suggest that the regulatory landscape may be shifting.
Recent legal battles that have delivered a few, albeit partial, victories for the crypto industry against the SEC are noteworthy. Coupled with increased transparency in crypto-specific accounting standards and endorsements for a Commodity Futures Trading Commission (CFTC) sandbox, there are signs that the regulatory perspective may be evolving.
There are also indications that this regulatory chill may be thawing. The state of Wyoming has recently established a new commission to build on previous efforts to classify blockchain and tokenized assets within the business landscape. Led by director Anthony Apollo, this newly formed commission is tasked with developing a stablecoin backed 1:1 by the US dollar. With states taking the lead, this will help create a more flexible and robust regulatory environment.
Larger Issues Should Take Priority
Amidst all the discussions and debates surrounding the cryptoasset sector, it's easy to overlook the broader issues driving much of the growth and interest in the sector. Money, redefined in the context of the 21st and 22nd centuries, is less about physical currencies and more about digital representations of value. A digital medium that is widely accepted, understood, transparent, and trusted will play a pivotal role in advancing the global economy.
Investments and interest in cryptoassets have recently captured the attention of the world's largest TradFi institutions, major states, and every significant player in the financial markets. This is due to the potential benefits associated with tokenized transactions and the need to modernize existing financial systems and processes, as evidenced by the launch of FedNow.
Specific investments aside, the race for the global reserve currency of the 21st and 22nd centuries is well underway, and crypto will play a vital role in this discussion.
Crypto requires innovation, smart regulation, and sustainable business strategies, all of which are promising starting points for future-focused conversations in the sector.