By Lee Bratcher, President and Founder of the Texas Blockchain Council
Coinciding with the meteoric rise of bitcoin and other blockchain-enabled digital assets have been untold challenges - including scammers, fraudsters, and cases of market manipulation. Despite these obstacles, the potential for bitcoin and blockchain-enabled digital assets to transform how we track value and conduct commerce remains significant. The speed at which these innovations have come to the fore has created unease within certain Federal agencies. The SEC is no exception and their piecemeal regulation by enforcement has drastically impaired the ability of innovators and entrepreneurs operating in the United States.
Now, comprehensive regulations seem to be on the horizon, although some of the finer details are yet to be determined. If done correctly, the future could be set for a much safer decentralized industry, paving the way for greater legitimacy and adoption that demonstrates the true intrinsic value of digital assets.
The Industry Needs Appropriate Guardrails
The introduction of bitcoin and digital currency unleashed an unprecedented explosion in company formation and capital allocation without corresponding laws and regulations to provide necessary rules of the road. The unscrupulous actions of a small group of projects and individuals have not only harmed innocent investors but besmirched the image of the entire space.
Fundamental industry issues include a number of outright scams and pyramid schemes, such as the infamous story of Bitconnect, which ultimately stole $2.4 billion from its investors. Then there’s the ever-present issue of attacks from hackers, who have hit major operations such as MtGox, Maker DAO, Bitfinex, and many, many more. Most concerning have been the scandals surrounding seemingly legitimate exchanges, like FTX, which then subsequently turned out to be fraudulently and incompetently managed. The conviction of Sam Bankman-Fried is a stark reminder that human nature requires the refining fire of transparency and accountability.
The SEC’s Politically Motivated Oscillation
FTX, in particular, drew the attention of the U.S. Securities and Exchange Commission (SEC). The agency has claimed there is a need for much stricter oversight of the digital asset space and has additionally stated that many of the companies currently offering crypto assets are, in fact, breaking securities laws. However, the lack of specific guidance has created an ambiguity in which reasonable legal minds disagree. These ambiguities even encompass enforcement actions for major asset exchanges that are considered ‘good actors’ like Coinbase and Kraken.
Most U.S.-based companies recognize the need for a regulatory framework that positions the U.S. to be the leading jurisdiction to provide consumer confidence in the industry as well as a broader license to operate, based on transparency and the rule of law. However, the lack of consistency and communication from the SEC has undermined U.S. competitiveness and continues to drive innovation and investment overseas.
The most comprehensive legislation that has gained real momentum is the Financial Innovation and Technology for the 21st Century Act (FIT Act), which was recently passed out of the House Financial Services Committee and House Committee on Agriculture. The bill would significantly expand oversight of the digital asset industry through the Commodities Futures Trading Commission (CFTC). This would provide a path for most entities to register with assets treated as commodities. Regulators would retain the ability to determine that an asset is a security if it can be shown that there is centralization or unilateral control of a protocol in the hands of any one individual or entity.
Additionally, all registered entities will comply with anti-money laundering (AML) and counterterrorism financing (CTF) protocols. This means gathering and sharing information on who their clients are and where funds are moving to and from. Most well-known U.S. companies voluntarily comply and seek to exceed basic requirements to protect against illicit finance. This higher degree of transparency would also help to eliminate market manipulation, as large investors with the potential ability to influence the market couldn’t hide behind major exchanges. These steps would better position the industry to win broader institutional adoption as price discovery would benefit from reducing the risk of undesirable or illegal counterparties and accessing increased global liquidity.
Clear and Consistent Regulation of Digital Assets is a Win for the American Economy
The implementation of clearly outlined measures to leverage the unique attributes of distributed ledgers to outperform legacy financial systems in both reducing corruption and crime will end misinformed concerns about a lack of market integrity.
We have seen arguments that digital assets are benefiting criminals and terrorism when the reality is that this technology makes it easier to identify and monitor bad actors. There’s a reason that the adoption of bitcoin tends to be higher in relatively poorer countries with elevated inflation and corruption. By serving all people equally and fairly, and removing the ability for external parties to seize or debase assets, millions of people around the world are accessing financial services that work for them for the first time. Should the U.S. be an obstacle or an accelerator for this movement that fundamentally aligns with American principles, such as protecting private property and reducing discrimination?
U.S. regulatory leadership, such as the opportunity to pass the FIT Act, would bring an end to an often undeserved perception that digital assets are living in a “wild west”, even as we already see major institutional investors entering the space.
For regulation to be successful and truly functional, it is also essential that all future digital asset regulations be supportive of innovation and recognize the global competitive landscape where many companies are already moving - countries like Singapore and Dubai. While there are many areas to be addressed, the rules that are put in place shouldn’t come from arbitrary executive orders or enforcement actions. If they are, it could not only push this industry out of the U.S. but could also reduce the use of the dollar abroad and the international growth of U.S.-based companies.
The Priority Facing US Regulators
Instead of just focusing on what companies can’t do, regulatory architecture should be designed to allow entrepreneurs to build the future of finance here in the U.S. Stifling the growth of decentralized assets only stands to put the U.S. behind many other developing regions, potentially even affecting the country’s economic standing in years to come. U.S. regulation can, and should, set the standard for the global adoption of blockchain technology. States like Texas are already leading the way and the Federal government should support innovation at the state level.
The Texas Blockchain Council is actively working to provide subject matter expertise to forward-thinking legislators with a focus on policy initiatives. They’re all convening at the annual North American Blockchain Summit in Fort Worth, TX November 15-17, where industry leaders, decision-makers, and a bipartisan group of state and federal legislators will meet for meaningful discussions around many of the topics mentioned above, including SEC/CFTC regulations, ETFs, bitcoin mining, and more.
About the Author
Lee Bratcher is the President and Founder of the Texas Blockchain Council. The Texas Blockchain Council is an industry association with more than 75 member companies that seeks to make Texas the jurisdiction of choice for bitcoin, crypto and blockchain innovation.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.