I’ve been watching the maturation of the cryptocurrency industry since 2016, when I founded The Digital Money Forum for the Consumer Electronics Show in Las Vegas. In 2017, Matt Rozak, one of the keynote speakers there, predicted that blockchain would be the railway to an entirely new form of money based on technology.
As of today, that prediction looks like it might have gone off the rails. It was a grim week for anyone in the crypto community. Celsius network, one of the largest owners of crypto, which lets you buy, sell and swap assets, and ostensibly make 18% interest on your balances, abruptly halted all trading and withdrawals this week. Bitcoin’s value dropped 65% from its all-time high. The TerraUSD and Luna stable tokens turned out not to be very stable, erasing billions in market value. Binance briefly halted all withdrawals. Coinbase said it would lay off 18% of its workforce. Many of the well over 10,000 active cryptocurrencies are down over 30% just in the last week. And the rest of the crypto industry is shedding jobs faster than a lobster sheds skins. It feels like something straight out of the bank run scene from It’s a Wonderful Life, only this time it’s a run on crypto banks.
So what gives? Irrational exuberance’s fall to earth? Has crypto become so institutionalized that it’s pegged to the stock market’s plunge? Is it a rightsizing of the industry? Is it a dot.com valuation era redux? Or, just possibly it’s an industry that’s crying out to be regulated in order to bolster the confidence quotient.
Regulate Me, Please
This isn’t the first time crypto’s volatility has resulted in community soul searching, but what’s different this time is that much of the industry, which has generally shunned government in favor of extreme libertarian politics and self-regulation, seems to be having an awakening. With plenty of reason. While many have likened the rise of blockchain and crypto to the early days of the internet, the two are quite different. The commercial internet was created by tech companies, and it’s taken two decades to get to the point where we’re finally talking about meaningful regulation. Meanwhile, the financial industry has always been heavily regulated. In the U.S., for example, credit activities are up to three times more regulated than the health care industry. Like the internet though, In its nascent days, the burden of regulation would have stymied crypto innovation, had it come earlier. Today though, given the industry’s collective near-trillion-dollar market cap, regulation is essential, especially if the U.S. wants to keep competitive in world financial markets.
In March 2022, I wrote that crypto might be the only policy area that a divided hyper-partisan government can agree on. That month, President Biden signed an executive order announcing the adoption of a government-wide approach to cryptocurrency and digital assets, calling for various government agencies and departments to get regulatory guardrails in place.
Four months later, at the June 9th -12th Consensus, audience members greeted politicians, legislators, and regulators with welcome arms. There was resounding applause in one session I attended, where Senators Kirsten Gillibrand (D-NY) and Senator Cynthia Lummis (R-WY) presented a bill they have jointly introduced that outlines a regulatory framework for certain crypto assets. They call it the Responsible Financial Innovation Act. The two worked together outside of the respective committees, because their goal was to make the bill an urgent one. Both felt legislation was necessary to bring more clarity to about the respective roles of numerous competing federal financial regulatory institutions, including the SEC, CFTC, FTC, and DOJ. It’s the first salvo but one they hope will pass both the House and Senate by the end of the year.
Among other things, the bill calls for settling the long-running jurisdictional dispute between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). For this go-round, the senators give deference to the CFTC, which regulates commodities and not securities. Gary Gensler, Chairman of the SEC, has famously called the crypto industry “the wild west,” He has long championed more oversight, but in a speech this week expressed his concerns that the bill did not give the SEC sufficient jurisdiction.
The bill would also require the IRS (Internal Revenue Service) to issue regulations clarifying long-standing issues about the digital asset industry. For example, it would eliminate capital gain taxes on crypto used to buy up to $200 of goods or services, putting crypto on par with ordinary dollars for such transactions. The bill also requires stablecoins pegged to the U.S. dollar to offer prompt payment and redemption, in order to instill consumer confidence. The Gillibrand press release provides a good summary.
To succeed with this bipartisan effort, both Senators admit that many topics were left unaddressed. At Consensus, Gillibrand noted that among the issues kicked down the road were environmental disclosures for currency mining, rules governing self-regulating organizations, and the potential creation of a digital U.S. dollar.
The point of regulation at this moment is ideally to ensure at least a modicum of trust and stability. Only with initial guardrails about taxation, sovereignty and custody will more folks be willing to jump on the bandwagon. There are already an estimated 30 million crypto holders in the U.S. Proponents hope regulation may help tame marketplace volatility and pave the way for wider audiences to engage with digital assets.. In a marketplace that’s been perpetually wracked by fraud, scams, bad actors, and shady schemes, investors will finally get some protection. Developers of innovative new crypto products will get the confidence they need to thrive.
Times have changed. A crypto movement that once tried to circumvent governments and regulators of any kind is finally raising its hand and begging to be regulated. The need for regulation and governance came up in session after session in Austin. In his closing remarks at the conference, Brett King, a prognosticator of the future of money, said “There must be some regulation that takes place. Do you really want your children’s DNA on the blockchain? Because without control and regulation, that will be happening…The goal of web3 is to digitize all of human existence.”
For more on why attendees at Consensus remain optimistic despite the crypto downturn, read this to hear what some of them told Raskin.