America requires regulatory clarity before Blockchain bears its bounty

Innovation is essential for economic growth and higher living standards. Better tools and techniques that make us more productive are requirements for wealth creation. Yet innovation attracts its fair share of skeptics whose fears about where new technologies might lead are ripe for exploitation.

At the helm of the regulatory agencies in Washington, today, many seem to be fears about the nasty abuses of technology or how innovation will make our work and way of life obsolete. Yet, with each new wave of technological uptake, the American economy has created more and better paying jobs than existed before, due to the increasing abundance produced and invested. Such progress would be impossible without entrepreneurs and their innovations.

Consider blockchain – one of the most important innovations to emerge from the financial technology revolution of the past few decades. Blockchain is most often associated with cryptocurrencies – digital currencies that users exchange through decentralized computer networks – and is valued for its ability to reduce the time, cost and security risks of transactions. But new and evolving applications will bolster blockchain’s utility in a wider variety of industries — that is, unless regulators kill it in the crib.

The early adoption of the technology by pioneering firms working in the financial sector created links in the public mind between blockchain and cryptocurrencies. And it gave US financial regulators initial ideas for determining who should police the crypto companies and how. The experience is a teachable moment.

Gary Gensler, chairman of the Securities and Exchange Commission, has been aggressive in the crypto space, which he says is “full of hucksters, fraudsters, scam artists.” Gensler views cryptocurrencies as securities and his agency as authorized to regulate them (as well as the websites and applications on which those assets are bought and sold).

The SEC has taken action against numerous crypto companies, including Coinbase, Binance and Ripple, which operate platforms that exchange or use billions of dollars worth of digital assets every day. The agency’s “regulation by enforcement” approach casts a wide net, which Gensler claims is necessary because the writing of laws and regulations cannot keep up with new industry practices and products. This power grab is similar to jamming square pegs into round holes.

Should these companies be regulated? Yes. But are their assets securities? Do the companies’ activities fall within the SEC’s domain? Are these assets to be regulated by the Commodity Futures Trading Commission? Is it something else that should be regulated under a different authority by a different agency?

While the SEC sees most cryptocurrencies as the same type of investment that has been classified as securities for decades, the industry sees securities law as inappropriate for digital assets and is seeking new laws and regulations. Indeed, most current financial rules were created before cryptocurrencies came into being, but no new regulatory framework is even being considered in the Biden administration. Meanwhile, the absence of regulatory clarity continues to hinder investment in and development of US blockchain applications.

A 2023 decision from the Southern District of New York in the SEC’s lawsuit against Ripple provided some clarity. It ruled that the XRP digital token does not meet the definition of a security when traded on public exchanges. This would appear to place most XRP activities outside the regulatory purview of the SEC. But the decision also said that Ripple’s XRP sales to institutional investors in the company do meet the definition of a security, keeping the SEC’s enforcement role, however minor. One option would be to appeal these and other rulings to the Supreme Court, which has expressed increasing caution about the federal agency’s overreach.

Finally, Congress needs to get back into the game of legislation. It must write and adopt new statutes to provide new authorities for new and more appropriate regulations. Although several bills to this effect have been introduced, they remain stuck in a divided Congress, prolonging an absence of the regulatory clarity needed to encourage innovation not only in the crypto space, but in supply chain management and logistics , health care, real estate transactions, election integrity and other industries and applications where middlemen or intermediate processes create inefficiencies. Meanwhile, Bitcoin and XRP are the only digital assets that have achieved any regulatory clarity.

Innovation is crucial for economic development and higher living standards. It is often met with anxiety because of the disruption it can cause. But the development and adoption of new technologies have first-time advantages. Jurisdictions that welcome innovation earlier as a catalyst for evolution tend to get a head start on investment. For example, the fusion of artificial intelligence and blockchain will be a hotbed of innovation. But for these and other technologies to take root and enable activities that were much more expensive or difficult in the past – and to plant the seeds of spin-off technologies that will spawn a burgeoning ecosystem of life-enhancing, cost-reducing technological applications – regulatory frameworks must be put in place . While regulations, even well-intentioned regulations, can stifle investment in innovation, so can the uncertainty that results from an absence of regulatory clarity.

In 1997, as the promise (some at the time would have said “threat”) of e-commerce dawned and terrified brick-and-mortar businesses, the Clinton administration offered a bold vision of regulatory clarity. It laid down pioneering rules of the road with the publication of its “Framework for Global Electronic Commerce.” At the time, Amazon.com was a money-losing online bookstore, Netflix had just begun offering DVD rentals by mail to compete with dominant video rental stores, and the Internet was portrayed in much of the business media as a fad or a haven of criminals and swindlers.

After the e-commerce rules were issued, everything started to change. Investments have flowed into legacy companies that use the Internet to cut costs, increase sales, and achieve greater profits. Technology has also gotten a lot better: the Internet has gotten faster, bigger, and wireless; devices have become smaller, more powerful and cheaper. The wealth created increased incomes and living standards in the United States and around the world. This is the nature of innovation.

The economic success stories of American technology show that if we want to reap the benefits of innovation in our economy, we must provide early regulatory clarity to allow the technology to develop and deliver its bounty. This was true for e-commerce 30 years ago, and it is true today for innovations such as blockchain and crypto.