In contrast to 2022, a disastrous year for digital asset markets, 2023 was characterized by aggressive regulatory action and positive market developments. The recent settlement between US regulators and Binance, the world’s largest cryptocurrency exchange, is poised to improve trust, transparency and accountability throughout the market. Meanwhile, most global financial centers have established clear regulations for the crypto industry. Despite this progress, the United States risks becoming an outlier if it does not establish new rules in 2024. Policymakers can choose between three potential paths to risks and opportunities in the crypto market: regulation, legislation and designation. Two years ago, US President Joe Biden took a major step to provide regulatory clarity by issuing his Executive Order on Ensuring the Responsible Development of Digital Assets. Since then, however, legislative efforts have stalled, and the US has fallen behind other countries in regulating the sector, despite the fact that virtually all digital assets are priced in dollars. The irony is that US-led bodies such as the Financial Stability Board, the President’s Task Force on Financial Markets, and the Financial Stability Oversight Board have been at the forefront of global efforts to regulate the crypto market. As chair of the FSOC, Treasury Secretary Janet Yellen also urged Congress to advance legislation to regulate dollar-denominated stablecoins. Federal Reserve Chairman Jerome Powell echoed these calls. These calls for legislation, reinforced by global regulatory bodies, highlight the potential risks associated with crypto. While some economists advocate drastic measures, such as allowing the industry to collapse or imposing strict rules, a preferred approach would be to leverage blockchain and other emerging technologies to ensure that financial services meet market demand outside of conventional banking hours can meet, a challenge that particularly affects global payments. As nearly every major banking, asset manager, fintech and payment services company around the world has already developed digital asset strategies, it is time for US policymakers to catch up and introduce technology-neutral, principled regulations that foster competition in financial markets. To this end, Congress should empower federal regulatory agencies to set rules for the market. It involves examining central bank digital currencies, despite opposition from politicians such as former US President Donald Trump, the Republican Party’s presumptive nominee in November’s presidential election. It also includes establishing regulations for digital wallets and streamlining state and federal banking and payment systems. These actions are crucial to preventing a potential fintech “constitutional crisis” and maintaining America’s competitive advantage. The Treasury Department also emphasized the need for decisive action. In November, Deputy Secretary Wally Adeyemo called on Congress to address the risks posed by crypto-financed illegal activities, pointing to the opacity of certain crypto products and the lack of regulatory oversight. These products are financial alchemy at its best; at worst it is financial fentanyl. The absence of a US regulatory framework for dollar-denominated stablecoins – which are increasingly licensed in jurisdictions such as the United Arab Emirates, Singapore and Hong Kong – represents a threat to US interests. This vacuum could spur the creation of products that exploit confidence in the dollar while circumventing US regulations, potentially becoming a haven for illegal actors. At a minimum, the US should ensure that foreign issuers of dollar-denominated stablecoins comply with the Bank Secrecy Act. , anti-money laundering and counter-terrorism laws, and sanctions regimes. Otherwise, digital dollars could undermine international security, rather than combat technology risks associated with dollar primacy. But before the US designates crypto firms or technology as threats, it must establish new rules. While there is already precedent for labeling open source technologies as national security risks, large token issuers or exchanges have not yet been classified as systemically important financial institutions, which would mark them as too big to fail. Instead of allowing offshore or near-shore crypto activities to spread unchecked or allowing other countries to set the standards for a market as inherently American as the Internet once was, American policymakers see 2024 as a watershed moment. The stablecoin bill passed by the House Financial Services Committee in July 2023 has generated significant policy momentum. Bipartisan congressional approval of this bill would provide the best legislative opportunity to tackle the surge in crypto-dollar counterfeiting. Moreover, this may be America’s last chance to maintain its dominance in digital-asset markets. It will certainly be difficult to move forward during a contentious presidential election campaign. But advancing digital asset policy is crucial to ensuring that the US remains a rule maker, rather than becoming a rule taker. This is especially critical now, as the European Union’s framework for markets in crypto-assets (MiCA) will come into effect later this year, potentially causing a transatlantic rift in the regulation of digital assets. To prevent such an outcome, the US policy agenda for digital assets this year must go beyond regulation, legislation and designation, and focus on promoting global regulatory harmonization. But these efforts are bound to fail without regulatory clarity and US leadership in the crypto market. — Project SyndicatelDante Alighieri Disparte is chief strategy officer and head of global policy at Circle.
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