Crypto policy needs to empower builders, not speculators

CAMBRIDGE — The cryptocurrency industry is going all in on November’s US presidential election, channeling hundreds of millions of dollars to promote candidates who may support sensible regulation. But for all the investment, the sector tops all others as a source of funds this cycle, it remains unclear how either candidate would approach the issue and prioritise builders over speculators. 

Casual observers may have heard that former president Donald Trump, the Republican candidate, has taken up the cause. Addressing a recent Bitcoin conference, he promised to make the United States the “crypto capital of the planet”, create a Bitcoin strategic reserve and embrace stablecoins. The crowd ate it up. Yet Trump’s brand of boosterism underscores the sector’s biggest challenge: For too long, those who want to use the technology for financial speculation have dominated policy debates, while those who actually want to build something with it are sidelined. 

Vice President Kamala Harris, the Democratic nominee, has largely remained silent on the topic, but now has an opportunity to offer a more thoughtful and progressive approach to financial innovation. Crypto policy, like AI policy, is fundamentally about innovation and national competitiveness. To establish the US as a leader in this strategic sector, the next administration must first replace the current lineup of hostile financial regulators, led by Securities and Exchange Commission Chairman Gary Gensler, who has consistently rejected meaningful dialogue with the industry. 

But installing regulators who are more sympathetic to the quick-profit mentality would hardly be an improvement. Crypto’s greatest strength, its ability to incentivise the construction of open networks, is also its biggest liability. As in the nineteenth-century railroad mania, cryptocurrencies have fueled the creation of valuable new infrastructure, but they have also been exploited by reckless actors to perpetrate scams and fraud, Sam Bankman-Fried being a prime example of someone who knew how to play the game within the existing, imperfect regulatory framework.

Businesses engaging purely in speculation, or even outright scams, benefit the most from the current regulatory chaos. Worse, many who have proactively advocated regulation or tried to collaborate with regulators have faced enforcement actions, resulting in a loss of access to essential banking services. 

Regulators often lack incentives to adapt existing rules to new technologies and incumbents often give them reason to defend the status quo. In crypto, accountability for criminality has come too late or not at all, leaving consumers burned. In the absence of regulatory clarity, market participants with established businesses or a need for banking services often shy away from exploring the technology, regardless of its potential. The result is a system that rewards recklessness and fraud while discouraging innovators seeking to improve payments, reform the financial sector, protect data privacy or address market concentration in Big Tech.

Thoughtful crypto regulation will require more than Trump’s pandering. This is an issue that goes beyond crypto. If the US is to lead in AI, defence and other fields, it needs rules that recognise how much value these innovation-intensive sectors’ can bring to the broader economy, not least by restoring competition. This is a complex undertaking. Success will require much more than courting Bitcoin maximalists and simply allowing stablecoins to exist. 

Consider Trump’s proposal for the US government to hold Bitcoin as a strategic asset. It is obvious that this would benefit Bitcoin’s price, but not how it would serve the national interest. Instead, the federal government should recognise blockchain-based networks as critical infrastructure, akin to 5G. 

Nor should the government blindly support domestic Bitcoin mining without encouraging methods that leverage renewables and stranded energy, or provide reinforcement for an increasingly fragile grid (as seen in Texas). Regulation should consider how Bitcoin mining and chip manufacturing could contribute to national security while ensuring minimal environmental impact. 

In his Nashville speech, Trump accused the Biden administration of targeting crypto businesses’ relationships with their banks. But the real problem is a regulatory and supervisory environment that makes it difficult for banks to engage safely with crypto. Many banks recognise that digital payments and assets will play a major role in the financial system. Yet they have been hampered by unreasonable rules like Staff Accounting Bulletin No. 121 (SAB 121), which imposes punitive accounting standards on enterprises that cannot privately explore exceptions with SEC staff. 

Trump also pledged to embrace stablecoins to reinforce dollar dominance. But, again, this issue is more complex than it may seem. To prevent the market from becoming as concentrated as the credit-card industry already is, the US needs to foster a competitive environment for stablecoin issuance. The dominant use case should not be dollarisation, as this goal could weaken capital controls, de-stabilise emerging economies, and undermine sanctions. Instead, legislation should ensure that stablecoins become a safe means of payment enabling instant, global transactions. 

Achieving this vision demands a robust compliance framework. Current stablecoin issuers either don’t know or don’t want to know if their digital dollars are held by sanctioned countries or criminals. But this dangerous blind spot is a major hurdle for mainstream adoption. The onus is on crypto entrepreneurs to develop innovative solutions that address identity and compliance challenges, but progress in these areas has been limited so far. New rules need to strengthen the incentives for the private sector to do the hard work. 

At the end of the day, policymakers in Washington must come together and draft new rules, rather than trying to squeeze crypto use cases into laws from nearly a century ago. And the industry, for its part, needs to tackle the many problems that traditional financial services and crypto leaders have long ignored. A thoughtful crypto policy would prioritise builders over speculators. The upside, much like in the early days of the internet, is a technology that can restore competition to sectors that haven’t seen it in decades.

Christian Catalini, founder of the MIT Cryptoeconomics Lab, is a research scientist at MIT, co-founder and chief strategy officer of Lightspark, and a member of the US Commodity Futures Trading Commission’s Technology Advisory Committee. Jai Massari, a fellow at the Berkeley Centre for Law and Business and a visiting lecturer at UC Berkeley School of Law, is co-founder and chief legal officer of Lightspark and a member of the Future of Finance Subcommittee of the US Commodity Futures Trading Commission’s Market Risk Advisory Committee. Rebecca Rettig, chief legal officer and chief policy officer at Polygon Labs, is a member of the Future of Finance Subcommittee of the US Commodity Futures Trading Commission’s Market Risk Advisory Committee. Copyright: Project Syndicate, 2024. www.project-syndicate.org