How the US is choking innovation with their non-approach to regulation
US regulators are aiming at crypto companies, but it's innovation that's taking the hit.
Over the past few months, several regulatory bodies including the OCC, the SEC, NYDFS, have been putting the squeeze on banks working with crypto companies, and the crypto companies themselves.
IN January, the OCC issued a joint statement alongside the FDIC and Federal Reserve “strongly discouraging” banks from supporting crypto. A month later, the SEC issued a Wells notice to Paxos, alleging that BUSD – a stablecoin issued by Paxos – is an unregistered security. On that same day, the NYDFS, which directly regulates Paxos, ordered Paxos to halt the issuance of BUSD.
The fact that Paxos is being targeted is not a surprise, really — stablecoins are taking over the world of finance. They're poised to become a major disruption in how we handle money. It goes without saying that the SEC would be seeking some level of control over them.
But here's the thing: stablecoins aren't securities.
The SEC is saying that Binance USD constitutes a money market account. But that isn't as straightforward as it sounds. Stablecoins don't promise any kind of expectation of profit return on investment for the end user. Yes, the issuer is making money, but it isn't being passed along to the holder of the coin. This classification is blurry at best. In my opinion, it seems like grasping at straws, trying to make a square-pegged stablecoin fit into their round-hole regulation.
Meanwhile, NYDFS retracted the guidelines they had put out just in December of last year, on the requirements for a BitLicense, and are now saying that any crypto activity will require the license, which is prohibitively expensive and onerous to get for most innovators.
All of this isn’t just hearsay, we have seen it firsthand in our operations at Conduit. In fact, it has factored heavily into our decision not to invest in building a US presence. And while focusing on business outside of the US can be costly and complicated in many industries – it is actually easier to do that than operate in the US for crypto and web3 companies.
While SEC chair Gensler says that crypto companies should "come into compliance" the reality is that there isn't a clear path to do that. In fact, the SEC's actions contradict their words.
There is no clear answer as to why this is happening. An easy excuse is increased scrutiny following high-profile crashes and scandals. FTX and Celsius come to mind. But that doesn't tell the whole story.
Attempting to stop fraud by blocking banks from working with crypto companies completely is like blowing up a highway to catch an escaping car. What about all the good actors building innovative, potentially revolutionary products?
Isn't that innovation what the U.S. is known for? What will stopping innovation accomplish, besides kicking off the Great Blockchain Brain Drain of the United States?
That may be a bit of an exaggeration: I don't really expect all crypto entrepreneurs and developers to pack up and leave the country tomorrow.
But anecdotally, I do know some founders who have done just that. They've taken their companies to more regulatory-friendly places around the globe. In these locales, crypto-innovation isn't just being accepted, it's being welcomed – in the form of money, infrastructure, and clarity around regulation.
There are several countries pouring money into supporting Web3 innovation.
Dubai, for example, is becoming more and more attractive for crypto startups. Hong Kong recently updated their regulations to increase clarity and invite innovation. Colombia instituted a regulatory sandbox in which crypto companies can partner with banks.
In Brazil, we just recently entered into a program that’s run by the central bank and established financial institutions and scale ups, specifically to help them understand and realize the benefits of crypto.
Do these places have perfect regulation? No. But they are working with innovators, using resources or regulation in hopes of being the fintech-hub version of the ballpark in Field of Dreams. "If you build it, they will come."
I guess they're really saying, "if we let them build it, they will come."
Meanwhile, the U.S. is trending in the opposite direction, with a regulatory environment that lacks cohesion and intentionality at the federal level. The SEC is saying “they’re a security”, the CFTC says “they’re commodities”; the IRS says “they’re property”; FinCEN says “they need to follow AML/CTF laws”.
It’s a scattered approach, with the only discernible intention being the alleged “Operation Chokepoint 2.0”. But even the purpose of that is unclear: typically the U.S. is attempting to either protect consumers or prevent money laundering – 2.0 doesn’t appear to be addressing either of those.
If the purpose is to protect consumers, shutting crypto down is not the answer. Consumers have clearly demonstrated their interest in crypto. Instead, a clear and coherent set of rules by which different types of crypto, DeFi and web3 companies could operate, would be best to serve consumer interests.
These rules do not exist today. In their place is nothing but an arbitrary interpretation of laws from the 1930’s – which crypto is being forced to abide by, despite existing in a technological landscape that has had 100 years of innovation and progression.
We need new laws and regulations that reflect the reality of our technological progress. When the current system was put in place, it was created for a system in which computers didn’t exist, the internet didn’t exist. In fact, only 40.9% of households in the US even had a telephone.
Can we expect a leap in technology as drastic as enabled by distributed ledger technology to conform to those rules?
Instead of letting the SEC “legislate” without actual legislation by playing a game of whack-a-mole with crypto companies, creating fear by selective enforcement actions, Congress would be better off creating actual new laws that would allow crypto and DeFi to exist.
Decentralized finance has the potential to vastly improve on the collapsing legacy financial system, build a new, more robust, more inclusive and sustainable one.
We are already here. Just let us build it.