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Policymakers must think outside of currently accepted norms to understand crypto Policymakers must think outside of currently accepted norms to understand crypto

Policymakers must think outside of currently accepted norms to understand crypto

Understanding crypto's complexity is key for policymakers to regulate effectively without stifling innovation.

Policymakers must think outside of currently accepted norms to understand crypto

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

The persistent disconnect between policymakers and technology invariably results in proposed and approved regulations overlooking pertinent parts of new technologies. US lawmakers and regulators face the challenge of regulating emerging technologies across blockchain and AI. Policymakers, like Senator Cynthia Lummis, have acknowledged the need for innovation in the financial sector and proposed legislation like the Digital Asset Innovation Act to address concerns. However, the SEC’s recent actions against Ripple Labs highlight the current “regulation-through-enforcement” approach, which critics argue stifles innovation.

To be effective, they must become well-versed in cryptocurrency and its underlying technology. As an example, public blockchain assets allow any person or entity to mine coins and tokens; there is a significant threat to the end consumer and national security if mining activity is unmonitored and unchecked. That said, the push has been to regulate blockchain under current regimes that, while exerting their best efforts, cannot create a framework to effectively address the real risks that could threaten our financial markets.ย 

Senators Elizabeth Warren and Roger Marshall are sponsors and supporters of the Digital Asset Anti-Money Laundering Act of 2022, which would provide specific rules for crypto. The drawback is that the rules look like rules we currently have forced to fit blockchain technology. A 51% attack is a significant threat to national security, especially as more users enter the crypto market.

Although the bill calls for certain entities to register as Money Services Businesses, it does not address blockchain as a global activity.ย  The influence of USA regulation is significantly diminished outside of our borders. A possible solution would be to create a blockchain monitoring division of FinCEN.ย ย 

Policymakers often respond to public concerns. Because they are usually reacting, solutions are sometimes superficial at best and create rules without a nuanced understanding of the technology. This oversight results in attempts to fit crypto into existing regulatory frameworks, disregarding the complexities inherent in new technology.

A proactive regulatory approach is likely the most effective for regulating blockchain technologies. Lawmakers and regulators should probably start with a task force that comprises industry leaders, consumers, miners, and keen regulators to determine the regulations, rules and laws that would be most effective.

Major crypto players have looked to regulators for regulatory clarity to ensure consumer protection. Instead of providing comprehensive new frameworks, policymakers are wielding enforcement actions against the industry, as evidenced by SEC lawsuits and high-profile settlements against major crypto companies. This “regulation-through-enforcement” approach is fundamentally flawed; it creates adversaries, not allies, and stifles innovation that the government could leverage to improve itself.

Uncertainties of the legal status of digital assets, as exemplified by ongoing cases like Hinmanโ€™s, hinder progress. Instead of relying on traditional lobbying efforts, policymakers must actively engage with the crypto community and industry professionals. The lack of defined precedents from unresolved court rulings in crypto cases is detrimental to both sides.

While the judiciary should not legislate from the bench, well-formed opinions that discuss the courtโ€™s views on blockchain could benefit how legislators act. The absence of clarity on whether digital assets or investment products constitute securities hinders progress toward comprehensive cryptocurrency regulations.

Compounding the challenge, many politicians continue to conflate the good and bad uses of blockchain technology. Indeed, some persist in associating crypto with illicit activities and other high-risk activities. Those positions foster doubt among the public and hinder individual participation in the crypto industry.

Dispelling these misconceptions is crucial for fostering an accurate understanding of the crypto landscape. The aforementioned task force could be the solution. Crypto transactions are significantly more complicated to disguise than cash transactions.ย 

Contrary to popular belief, crypto transactions are not a covert haven for criminals. Crypto offers enhanced traceability, with a searchable, immutable record of every transaction. Understanding the significant differences between crypto and traditional banking transactions is pivotal for informed policymaking. Can be seen by a wider audience,

Law enforcement can be crucial in leveraging blockchain intelligence to track activities on public blockchains and identify bad actors. A well-trained task force familiar with blockchain technology is a powerful deterrent against criminal activities.

Policymakers face the ongoing challenge of adapting to the rapid pace of technological advancements. A proactive approach is essential to formulate effective regulations, necessitating connectivity with projects and significant players rather than relying solely on traditional lobbying efforts.

The crypto community and industry professionals can contribute to a more informed policymaking process by forming trade groups and inviting policymakers to educational events. Bridging the knowledge gap is essential for creating regulations that facilitate innovation while ensuring security.

Proposed actions for policymakers on building a secure and innovative crypto futureย 

Striking a balance between enhancing security measures in the crypto space and fostering innovation requires an informed approach. Policies should be designed to protect users while allowing the industry to flourish, primarily if the US aims to maintain global leadership in innovation.

The realization of crypto’s full potential hinges on policymakers grasping its intricacies. It’s time to move beyond superficial approaches and embrace a more informed regulatory environment supporting innovation and security. The crypto community is prepared to engage in constructive dialogue, bridging the gap between technological advancements and effective regulation.

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