Blockchain technology and the digital asset ecosystem catapulted into mainstream consciousness in recent years, likely profiting from the flight of capital from global financial markets during the COVID-19 pandemic. However, despite rapid capital growth, gradual institutional adoption, and endorsements by reputable enterprises and professionals, a crucial component lags: legislation. Further, the collapse of some digital asset projects and cryptocurrencies has exposed risks and vulnerabilities, underscoring the need to regulate the ecosystem. But while regulatory clarity and collaboration are vital to the health and development of the ecosystem, it continues to be a moving target. However, if legislative action follows a blueprint established decades ago by the biotechnology industry, we believe it can help fuel innovation and encourage continued adoption.
In a recent interview, Rep. Jake Auchincloss compared the current state of digital asset regulation in the U.S. to the early days of the American biotechnology industry. Massachusetts became a globally renowned cradle of biotech innovation due partly to a series of regulation decisions in the 1980s that helped coordinate biotechnology policy by resolving interagency debates about the scope and boundaries of regulatory authority. As a result, two working groups formed, establishing the Coordinated Framework for Regulation of Biotechnology. This comprehensive regulatory guide and continued collaboration with the government have profoundly impacted the state, patients and providers, and America’s position as a leader in biotech innovation. According to Robert Coughlin, CEO of the Massachusetts Biotechnology Council, “The key differentiator between Massachusetts and any other state in the U.S. and any other country in the world is that government has been our partner.”
Conversely, the digital asset ecosystem has been subsisting on regulation by enforcement rather than benefiting from a meaningful partnership with policymakers and regulators. Without a thoughtful legislative framework that encourages the ecosystem’s growth, companies must forge ahead and hope legal action doesn’t derail their endeavors—that is if they choose to remain in the U.S. rather than venture offshore to more crypto-friendly jurisdictions.
Due to the active participation of legislators, the biotech industry is one of Massachusetts’ strongest drivers of economic growth. In order to foster organic innovation and potentially see the same outsized prosperity as the biotech industry, the U.S. needs a regulatory climate that is supportive of blockchain and digital assets. In addition, we believe the U.S. government has a great deal to gain from a digital asset ecosystem bolstered by insightful and intelligent regulation. For instance, one of the U.S. government’s biggest interests is strengthening the U.S. dollar’s status as the global reserve currency. Therefore, China’s move toward digital currency has pushed the U.S. to sharpen its focus on stablecoins and central bank digital currencies (CBDCs), which could play a role in fortifying the U.S. dollar’s primacy. Former SEC Chairman Jay Clayton asserted, “Dollar primacy and stability are critical to global economic development, financial stability, and U.S. national security.” Clayton said, “The reserve currency race [with China] is on.” Should China win, he suggests it would “affect our global standing but also could destabilize the global financial system.”
Generally, regulation seeks to create transparency, establish legitimacy, protect consumer interests, and assure the reliability of an industry’s participants. Consequently, for digital assets, the lack of clear parameters forms a paradox: ecosystem builders find it difficult to innovate within existing frameworks, but it is challenging for regulators to regulate complex innovations that take time to understand. However, without guardrails, developers are hesitant to break unwritten rules, investors are wary of risk, and many legacy institutions are expressly barred from participating in unregulated markets that cannot pass compliance standards. As a result, digital asset companies are left to fit themselves (square pegs) into rules designed for traditional markets (round holes).
The lack of guidance from regulators is exacerbated by uncertainty between entities like the SEC and the CFTC. Presumably, the two agencies would share jurisdiction over crypto assets, and neither body currently has the authority to construct the necessary scaffolding. This absence of legislation impedes the inflow of capital from non-crypto native companies because businesses need clarity before dedicating resources and capital. Further, without a stable foundation of rules, crypto-native companies and projects often operate on quicksand. U.S. Securities and Exchange Commissioner Hester Peirce suggests that the U.S. is dropping the ball on regulation. She said, “We’re not allowing innovation to develop and experimentation to happen in a healthy way, and there are long-term consequences of that failure.”
Currently, regulation varies widely across countries and states. While some jurisdictions enthusiastically welcome digital assets, others have outright banned them. For instance, El Salvador adopted Bitcoin as a national legal tender last year. In contrast, cryptocurrencies are not considered legal tender in the U.S. (cryptocurrency exchanges are legal, however, and rules vary by state). As with many technological advancements, a chasm between old and new financial frameworks exists, creating a roadblock to widespread crypto adoption.
Although the journey to regulation has been sluggish, the needle is moving. Notably, Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) recently introduced a bipartisan bill that Rep. Auchincloss deemed “the most significant federal effort yet.” It outlines a comprehensive framework for regulating this evolving industry that Lummis hopes “hits the sweet spot between regulation that is clear and understood, and does not stifle innovation.” Ecosystem participants have also clarified their desire for a legal framework, with political donations outpacing other sectors and topping $26 million as the U.S. approaches its next congressional election cycle. Crypto companies hope to balance the seesaw between the U.S. government and regulatory bodies as they rally to ensure that eventual oversight is informed, thoughtful, and responsive to the ecosystem’s maturation. However, whether we’ll see any meaningful legislation enacted this year remains to be seen, as political bureaucracy is likely to take precedence in the immediate term.
Despite rapid capital growth, gradual institutional adoption and endorsements by reputable enterprises and professionals, regulation still struggles to keep pace with the rapidly changing digital asset landscape. Digital assets are still misunderstood by many people who may eventually control their fate. Therefore, an intensive and deeply informed review of the ecosystem is critical in securing its future and the future of finance. However, as information gaps narrow, there is greater consensus that appropriate, comprehensive legislation of the evolving industry can fuel innovation, encourage continued adoption and protect the interests of investors and consumers. If the government and regulatory bodies adopt a collaborative, coordinated approach, they can develop a transparent regulatory environment that mitigates risk while fostering innovation and preserving the sector’s dynamism. We’re on the right path, but it has been more than a decade since the arrival of Bitcoin, and the journey is only just beginning.