There have been numerous innovations and breakthroughs in the crypto industry this year. Institutional investors have made significant investments in bitcoin and Ether ETFs, and the price of bitcoin hit an all-time high. The vast potential of tokenization, stablecoins, blockchain, and other digital asset technologies has captured the attention of financial companies worldwide.
Yet, in the U.S., the absence of a clear regulatory framework continues to hinder crypto innovation. In his latest report, Crypto Gets Political, James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, examines how regulatory uncertainty is affecting the U.S. crypto industry, and the impact crypto can have on upcoming elections.
Enforcement First
There is little argument that existing U.S. digital asset laws are inadequate to govern the crypto industry. Without a framework in place, U.S. regulators have taken an enforcement-first approach to crypto oversight.
“The only thing that is clear is that nothing is clear,” Wester said. “It’s becoming tough for companies to build products in this space, because they don’t know they’re doing anything wrong until they get an enforcement notice. Imagine not knowing the speed limit until you get pulled over for a ticket. That’s the way things are shaping up right now.”
Meanwhile, the European Union is developing a regulatory framework for crypto and digital assets through its Markets in Crypto Assets (MiCA) rules. Set to take effect later this year, MiCA aims to provide an all-encompassing set of regulations governing the issuance, purchase, and trading of crypto and digital assets within the EU.
A transparent legal structure will make the EU an attractive alternative for crypto companies. As marketplaces become increasingly global, countries will continue to compete for technology investment and development.
The lack of regulatory clarity in the U.S. raises the real possibility that the country could lose digital asset technology to regions with more established legal frameworks. This might not concern those who believe that crypto and digital assets are nothing more than the domain of criminals and scammers.
“The problem with that approach is that financial institutions, capital markets, and infrastructure players like the DTCC, Swift, and the Bank of International Settlements don’t agree with that assessment,” Wester said. “All those entities believe this technology is more efficient and less expensive than conventional means, and in fact they are betting on it.”
“Considering how important capital markets, financial institutions, and financial infrastructure are to the U.S. economy, the belief that crypto and digital assets are just a haven for scams and Ponzi schemes is clearly inaccurate,” he said.
Building the Engine
However, crypto fraud continues to occur and was a key point of discussion at a recent U.S. House Financial Services Subcommittee meeting on decentralized finance. The main question raised was: if a criminal commits a rug pull or a Ponzi scheme on a decentralized protocol, does the platform bear any responsibility?
“There’s a famous letter where bank robber Clyde Barrow, of Bonnie and Clyde fame, praised Henry Ford for creating the V-8 engine because it was fast enough to help him get away from the police,” Wester said. “Was Henry Ford responsible for Clyde Barrow? Ford built the engine, but Barrow was the bad guy. Right now, in the crypto industry, it seems like if a company builds an engine and someone misuses it, the company is being held responsible.”
An Electoral Issue
Despite looming regulatory hurdles, the most important takeaway is that crypto and digital assets have become a significant topic in an election year. While it might not be the number one issue on voters’ minds, it is on their lists, and that is a dramatic shift from years past.
“Could crypto make an impact in a very close election?” Wester said. “It might. That’s likely not because of the million or so voters who work in the crypto industry. Could the election turn on the approximately 20% to 25% of voters who own crypto? Possibly. The difference in the 2020 election was roughly 50,000 votes across six states, which is quite narrow.”
Regardless, digital asset technology has become a meaningful topic that has risen to such prominence that it is an electoral issue.
“Just the fact that there was a presidential nominee for a major party who appeared at arguably the largest bitcoin conference in the U.S., if not the world, is a big deal,” Wester said. “This is not some local race; we have presidential politicians who are actively discussing crypto and digital assets technology. If you told me that a few years ago, I would not have believed it.”
