Political Crossroads - Shaping the Future of American Crypto Innovation and Regulation

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Over the past fortnight, policymakers in Washington D.C. have presented contrasting visions for the future of digital assets, with one path fostering American innovation and job growth, while the other leads to a diminishing future.

Shaping the Future of American Crypto Innovation and Job Growth

Recent actions taken by the U.S. Securities and Exchange Commission (SEC) against Coinbase and Binance indicate the agency’s belief that crypto should not exist within the United States. The conclusion can be drawn from their decision to refrain from issuing a specific securities framework for cryptocurrencies, despite the evident lack of regulatory clarity.

Although legal experts debate the classification of crypto assets due to the lack of clarity in existing laws, the SEC has chosen to enforce regulations as a way to achieve its desired policy goals.

At the same time, lawmakers near the SEC’s headquarters have made bipartisan advancements in creating rules for the market structure of cryptocurrencies. Drawing inspiration from the bipartisan JOBS Act, this preliminary legislation, known as a “discussion draft,” seeks to allow token issuers to raise funds for their projects while maintaining strong protections for investors.

The proposed draft also facilitates appropriate registration of firms with government agencies, aligning with SEC Chairman Gary Gensler’s assertion that such registration has always been possible.

Furthermore, it settles the debate between securities and commodities, determining which regulatory body, either federal securities or commodities regulator, will take the lead. Gensler, who previously considered most cryptocurrencies commodities but now views them as securities, has played a role in this shift.

Issued by Chairs Patrick McHenry (R-NC) of the Financial Services Committee and Glenn Thompson (R-PA) of the Agriculture Committee, the discussion draft leans slightly left of an ideal Republican bill and slightly right of the Democrats’ preferred outcome, striking a reasonable compromise.

If Republicans and Democrats can advance from the initial draft to pass legislation and make it a law, it would bring much-needed clarity to the crypto market. This clarity would promote innovation and provide better protection for consumers and investors.

Amidst these developments, Mike Selig, Counsel at Willkie Farr & Gallagher LLP, explores how the ongoing lawsuits by the SEC against Binance and Coinbase may influence future crypto regulations.

Selig also discusses the current state of crypto regulation in the United States and its potential trajectory. Additionally, the release of documents tied to William Hinman, the former director of the SEC’s Division of Corporation Finance, in connection with the SEC’s lawsuit against Ripple Labs has sparked reactions from various stakeholders.

Establishing a comprehensive regulatory framework for crypto assets will enable the United States to align with other countries in terms of crypto asset regulation. This, in turn, will simplify policy discussions around financial assets, contributing to overall financial stability.

The ultimate consequences of the SEC’s regulatory approach remain uncertain and even skeptics of crypto assets should pause to consider the implications. Even if the SEC succeeds, crypto will not disappear but rather migrate elsewhere, potentially beyond the jurisdiction and control of U.S. regulators.

This further emphasizes the need for lawmakers to make significant headway in establishing a regulatory framework for the crypto market. As crypto assets move away from the U.S. regulatory scope, domestic regulators’ ability to manage associated risks diminishes.

Path to Clarity: Advancing Legislation for Crypto Regulation

Do policymakers genuinely care about protecting investors from fraud and preventing bank-like runs that destabilize the financial system? Attempting to convince another country to address these concerns outside their jurisdiction is a daunting task.

Do they recognize the potential benefits of blockchain technology for U.S. society and the importance of American innovators and workers leading the way? It appears that innovation in this field will thrive in cities like Dubai, Paris, or Beijing.

Resolving the crypto wars and reaching a negotiated regulatory framework that provides much-needed clarity is the only logical path forward for the United States. Unfortunately, there are indications that rationality may not prevail.

During a series of farewell interviews following his enforcement actions, Chair Gensler made a potentially significant political gaffe. In response to an interviewer’s question, Gensler expressed apparent frustration and stated that the U.S. “doesn’t need” more digital currency.

This admission is surprising coming from a chair who claims to lead a “merit-neutral” agency that avoids favoring specific investment choices.

Regardless of Chair Gensler’s actions or statements, it is undeniable that attempting to crush crypto within the United States is futile. Technology, especially in the 21st century, cannot be controlled, let alone extinguished, and that is precisely what crypto represents.

U.S. policymakers face a choice: either find a way to harness the potential of crypto and blockchain technology within the country or follow Gary Gensler down a fast lane that leads to nowhere.

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