The SEC's Cryptic Wish to Smother Cryptocurrencies With Regulation

The SEC's Cryptic Wish to Smother Cryptocurrencies With Regulation

People who come up with better, cheaper, or completely novel products or services raise the standard of living for all of us. Blockchain technology is one example, and it’s already impacting a variety of industries including finance, data security, and real estate. While these current applications of blockchain are great, it has the potential to do much more as long as it’s not smothered by government regulation.


Blockchain is essentially a public ledger that safely and securely records transactions. Many well-known cryptocurrencies, such as bitcoin, rely on blockchain technology, but the technology itself has a variety of potential uses. Some people see blockchain as a way to facilitate investments in alternative assets, such as rare paintings, while others believe it can transform the construction industry by making it easier to keep track of materials and permits.


Bitcoin gets most of the press because of its popularity as an alternative currency, but blockchain’s cryptocurrency applications extend beyond bitcoin. This is evident in the more recent development of “utility tokens” such as XRP , ivy, and JP Morgan’s JPM Coin, which are designed to help people and financial institutions transfer money across international borders faster, more safely, and at lower cost. A well-functioning financial system is important for economic growth, so products that make it easier to move resources to where they’re needed most help us all.


The key to realizing the potential of blockchain technology is making sure people are free to experiment with it. Right now, cryptocurrencies that rely on blockchain are under heavy scrutiny from regulators and the actions regulators take will have a big impact on how such currencies develop.


The Securities and Exchange Commission (SEC) wants to regulate certain cryptocurrencies as securities — like stocks and bonds — in part as a response to the increasing popularity of “initial coin offerings” (ICOs).


As tech policy expert Andrea O’Sullivan has explained, the idea behind ICOs is straightforward: Developers who have an idea for a new or improved cryptocurrency solicit funds from investors to make the idea a reality. In exchange for dollars, investors get a claim on future cryptocurrency — which they can sell or hold — and first access to the platform.


ICOs sound fine in theory, but in practice many have turned out poorly due to fraud or mismanagement. As a result, some regulation is inevitable and appropriate, but the SEC must be careful not to regulate the next generation of useful cryptocurrencies out of existence.


Regulation of cryptocurrencies and other blockchain applications should focus on real, widespread problems. ICOs have issues, but classifying cryptocurrencies as securities is not the only way to address those issues. Alternative forms of regulation should be considered. Wyoming has set up a regulatory structure for cryptocurrencies that encourages experimentation and federal and other state regulators can use it as a guide. In fact, presidential hopeful Andrew Yang recently hinted he would do just that if elected.


America is not the only country dealing with cryptocurrency issues, either. Entrepreneurs in China, Singapore, and many other places are also experimenting with cryptocurrencies. Regulations that restrict innovation in one country incentivize entrepreneurs to take their ideas, products, and services to more accepting locales, an idea referred to as “innovation arbitrage.” If America wants to be the leader in cryptocurrencies and other blockchain applications, we need simple regulations that solve tangible problems, not sweeping regulations based on good intentions or hypothetical worse-case scenarios that ultimately squash innovation.


In general, cryptocurrencies should be given room to grow free of government regulations designed for an older, slower-paced industrial age. Right now, it appears that established cryptocurrencies like bitcoin and ether won’t be regulated as securities due to their decentralized design. This is good news for holders of these currencies, since a securities classification would create significant compliance and reporting headaches.


The situation surrounding other cryptocurrencies is less clear and the uncertainty is harming innovation. This needs to be resolved, but as with any industry regulators must be careful not to inadvertently smother progress in the process.


Adam A. Millsap, PhD is the assistant director of the L. Charles Hilton Jr. Center at Florida State University and an affiliated scholar at the Mercatus Center at George Mason University.

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