By now, we all know that cryptographic blockchain has the potential to revolutionize the transfer of value over the internet—quickly, inexpensively, and without intermediaries. With mass-adoption, a blockchain-powered immutable public ledger of transactions could reshape financial systems globally. Yet, like any transformative technology, its long-term success hinges on legal and regulatory clarity. It is time for Congress to establish a comprehensive, sensible framework for regulating crypto assets.
For decades, U.S. financial markets have been the world's most innovative, supported by clear and balanced regulatory structures. The Securities and Exchange Commission (SEC), for example, has played a pivotal role in maintaining market integrity through a disclosure-based system that fosters transparency and investor protection. This framework has nurtured the growth of new asset classes, including exchange-traded funds, money market funds, and derivatives, all while keeping American financial markets at the cutting edge of global finance. But with respect to crypto assets, the existing regulatory framework has struggled to keep pace.
The SEC's Approach to Crypto Assets
Most crypto assets differ fundamentally from traditional securities. Unlike stocks or bonds, crypto assets generally do not confer ownership stakes, contractual rights, or claims on the issuer's assets. Despite these differences, SEC Chairman Gary Gensler has asserted that "the vast majority of crypto tokens are securities," thereby extending the SEC's jurisdiction over them and the platforms that trade them. Gensler's position rests on a broad interpretation of the 1934 Securities Exchange Act and the Supreme Court's Howey test, which defines what constitutes a security.
While investor protection is an important priority, applying these older laws to an entirely new asset class has created significant uncertainty. In public hearings, Chairman Gensler has emphasized that investor safety remains paramount, but his reluctance to provide more specific guidance on how securities laws apply to different types of crypto assets has left market participants with little clarity. As a result, many firms are unsure how to comply with the SEC's expectations, stifling innovation and discouraging investment in the U.S. I wrote more about this in my book Regulating the Future of Finance and Money: A Rational U. S. Regulatory Approach to Maximizing the Value of Digital Assets.
Regulation by Enforcement: A Chilling Effect
Rather than issuing tailored rules for the unique attributes of crypto assets, the SEC has primarily pursued a strategy of "regulation by enforcement." The agency has initiated numerous lawsuits against issuers and exchanges, leaving the courts to determine how securities laws apply to crypto markets. This reactive approach has not only created a chilling effect on innovation but has also led many crypto entrepreneurs to shift their operations to other countries with clearer regulatory frameworks.
Although federal courts may eventually resolve some of the legal uncertainties surrounding crypto assets, this process is time-consuming and ill-suited to the rapidly evolving nature of blockchain technology. Relying on litigation to define the regulatory landscape for such a transformative industry could delay innovation for years, if not decades. The U.S. risks falling behind other countries that are already establishing clear and comprehensive rules for crypto assets.
The Role of Congress: Crafting a Sensible Regulatory Framework
The responsibility for solving this regulatory dilemma lies with Congress. Lawmakers are better equipped than courts to create a thoughtful and forward-looking regulatory framework for crypto assets. Unlike judges, who must interpret existing statutes, Congress has the ability to craft new laws that address the specific challenges and opportunities posed by blockchain technology. Additionally, members of Congress are directly accountable to their constituents, making them better suited to weigh the competing interests of innovation, investor protection, and market integrity.
Fortunately, several members of Congress have already taken steps toward legislative solutions. Bipartisan efforts led by Reps. Patrick McHenry (R-N.C.) and Wiley Nickel (D-N.C.), along with Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), have advanced proposals that would provide much-needed clarity for the regulation of crypto assets. These initiatives address both the broader crypto market and specific subsets, such as stablecoins, which require distinct regulatory considerations.
The Need for Action
While some political leaders have been cautious in advancing crypto legislation, recent developments suggest momentum is building for a more constructive approach. For instance, the House recently passed the FIT 21 bill, which clarifies the boundaries between securities and commodities regulations, with strong bipartisan support. Meanwhile, there are signs that future administrations may take a less adversarial stance toward crypto assets, creating opportunities for more balanced policy discussions.
With the future political landscape uncertain, the time for action is now. Congress has a unique opportunity to provide clear rules for the issuance and trading of crypto assets, fostering innovation while ensuring investor protections. By acting decisively, lawmakers can cement the U.S.'s position as the global leader in financial innovation and prevent other countries from overtaking America in the development of blockchain technology.
The stakes are high. If Congress fails to act, U.S. innovators will increasingly look abroad for opportunities, and the country could lose its competitive edge in this rapidly growing field. By enacting sensible and transparent regulations, Congress can help build a robust and secure framework for crypto assets, benefiting investors, entrepreneurs, and the broader economy alike.
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