Tales From The Cryptocurrencies: The Need For A Smart Regulatory Framework

Democracy and freedom is a two-edged sword.




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Free from Old World constraints, entrepreneurs could flourish in young America’s egalitarian economic and political system.  Economic incentives, coupled with a rule of law that protected both commerce and new inventions, created a fertile setting for innovation and drove visionaries forward. Meanwhile back in Europe, those at the top had no need to innovate (they were already at the top) and those farther down couldn’t — leaving the continent without the motivation or the framework to advance.

A key historical figure who recognized this was Sam Slater, a British manufacturer during the Industrial Revolution. It was illegal to smuggle designs out of the country, so he simply memorized them and moved to the United States. Kind of a traitor to Britain, but a hero — in the long run — to mankind.

After a couple hundred years, many take the idea of America as “the land of opportunity” for granted, but it’s now easier to see the differences internationally than ever before. Without that spirit of democracy and free enterprise, we wouldn’t have the many technologies we do now, such as the magic device you’re reading this from.  Although these technologies now exist almost everywhere and provide greater freedom for mankind, they can also be dangerous if they fall in the wrong hands

Right now, we’re seeing an example of that with cryptocurrency.

Cryptocurrencies: The Great Disruption

Perhaps not since the dotcom boom of the 90s has a new technology captured the attention of investors so voraciously. Cryptocurrencies have the potential to disrupt traditional payment systems and improve system efficiencies across all sectors of the global economy. For those reasons, they have captured attention from millions of people across the globe and have created several challenges for governments and regulatory agencies alike.

Market manipulation and the recent accumulation of Bitcoin and Ethereum by countries such as China threaten the very idea of blockchain, which is supposed to decentralize power to create a harmonious, communal, democratized currency. Although China was not innovative enough to develop Bitcoin, they are well-organized enough to exploit it, and are likely doing so now.

Our biggest economic rival already controls 74% of the Bitcoin hash power and five of the six largest bitcoin mining pools. They now have so much hash power that they can threaten Bitcoin’s designed function by censoring transactions and influencing what blocks miners can validate. A Princeton Study has already concluded that China has used “domestic regulatory and technical measures” to undermine the Bitcoin network.

The Chinese centralization of a currency designed to be decentralized is a trend America needs to take seriously by regulating our own framework. Key officials from the Securities and Exchange Commission have already stated publicly that the leading mined coins, Bitcoin and Ethereum, now largely dominated by the Chinese, are not securities.

What About Utility Tokens?

But utility tokens designed for decentralized functions are another matter.  The SEC hasn’t yet decided how to categorize American utility tokens like XRP, which has a functional value as a “bridge currency” in which it serves as a medium for international transaction settlements within its XRP ledger.  It could revolutionize international transfers by increasing the speed, transparency, and cost of moving money.

Entrepreneurs, such as Ripple, Omni and Coil, are already building real businesses around the utility token, showing that its distributive power is disrupting several different sectors.

However, without regulatory clarity, a wide range of American innovations — from XRP to Micron Technology chips for smartphones — may be grounded by uncertainty and investor fear, allowing foreign countries to step in and take advantage of our inaction.

To prevent this from happening, the U.S. must ensure that the crypto field receives the thoughtful, deliberated regulation it deserves — so American innovations can prosper, not collapse or be subject to the whims of the Chinese. All that’s required is a clear legal framework for cryptocurrencies through collaboration from key stakeholders such as the Treasury, the IRS, and major crypto players.  Stumbling our way around in the dark only invites poor consequences.

Need For (Light) Regulation

Without a proper framework that successfully threads the needle, we could face another scenario where homegrown technology is stolen by foreign powers right under our nose – and it will be far easier for the Chinese government in 2018 than it was for Sam Slater in the Industrial Revolution.

In an ideal world, innovative new technologies could prosper in a market free from government interference. This system — called capitalism — is responsible for the amazing advances in human quality of life since the Industrial Revolution. And the place most of that has happened is America, thanks to our open, democratic society.

But to keep pace, cryptocurrencies require sensible regulatory framework: one that’s strong enough so they’re adequately supervised and protected from foreign manipulation, but relaxed enough so they can still flourish.

A light touch now would preclude a heavy hand from the SEC, which could smash the entire industry here at home. That way all this freedom and democracy stuff is working in our favor rather than against us.

  • Whitley is a long-time DC politico who has also lived in Dubai and Berlin. He has an MBA from Hult International Business School.

 

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