Former Alaska Republican Senator Ted Stevens’ famous explanation of the internet being a “series of tubes” is properly hailed as an all-time classic mockable quote. The most disconcerting part of what he said was that he said it in 2006—a year 71 percent of U.S. adults were using the internet. It wasn’t nascent technology at that time—it was mainstream.
Even when they become mainstream in usage, disruptive technologies can be hard to understand and even harder to regulate. Legislators are making choices today that affect any number of possible situations that could exist in the future. They may stifle innovation with an ill-considered turn of phrase based on a constrained or incorrect understanding of the underlying technology.
Thanks to a few pages in the bipartisan infrastructure bill that has now passed in the Senate and the House, our government officials have stumbled into a hornet’s nest related to cryptocurrency, blockchain technology and the impact of the legal language used in our laws on this nascent industry. While motivated by the reasonable goal of requiring cryptocurrency exchanges to do proper tax reportings on holdings, the language in the bill threatens the U.S. global lead in blockchain-based financial innovation.
Cryptocurrencies facilitate more competition, lower fees, faster services, cut out unnecessary middlemen and provide more financial access and control than any other technology we presently have. The first thing American legislators should understand is that this is the future of all money.
When people hear cryptocurrency they usually think of Bitcoin, however, it’s much broader than that. The world’s most traded cryptocurrency is in fact the digital dollar. In the past twelve months, 13 percent of Americans have traded cryptocurrencies compared to the 24 percent of American adults who have invested in stocks during the same period of time. And guess what? Those people vote and have a lot more disposable income than the average American.
Blockchain-based peer-to-peer technology is going to disrupt every industry from securities, mortgages, remittances and supply chain logistics. It will be the underlying technology that all our future systems sit on top of.
The government’s failure to correct its error isn’t only about cryptocurrency. It’s about the future of all industry and commerce. The United States is perfectly positioned to be the leader in this for the next century as long as we don’t screw it up.
Regulations can be a great thing. They provide clarity and rules that we are all expected to follow. Ultimately, they underpin all markets. Trillion-dollar industries are built on top of smart regulatory regimes. The downside to regulations, particularly with nascent technologies, is that they can be inflexible and often limit competition in the marketplace depending on the level of the regulatory burden. The more burdensome the regulation, the fewer participants that will exist in the marketplace. When you take the nature of that dynamic in tandem with the natural tendency of markets to consolidate through mergers and acquisitions, consumers are often left with fewer choices, less innovation and higher prices.
It would be to our benefit to regulate crypto as we regulated the internet, with a deft touch and a focus on unleashing innovation.
OZAN KOSE/AFP via Getty Images
Some crypto critics believe that the recent kerfuffle over the language in the infrastructure bill is an effort to evade paying taxes or because people want to hide in the shadows doing illicit things. But frankly, that’s actually the opposite of what the industry stands for; you will regularly hear crypto companies and consumers alike hailing how the transparent nature of blockchain technology fixes so many of the problems we all know exist in the financial services industry. The truth is the original language in the infrastructure bill—now passed by the government without the benefit of well-considered amendments that were proposed by Senators Ron Wyden (D-Ore.), Mark Warner (D-Va.), Cynthia Lummis (R-Wyo.) and Pat Toomey (R-Pa.)—is dangerous, broad and will have unintended consequences. Laws matter and the reverberations of the original language could affect pretty much anyone who deals in cryptocurrency as the technology is fundamentally peer-to-peer. While the effect may be limited somewhat by the legislative history created as various senators realized the potential overinterpretation of the original language, it remains so broad that it could mean anyone who uses blockchain or cryptocurrencies is effectively a broker.
Crypto companies largely consist of good actors with good intent trying to comply with unclear regulations. There are laws and we follow those laws because we’re all members of society. The people running these crypto companies are all moms and dads, brothers and sisters, daughters and sons.
Companies should be held to high standards, but so, too, should regulators. Regulators can become a bottleneck to innovation sometimes taking years to approve licensing and registrations. Quite simply, accountability is presently a one-sided affair wherein companies are held accountable, but regulatory bodies are not held to any sort of statutory standards and act on woefully inadequate information.
The amendment proposed to fix the issues did not actually get an up or down vote, even after extensive negotiation. This occurred despite having what appears to be a bipartisan consensus among senators willing to support an amendment that clarifies the language of who should qualify as a broker. The language of this bill will give overly broad authority to the Department of Treasury, allowing them to classify almost anyone who engages with or even builds the technical protocols that facilitate cryptocurrency as a broker. Even the bipartisan Blockchain Caucus in the House wrote a letter sharing their concerns over the language of the bill. If the Treasury Department so chooses—they could place heavy restrictions on various natures of cryptocurrency and blockchain technology protocols, developers and other actors who should not qualify as a “broker.”
This authority, if used improperly, could have a chilling effect on the industry at a time when the United States is perfectly positioned to become the global hub for the center of all digital commerce using blockchain and their respective cryptocurrencies as the underlying technology.
The industry participants who rallied quickly over the past week must stay engaged. We must be very thoughtful with how we apply our necessary and proper regulatory framework in the United States or the industry will find a home somewhere else and tens of millions of Americans will otherwise be limited in their own financial choices.
Chris Kelly is co-owner of the Sacramento Kings, an investor in crypto businesses and former head of global public policy and chief privacy officer of Facebook.
Daniel Gouldman is cofounder of Unbanked.com.
The views expressed in this article are the writers’ own.
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