Us Crypto Industry is in Fight for Its Life

Published on June 15, 2023

“First they ignore you, then they laugh at you, then they fight you, then you win.” – Mahatma Gandhi

The crypto industry is currently in the fight phase, especially in the U.S., where a turf war has broken out in Washington, D.C. Regulatory agencies all want a piece of crypto oversight.

“The Executive Branch currently interprets laws broadly, in order to cover all of the activity taking place in this novel, exciting industry,” said Kadan Stadelmann, CTO of Komodo blockchain. “New and crystal clear laws would lessen executive agency risk, such as losing cases, when it comes to bringing charges against industry players.

New laws are necessary because the U.S. financial regulatory system is premised on the concept of an intermediary, which handles KYC, etc. (Reports must be filed about suspicious transactions, for instance). Intermediaries not only report transactions but can block transactions, such as those to persons or entities on sanctioned lists.

“Such a regulatory regime would not work for autonomous crypto systems, which developers ideally design to eliminate intermediaries,” said Kadan.

The regulations, however, could prove burdensome to the crypto industry. In the U.S., for example, an entity introducing a new security must register with the Securities and Exchange Commission, which involves millions worth of compliance costs annually, a one-year wait for approval, and is thus unsuitable for a startup or a small developer team. Furthermore, the U.S. might require that if a security token issuer amends its software, even just a little bit, it would need to re-register as a new offering.

Everybody Wants a Piece of Crypto

While they do have a congressionally controlled budget, U.S. regulatory agencies are largely autonomous.

“These agencies are composed of individuals pursuing long-term career paths,” notes Stadelmann, who worked in the Austrian government before moving into the burgeoning cryptocurrency industry in 2011. “They might want to work in the private sector one day, after all. And, it would be quite the resume booster if they played a significant role in the development of federal crypto regulations.” Seven entities govern the U.S. crypto markets: SEC, CFTC, CFPB, IRS, FinCEN, OFAC, and Congress.

The CFTC holds regulatory authority over commodities derivatives. A U.S. Eastern District of New York federal judge determined in a March 2018 ruling that cryptocurrency ought to be regulated as a commodity under the CFTC.

The SEC, which regulates U.S. securities markets and works closely with the CFTC on crypto regulation, requires registration of most U.S.-based digital assets. The SEC also provides oversight for Initial Coin Offerings (ICOs) and token sales, which are increasingly a remnant of crypto’s past.

FinCEN, which has long issued guidance on crypto, was founded to enforce the Bank Secrecy Act and other financial intermediary regulations. If a financial intermediary is a party to a suspicious transaction, it reports them to FinCEN.

“It seeks to hold crypto entities to the same standard,” notes Stadelmann.

The Consumer Financial Protection Bureau was originally founded to protect consumers from banks. Now it is trying to regulate crypto in the same fashion—an effort spearheaded by Elizabeth Warren.

OFAC says U.S. citizens are not allowed to transact with certain sanctioned persons and entities—Iran, Russian oligarchs, etc., and crypto, including DeFi, must comply, too.

“The IRS of course wants taxes from crypto,” said Stadelmann.

And then there is Congress, which consists of politicians seeking, in many cases, long careers and donations. At this point, some of them receive donations from traditional finance, which probably doesn’t like the potential competitor in DeFi. Others receive donations from the crypto industry, which is why they’re supportive.

This Approach Could Kill Crypto in the U.S.

Good faith innovators flock to crypto, only to be burdened by the broad approach of multiple agencies which go after crypto while leaning on old and irrelevant laws.

“Regulators and law enforcement need to admit that crypto—both a new type of technology and market—needs a novel set of regulations and perhaps even a dedicated regulator,” says Stadelmann. “Unfortunately, due to so many clashing interests, it’s tough to pass such innovative and bold legislation.”

The U.S. could let an immense opportunity slip through its fingers by taking a draconian approach to crypto. The opportunity is no more palpable than in the stablecoin phenomenon. USD-denominated stablecoins are in demand worldwide.

Stablecoin technology has opened up massive new inroads for consumers worldwide to gain access to the U.S. Dollar. Considering the Federal Reserve can control dollar policy, the benefits appear to greatly outweigh the risks for the U.S. government, if they can strike a good balance between reasonable regulation and overregulation.

Stablecoins are akin to exporting U.S. dollars to other countries, and they are ultimately a result of the exorbitant privilege of U.S. dollar reserve currency status. The U.S. needs to embrace this development, lest China introduces similar stablecoins pegged to their currencies, which capture global attention, and lead to an increase in Chinese yen usage.

“If the U.S. continues on its current trajectory, it could suffer a crypto brain drain, as experts are lured to more friendly jurisdictions,” said Stadelmann. “The hostile approach would limit growth of the industry and hurt the U.S.’ competitive advantage globally.”

If we lived in laissez-faire societies sans onerous financial regulations, then crypto would be less useful.

The more ubiquitous the surveillance requirements and the laws, and the more they lock people out of prosperity, the more attractive crypto becomes—all trends we see today.

“That’s why it is so important for the crypto industry to unite in this fight,” said Stadelmann.


Reporter. Past work appears in Epoch Times and NTD.

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