It’s time to move crypto from chaos to order

Miles JenningsBrian Quintenz

Many believe blockchains and crypto are a groundbreaking technology that enable creativity and entrepreneurship, and some regard these tools as just another internet fad.

Regardless of where you stand, it’s indisputable that the consumers and entrepreneurs alike in the burgeoning crypto and web3 sector face tremendous regulatory uncertainty, which holds the legitimate industry back and allows bad actors to flourish.

This tension was on full display as a federal district court just issued a much-anticipated summary judgment in the Securities and Exchange Commission’s lawsuit against Ripple Labs and two of its founders.

The ruling deems Ripple’s direct sales of their digital asset XRP to institutional investors to be securities offerings—which is in line with previous cases applying securities laws to initial coin offerings (ICOs) that dominated the industry in its early years. But in a blow to the SEC, the ruling did not extend the application of securities laws to Ripple’s—and its founders’—sales of XRP to individuals via certain digital asset exchange platforms.

While this is a potentially significant win for crypto, and a rebuff to the SEC’s ongoing war against it, the ruling results in a confusing set of outcomes which highlights the long standing uncertainty plaguing an industry clamoring for stability.

What are entrepreneurs to make of the decision? On the one hand, the ruling is not the definitive word on the issue and may be appealed. This means entrepreneurs may choose to continue current industry practices, where digital asset issuers mostly rely on the SEC’s helpful, but incomplete, decentralization framework from 2019—a process that mitigates many of the risks digital assets pose to consumers. But even some members of the SEC have tried to distance themselves from that framework and it has proven to not be sufficiently clear or robust enough to be effective.

On the other hand, the ruling opens an entirely different pathway for digital asset issuers, as it establishes that digital assets sales on exchange platforms are not governed by securities laws. But the ruling is also directly at odds with the SEC’s very recent actions against several major digital asset exchanges, including Coinbase.

Ultimately, what the Ripple ruling makes obvious is that the rules are anything but clear. And without clear rules, the SEC’s current regulation-by-enforcement posture toward crypto is hurting, not helping American innovation.

This uncertainty has already long acted as a drag on the pace of innovation and a feeding ground for bad actors. Responsible actors have been subject to dubious U.S. regulatory enforcement actions, while ill-intentioned firms launch products that flagrantly violate long standing rules – often beyond the reach of U.S. authorities until it is too late.

Unfortunately, this is likely to get worse before it gets better. Unless Congress acts quickly.

There are significant challenges to applying 80-year old precedents to novel technologies consistently. The unique advantages and risks of blockchain and crypto demand a new regulatory approach. Legitimate innovators and consumers of new products need clear rules of the road to build products with utility that can be purchased and used safely—and for use cases that go far beyond financial speculation.

The only way forward at this point is through thoughtful, well-calibrated legislation that protects consumers from scams and conflicts of interest—while still embracing the innovations of blockchain technology. Other countries around the globe have already reached this conclusion; the United States is falling behind.

So how do we not fall behind, yet also avoid more confusion and uncertainty? We recommend that U.S. legislators do three things:

First, ensure that both consumers and investors are protected by requiring registration and supervision of centralized firms. Regulators should be probing for risk arising from custodial relationships, conflicts of interests, and use of digital assets in illicit finance. We have seen many examples already of these regulatory failings.

Second, any legislation should provide the entrepreneurs who have been building non-centralized networks and legitimate businesses in spite of this uncertain environment a pathway to compliance.

Finally, laws and regulation should properly incentivize decentralization and community ownership and usage—the key characteristics of crypto and blockchain technology that drive the true benefits to the public and next-generation internet that this technology offers.

There are some hopeful signs: Progress is being made in both the House and the Senate on such legislation. We applaud Chairmen Patrick McHenry (R-N.C.) and G.T. Thompson (R-Pa.) and Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) for attempting to create meaningful consumer protections through legislative frameworks that promote responsible innovation. We urge Congress to swiftly consider and pass such legislation before it’s too late.

This op-ed first appeared in Fortune on July 15, 2023.

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