Seven things U.S. government agencies can do to help seize the web3 opportunity
Crafting effective policy for emerging tech can be challenging, especially when that technology doesn’t fit into legacy regulatory frameworks. This is certainly the case in web3, where decentralized systems cannot — by their very nature — comply with traditional legal requirements. For example, current rules assume the existence of some kind of centralized intermediary, which is often not the case in web3. And those same rules seek to reduce the risks, like conflicts of interest and information asymmetries, that arise from the presence of trusted intermediaries, like a management team. Yet applying rules like this to decentralized systems risks forcing re-centralization, stymieing innovation, undermining the transformative potential of web3, and harming users.
Decentralization is already reshaping areas like social media, identity management, creative industries, and certainly finance. But even though the U.S. is the developed nation with the highest rate of crypto adoption, it does not have a functioning regulatory regime for decentralized crypto assets.
While the U.S. has already made some progress (like FIT21 and Wyoming’s DUNA), we still need significant legislative progress to provide regulatory clarity, properly encourage decentralization, and protect consumers. Regardless of who wins the U.S. election, there are simple steps that U.S. government departments and agencies could take today — absent legislation — to help the U.S. seize the web3 opportunity.
Here are seven of the most important ones. While this list is incomplete, it should help the U.S. government and other stakeholders understand how they can move in the right direction.
1. All relevant agencies should incorporate increasing competition and promoting innovation into their mandate
As Marc Andreessen and Ben Horowitz have written, the key to American technology supremacy has always been the startup. “A startup,” they observe, “is what happens when a plucky group of outcasts and misfits comes together with a dream, ambition, courage, and a particular set of skills — to build something new in the world, to build a product that will improve peoples’ lives, and to build a company that may go on to create many more new things in the future.” Edison, Jobs, and Musk are just a few of America’s startup champions. The U.S. has led in startups largely as the result of competitive innovation borne of our pioneering spirit, work ethic, rule of law, robust capital markets, education system, and public sector investment in research and development.
Though startups can redefine — and in some cases even invent — entire industries, they begin with every possible disadvantage. Pitted against huge corporations with considerable user bases and financial resources, startups often struggle to get off the ground. Some incumbents may also have another advantage: the ability to position the government against startup competitors or promote costly rules which create a “regulatory barrier to entry.”
If startups are the lifeblood of American innovation then all agencies should incorporate increasing competition and promoting innovation into their mandate to ensure that these goals remain among their North Stars.
2. The SEC should engage in formal rulemaking and provide clear guidance on the classification of digital asset transactions
As Securities and Exchange Commission (SEC) staffers struggle to define which crypto asset transactions are securities, imagine how hard it is for a normal user. As a consequence of this lack of clarity, the U.S. doesn’t have a functioning market in digital assets. To help fix this, the SEC should engage in rulemaking to provide clear instructions for market participants to understand whether transactions in a specific digital asset involve the sale of a security — taking this action would have numerous implications. But since 2019, the SEC has resisted calls to issue guidance to the public, choosing instead to engage in counterproductive regulation by enforcement, potentially harming businesses, confusing investors, and disrupting everyday users.
3. Remove intermediary requirements where blockchains eliminate the need for third parties.
A key innovation of blockchains is their capacity to facilitate transactions without the need for third-party, centralized intermediaries. Yet current rules designed for traditional markets presuppose the existence of centralized intermediaries like brokers, clearing agencies, custodians, and market makers. Where centralized businesses are involved in those functions, regulation is appropriate.
But treating decentralized systems in the same way prevents them from playing similar roles and precludes the benefits those systems provide. This amounts to a “technology-discriminating” approach. Disintermediating services reduces risks (like counterparty risk) and costs (like transaction fees) even as it increases efficiency and promotes competition. Where relevant, agencies should remove intermediary requirements if blockchain technology eliminates the need for intermediaries. For example, securities laws should not require intermediation when blockchain technology can achieve the same regulatory objectives.
Likewise, by modernizing existing rules, agencies can help enable blockchains to revolutionize our financial system. Cross border payments, settlement of digital security and commodity transactions, and derivative markets could all be made much more efficient if existing rules are adapted to facilitate transactions taking place on blockchains.
4. Promote transparency in agency decision making processes and increase engagement with private sector stakeholders, civil society organizations, academia, and the public
Promoting transparency in agency decision-making processes is vital for creating sensible crypto policy. It builds trust, ensures accountability, and allows for public input. Open dialogue with stakeholders ultimately leads to more effective regulatory solutions — solutions that firms explore in partnership with regulators to ensure the agency’s full understanding of a dynamic market structure and a business’ aims, operations, and risk. When agencies openly share how decisions are made, it also prevents undue influence from special interests and helps ensure policies are balanced and fair.
Critically, agencies should encourage — or at minimum permit — businesses to have educational meetings with regulators without fear of reprisals in the form of enforcement actions. This would help bring about what I’ve described as “regulation by conversation,” as opposed to regulation by enforcement.
Transparency enables stakeholders, including innovators and the public, to provide feedback, fostering a more informed and inclusive approach to crypto regulation that reflects diverse perspectives and promotes long-term growth.
5. Permit White House staff and federal agency employees to use crypto
A 2022 legal advisory notice from the U.S. Office of Government Ethics prevents “employee[s] who [hold] any amount of a cryptocurrency or stablecoin” from working on crypto-related policy and regulation that could have an effect on the value of their assets. The notice applies to all White House staff and employees of federal agencies, and specifies that the de minimis threshold available for securities is not applicable in the case of cryptocurrencies.
Maintaining ethical standards around conflicts of interest is of course critical for establishing trust in governmental actions. But preventing government employees tasked with creating rules of the road for crypto from, well, using any amount of crypto is akin to prohibiting Department of Transportation officials from ever getting into a car or riding an airplane. Sensible policy comes from engagement and the knowledge it provides. Government employees charged with regulating crypto should be allowed to use it.
6. Provide specialized training for government employees
In addition to benefiting from interacting with crypto, government employees would also benefit from specialized blockchain training — crucial for understanding decentralized innovation, informed policy decision-making, and effective use of enforcement resources. As decentralized systems reshape sectors like finance and cybersecurity, officials need to understand key concepts like blockchain analysis, smart contract design, and decentralized governance. This training can help officials understand how to leverage the transparent nature of blockchain to better achieve regulatory outcomes. It would also help governments to craft balanced regulations, support blockchain-driven innovation, and ensure that public sector initiatives align with the principles of decentralization and the public interest.
Partnerships can turbocharge this training: By collaborating with industry, research organizations, and universities, governments can provide employees with access to cutting-edge research and expertise in blockchain technology. Where such initiatives (like the SEC’s Strategic Hub for Innovation and Financial Technology) already exist, agencies should take advantage of engagement with innovators, developers, and builders of new technologies.
7. Support private-sector blockchain research and use zero knowledge proofs to better secure sensitive and proprietary information
U.S. government agencies should also facilitate research into open source, permissionless blockchain systems to promote national security. Many of our adversaries, including Russia and China, are developing government-backed blockchain protocols that, if adopted globally, could provide adversarial governments with access to personally identifiable information and sensitive financial and operational data. U.S. agencies should support blockchain research to aid the development of private-sector solutions that can help combat the risk of the U.S. losing ground in the crypto space to other countries who do not share Western values.
One area in which government R&D can be of benefit is in the development of privacy-preserving technologies such as zero-knowledge proofs (ZKPs). ZKPs represent a step function improvement over other privacy-enhancing technologies, ensuring maximum privacy and control for users.
ZKPs can directly benefit U.S. government agencies, helping them enhance the security and privacy of information. Blockchains provide a decentralized, secure ledger that ensures that data is protected across multiple nodes. Encrypting and decentralizing information reduces the risk of hacks and service interruptions. ZKPs allow parties to verify the authenticity of information without revealing the actual data, making it possible to share only the necessary proof of identity or authorization without exposing sensitive details — for example, proving someone is above an age threshold without revealing their birthdate.
Together, blockchains and ZKPs can strengthen data integrity, improve trust in digital systems, and protect confidential information in various government operations. Agencies can also use decentralized systems to improve data transfer, communications, and more. Agencies should therefore consider using blockchain and ZKPs to preserve sensitive information such as private sector financial data and enhance efficiency.
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The U.S. needs to do more work to create a functioning crypto regulatory regime — one that incentivizes decentralization while protecting consumers. In the meantime, our hope is that this list of possible agency actions, albeit incomplete, will help U.S. agencies and other stakeholders understand how they can take steps in the right direction without waiting for new legislation.
And maybe, as we wait for legislation, staffers could be permitted to actually use some crypto.
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Brian Quintenz is the Global Head of Policy for a16z crypto, and a former commissioner of the Commodity Futures Trading Commission (CFTC). You can follow him on X @brianquintenz and Farcaster @brianquintenz
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