About the authors: Jamil N. Jaffer is the founder and executive director of George Mason University’s National Security Institute. He previously served as a senior executive in a publicly traded cyber security company and in national security roles. John Poulson is head of public policy and government relations at GMU’s National Security Institute. He previously served at the US Treasury Department as Special Assistant to the Under Secretary for International Affairs.
This summer has seen chaos in the cryptocurrency market, with major corrections in digital currencies and major crypto institutions. Many who view this scenario – such as former Clinton-era Labor Secretary Robert Reich – believe these events highlight the need for sweeping new regulation of this nascent market, including potentially treating cryptocurrencies as marketable securities. In our view, this is precisely the wrong time to introduce massive new securities-style regulations. The result would be to stifle this new industry or worse, push it overseas.
The correct approach is to recognize the latest correction for what it is: the appropriate – if belated – function of markets to deal with widespread overextension. The crypto market may benefit from some broad regulatory guidance and basic guardrails to protect consumers and national security, but we should not let our zeal for regulation drive this important industry into the ground.
There can be little doubt, as many have noted, that crypto has long been dramatically overvalued relative to its fundamentals. As such, not only was the recent correction likely, but it is actually a much-needed antidote to overheated speculation. It demonstrates that traditional market mechanisms can still work well, and that the feverish rise in valuations of both cryptocurrencies and crypto-companies was exaggerated.
Crypto’s dramatic rise and disruptive impact also created challenges. The presence of unsolicited early adopters—including nation-state actors bent on disinformation, hackers exploiting weak security to get paid, and those hiding illicit financing schemes from governments, terrorists, and other criminals—has prompted a valid pushback from many government officials when it comes to to see crypto as a legitimate private store of value.
But if we do what many longtime regulators and academics like Reich and SEC Chairman Gary Gensler want — like apply ill-fitting securities laws to this new industry — we could seriously stifle our nation’s ability to stay at the forefront of this transformative technology. . While there is little doubt that cryptocurrencies, if misused, can pose a critical threat to our economic and national security, it is also true that if properly harnessed, crypto can help maintain American leadership for free and open markets. Similarly, appropriate limited regulation could easily correct some of the excesses we have seen to date.
To that end, Congress should initially establish a broad policy framework, ideally in bipartisan legislation, such as the proposal by Senators Cynthia Lummis and Kirsten Gillibrand. It sets out the key policy goals for crypto regulation, including accounting for national security issues, and seeks input from the executive branch on which agencies, if any, should regulate in this area and what regulatory approaches they would propose in light of Congress. political framework. Only after laying out such a framework and receiving feedback from the executive branch should Congress grant detailed and narrow regulatory authority to one or more federal agencies.
Such a process can be longer and more involved than usual. But it’s especially important where, as with crypto, there are economic, national security and innovation imperatives that run in a number of directions. Also, given the speed of development in the crypto industry, taking a cautious, more deliberate approach to regulation, including getting significant, detailed buy-in from Congress, seems like a better way forward.
To be sure, any regulation will need to address the real problems of money laundering, sanctions evasion, terrorist financing and other criminal behavior we have seen in the crypto market, as well as the implications of this new technology for the traditional nation-state monopoly on monetary policy . Many of these challenges can be seen in the Treasury Department’s recent decision to sanction virtual currency mixing service Tornado Cash for use in money laundering and sanctions evasion. A fierce debate has broken out about whether the use of property-based sanctions is compatible with the law.
Ensuring that crypto-innovation takes place in free economies and creates more financial inclusion, rather than being hijacked by authoritarian nation-states that seek to control their own people and export oppression abroad, is critically important. The open, rules-based, private market system built by the United States and our allies is the proper home for this innovation, not the lands of digital authoritarians and human rights violators.
It is more critical now than ever – as the crypto industry works through the correction – that we embrace and encourage its development as a transformative capability with the potential to advance key US economic and national security goals. Of all the areas that government can regulate, this is one where a strong bias in favor of innovation and against rash actions is key.
By keeping these principles in mind as regulators look to act and as Congress looks to legislate, we can effectively balance the need to maintain America’s national security while advancing our economic interests.
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