The only constant about the crypto markets in recent weeks is the speed at which things seem to be getting worse.
Even the most seasoned observers were shocked when Bitcoin lost more than half of its value in a few months and the total cryptocurrency market capitalization fell below $1 trillion after reaching $3 trillion in November.
It’s a chain of events that started with the overnight collapse of the algorithmic stablecoin TerraUSD and its companion token Luna. The contagion effects took down Three Arrows Capital, Celsius and Voyager.
Now critics are doubling down on the claim that crypto markets are nothing more than a “wild west” of costly speculation. The crypto industry and traditional finance await more – and potentially far more aggressive – government regulation.
Only time will tell what that regulation will look like and whether it will be effective. For now, one thing is clear: the application of traditional regulations won’t cut it.
Cryptocurrency is a unique asset class based on a unique technology. For crypto regulation to really make a difference, it needs to protect investors without stifling financial innovation.
My experience as a Treasury regulator, architect of one of the first cryptocurrency compliance functions, and co-founder of a regtech company has led me to conclude that a strong and comprehensive cryptocurrency regulatory framework can only be achieved through the prioritization of a few central goal.
Clear, usable definitions
The SEC has made clear its desire to regulate and monitor cryptocurrencies. The recent near-doubling of the size of the Cyber Unit (now renamed the “Crypto Assets and Cyber Unit”) shows that it is ready to dedicate additional resources and personnel to bringing crypto fully under its regulatory umbrella. But while increasing personnel will inevitably expand the SEC’s enforcement capabilities, crypto platforms are still awaiting answers to the question of exactly how cryptocurrencies will be classified, as well as how regulatory authority will be shared or shared between the SEC and the Commodity Futures Trading Commission (CFTC).
It will be up to Congress to step in and figure out these questions. Decisive legislation in the near term doesn’t seem particularly likely, however, considering lawmakers only recently began prioritizing crypto hearings.
When lawmakers brought in Crypto chiefs for a meeting last December, a key presentation was a “level-setting” explanation of blockchain and the basics of web3 by former acting Comptroller of the Currency Brian Brooks (notably the first agency head with a background). in crypto). This was a good first step, but legislator education will be key to closing the knowledge gap to create effective regulation.
To date, potential regulators have defined crypto by comparing it to the closest approximation from the traditional financial world. This if-it-looks-like-a-duck approach has resulted in definitions based on what cryptocurrency has in common with traditional finance, rather than what sets it apart.
Crypto regulators must create new definitions – those that speak directly to the technology and processes unique to crypto. This in turn will allow regulators to create a regulatory framework specifically tailored to the assets they seek to oversee.
Some of these definitions are written into the recent Gillibrand-Lummis bill. Should the bill be adopted, these definitions will become the literal “letter of the law”. But it remains to be seen whether the language and information provided will be sufficient for the agencies tasked with creating and enforcing regulations.
Develop regulations that are strong yet flexible
It is an old truth that innovation does not happen in a boardroom. Technological innovation often requires an independent streak that does not play well with the status quo.
The problem, of course, is when the independent streak runs counter to traditional legal guarantees. But regulation and innovation can work together if we stay flexible and focus on end user. To the extent that a crypto token fits an existing regulatory framework, the regulation should apply.
However, if a token fits into multiple regulatory frameworks, depending on how it is used, individual use cases should not automatically expand the regulatory scope beyond its scope. A good litmus test for regulators is to ask the question: Does this rule protect the end consumer? Or am I protecting existing businesses at the expense of new product innovation that could improve consumer outcomes or promote competition?
Regulators cannot be expected to see the future any more than anyone else. But by being aware – not only of the limits that are set, but of the space left for products and processes. grow-they can write strong, comprehensive regulations while allowing the economy and technology to continue to develop.
Enforce regulations at the speed of technology – and let technology help you
Future conversations about 2022’s crypto market crash will inevitably focus on how quickly things went wrong. It will be on the minds of lawmakers and regulatory agencies as they develop new policies specifically designed to protect consumers and counter extreme market volatility.
As these new laws solidify, it will be critical that these groups consider an often-overlooked policy goal: the development of an enforcement framework that will allow regulators to move as quickly as the crypto market itself.
Speed is traditionally not a regulator’s strong suit – and that’s on purpose. Regulators are by nature thoughtful, cautious and measured. However, unlike the opacity of the traditional financial industry, crypto-specific regulations have the potential to take advantage of crypto’s own native characteristics, such as its digital-first format and inherent transparency.
Not only does this mean that blockchain-enabled tools can be adopted to enforce regulations, but future regulations will also benefit from the technological advances that have emerged as part of the larger crypto ecosystem.
This, like the work to set clear definitions and write flexible policy, will require work from both legislators and regulatory bodies. But the reward for doing so could be an enforcement framework that paves the way not only for crypto regulation, but also for the next generation of traditional financial market regulation.
A way forward
The advantage of periods of crisis and difficulty is that they often spur action from those who have the power to effect lasting change.
However, there is always a danger that the desire to “fix what’s broken” will lead to decision-making that is overly conservative and short-sighted, stifling growth in the long term.
Crypto regulation is necessary – and the time to write and implement it has clearly arrived. Policymakers would do well to remember that ignoring what makes cryptocurrencies unique and valuable is as foolish as never regulating them at all.
Matt Van Buskirk is co-founder and CEO of Hummingbird Regtech.
The opinions expressed in Fortune.com comments are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.
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