When it comes to financial regulations, the primary role of any government is to protect its citizens from financial losses due to unethical practices. The government does this by establishing and vesting regulatory agencies with the authority to enforce its regulations.
The Securities and Exchange Commission (SEC) in the United States is an example of such a regulatory agency. As the name implies, its original purpose was to regulate securities. However, it has now extended its oversight to cover new technologies and financial markets, such as the multi-trillion-dollar cryptocurrency industry.
Though the legal standing of cryptocurrencies in the U.S. is still under debate, the SEC clearly views them as more in line with securities and consequently wants to use the existing securities laws to regulate cryptoassets.
The challenge here is that cryptocurrencies are a unique asset class, and simply applying the existing securities laws to this new territory isn’t entirely appropriate. Nevertheless, the SEC has chosen a strategy of regulation through enforcement.
This article explores the possible reasons behind the SEC’s current approach to cryptocurrency regulation and the potential consequences for financial innovation in the U.S. if this continues.
Let’s start by exploring why the SEC believes it’s necessary to regulate the cryptocurrency sector.
Why Is the SEC Going After Crypto?
In 2022, over 50 million Americans owned at least one type of cryptocurrency. This number is likely to rise due to increasing interest. With 20% of the U.S. population involved, regulatory bodies will definitely want to closely watch this industry.
Entities like the SEC have a responsibility to ensure consumer protection and financial stability. This duty is vital because excessive exposure to risky asset classes can adversely affect the nation’s economy.
Several negative incidents have intensified concerns surrounding the need for crypto regulation. For instance, in the first half of 2022, the collapse of Terra Luna resulted in a loss of over $300 billion from the already volatile crypto market.
Additionally, the collapse of FTX, valued at $32 billion at the time, triggered a chain reaction that impacted traditional firms exposed to cryptocurrencies, including Silvergate and Silicon Valley Bank (SVB).
These events, coupled with unending DeFi hacks, have most probably amplified the SEC’s apprehensions regarding crypto regulation, informing the conclusion that the absence of rigorous oversight in this industry leaves investors vulnerable to hefty losses.
Reacting, the SEC swung into taking enforcement actions such as halting crypto services like staking offered by exchanges. Additionally, the SEC filed several lawsuits against other major industry players such as Nexo, Binance and Coinbase.
While these enforcement actions seemed necessary to promote a healthy financial environment in the U.S., the SEC has failed to provide a clear framework for every market participant to abide by, similar to the regulatory provisions in traditional stocks and securities markets.
As a result, these enforcement actions have had more negatives than positives for the U.S. and far-reaching implications that extend beyond the crypto industry.
How the Current U.S. Crypto Regulation Regime Is Stifling Innovation
Cryptocurrency leverages blockchain technology, an evolving innovation anticipated to underpin future digital advancements. However, the unwelcoming regulatory environment in the U.S. potentially limits what’s possible with this new technology. Here’s how
Stifling Technological Advancement
The current regulations have gaps that discourage new players from entering the market. While the SEC is active in regulating cryptocurrency activities within the U.S., other bodies like the CFTC are also involved.
Notably, the CFTC has also taken action against entities like Binance. This creates confusion about which rules to follow, making it hard to participate in the market. This uncertainty also affects other emerging technologies like A.I., IoT, Metaverse, and Digital Twin, which interact with blockchain tech.
Dampening Entrepreneurial Drive
The success of cryptocurrencies has ignited entrepreneurial endeavours and a keen interest in leveraging blockchain and crypto technologies to tackle real-world problems. However, entrepreneurs in this space frequently encounter a significant obstacle: the uncertain nature of regulatory structures.
Innovators would seek to leverage blockchain and crypto technologies to create solutions to real-world problems. However, this “enforcement by action” of unclear regulations would stop them dead in their tracks.
A case in point is the recent legal dispute involving Kraken, a prominent U.S. crypto service provider. The U.S. Securities and Exchange Commission (SEC) imposed a $30 million fine on Kraken and mandated the cessation of its staking services. This situation underscores the difficulty that new crypto businesses confront while navigating a hostile regulatory environment.
The repercussions of this hefty $30 million penalty go beyond impacting just Kraken’s operations. It serves as a cautionary tale for other crypto startups. The ambiguity surrounding regulations in the U.S. has diminished the willingness of entrepreneurs and investors to allocate resources to projects that can disrupt traditional industries.
Exodus of Crypto Firms Outside the U.S.
A growing number of cryptocurrency companies and service providers are expressing their dissatisfaction with the regulatory landscape in the United States. This frustration is prompting them to consider other countries where they can pursue their ambitious projects with more freedom.
For instance, Bittrex, a crypto exchange based in Seattle, has ceased operations in the U.S. Similarly, prominent names like Gemini, Coinbase, Ripple, and Nexo are hinting at relocating to jurisdictions outside the United States.
The consequences of these closures of U.S.-based crypto businesses extend beyond boardrooms. They also impact the individuals who rely on these companies for their livelihoods.
Unfortunately, these developments sharply contrast with a potential scenario where well-defined and favourable regulations could have led to more job opportunities within the United States.
The current regulatory landscape in the United States is creating a discouraging environment for newcomers and obstructing progress in the cryptocurrency sector and broader digital innovation.
An illustration of this issue is the ongoing legal clash involving Ripple Labs and the SEC. This legal process has not only drained substantial resources but has also impeded the company’s growth and potential collaborations due to uncertainties stemming from regulatory concerns.
Rather than stifling growth through enforcement-heavy regulation, the U.S. should adopt a proactive approach, similar to countries such as El Salvador, Singapore, and the UAE, to foster innovation in crypto and blockchain technology.
By establishing clear and supportive regulations, the U.S. can encourage legitimate market participants to contribute to the growth of the crypto industry while also deterring malicious actors. This approach would result in a more transparent and closely monitored market, reducing the prevalence of illicit activities like money laundering and scams.
Furthermore, appropriate regulation could pave the way for novel developments, such as the introduction of cryptocurrency-based ETFs, that would attract traditional investors and have a positive cascading effect on the broader economic landscape in the U.S.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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