The political environment for crypto in 2022 has started full steam ahead. The industry had grown tremendously, institutional adoption was growing by leaps and bounds, and policymakers had taken notice. Many players on the financial side of crypto, including exchanges and those who create financial products on the blockchain, have stepped up their involvement in the political conversation in Washington, D.C.
Policymakers who were historically skeptical began to see the value of the technology and the growing impact it could have on traditional financial markets. Criticism was increasingly dismissed, given the perception of huge opportunities in space, and friendly regulation seemed to be in sight. Once regulatory certainty is addressed, the industry could thrive. In May 2022, that positivity within the political community came to a screeching halt.
Chris Hayes is a senior government relations executive specializing in financial regulation. He previously led global government relations for a layer 1 blockchain. This article is part of CoinDesk Crypto 2023 series.
The collapse of Terra’s UST stablecoin (which, behind closed doors, some in Web3 have spoken of as inevitable) along with the collapse of many centralized lending platforms in the crypto space has sent the industry into a cold winter. and provided a strong narrative for skeptics of not just the crypto industry but, worse, the usefulness of blockchain technology itself. The implosion of FTX in November provided further fuel to this narrative, with significant implications for policy-making. An organization that presented itself as the model child of responsible management and consumer protection turned out to be a house of cards, even worse than the example of Enron.
Despite all the losses to depositors, customers, and reputational damage to the industry, the FTX implosion surprisingly gave rise to opportunity. There now appears to be some bipartisan consensus in the US Congress that new digital asset legislation is needed to protect consumers. The 118th Congress, which begins in January, will likely pass some sort of regulatory framework for crypto and blockchain technology in 2023 or 2024. This framework will shape how the industry operates for years to come. That’s why it’s critical that the entire Web3 industry be involved in this conversation, and most importantly, layer 1 blockchains and builders on these platforms.
I often hear from those new to Web3 or blockchain technology (including in my old TradFi world) that they “see the value in blockchain technology, but crypto is worthless”. Unfortunately, these comments are common among those who don’t realize that a blockchain needs a native cryptocurrency to process transactions, motivate validators, and secure the network. Those less familiar with the technology, including many crypto-averse policymakers, still haven’t heard of the job creation and economic growth potential of companies that rely on blockchain infrastructure. . Layer 1s, as the building blocks of the entire industry, must bring these founders and companies to the forefront to tell the story of the technology and its potential for real-world application. A forward-thinking message is needed now, not a financial message.
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Any new crypto legislation or Securities and Exchange Commission (SEC) regulations must clarify Layer 1s and their native tokens while ensuring sufficient consumer protection. This means finally addressing the lack of clarity around the application of the Howey test to these types of digital assets, including determining whether they fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) or the SEC. If some native Layer 1 tokens were to ultimately qualify as securities, any SEC legislation or regulation must provide a safe harbor for existing blockchain tokens in circulation and must organize an updated SEC registration regime that addresses the differences technologies presented by digital assets. If the SEC does not initiate a rule-making process using its existing authority, Congress must require the regulator to do so.
Industry-leading layer 1 blockchains need to collaborate on policy engagement, delivering a uniform message that regulatory clarity is needed beyond Bitcoin and Ethereum. Only then can this important technology continue to thrive here in the United States as the engine of technology companies of the future.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.