While overregulation can destroy progress, the United States’ blockchain strategy has failed to properly develop, leaving companies in regulatory limbo. It isn’t because of policymakers’ inaction, but because the U.S. has largely taken a patchwork approach to blockchain regulation, leaving individual states to make up their own rules without clear direction from Washington.
Meanwhile, countries like China have made blockchain a top priority, committing to invest in the technology and creating a conducive business environment for growth. The U.S. Securities and Exchange Commission (SEC), the agency responsible for regulating cryptocurrencies, has had a difficult time properly monitoring the space – largely because prevailing laws are old and designed for legacy banking systems.
The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization, is said to take its marching orders from the SEC. And given the SEC’s lack of regulatory guidance, FINRA, as of 2019, had stalled on applications from broker-dealers that operate in the digital asset space looking to score licenses to offer securities. The agency’s inaction threatens to push these companies to leave the United States for more crypto-friendly jurisdictions.
The SEC, for example, has yet to approve a bitcoin exchange-traded fund (ETF), which would make it easier for Americans to gain easy access to the leading cryptocurrency in a 401(k) plan. The crypto industry has also been anxiously awaiting the creation of a taxonomy system for years so that entrepreneurs know whether existing or new digital assets will be classified as a security, commodity, or something else.
States have taken varying approaches to the blockchain space. A handful of states have risen to the occasion, like Wyoming, which rolled out the red carpet for blockchain companies. Pennsylvania has also taken a more business-friendly approach. These states are the exception, however.
Most states have not been able to navigate the landscape on their own, leaving some to stick their heads in the sand. This has cost the United States on innovation, where companies have either redomiciled to friendly jurisdictions or are threatening to do so.
For example, a lack of a classification system for cryptocurrencies has pushed Brad Garlinghouse, the CEO of blockchain-fuelled money-transfer startup Ripple, to the brink. His company supports XRP, the third biggest cryptocurrency, for blockchain-powered payments. Garlinghouse is considering redomiciling his company from San Francisco overseas and is eying the UK — among other jurisdictions — where there’s a clearer taxonomy system for digital assets.
There are others, like Cblocks, a company that’s designed to make it easier for people to use cryptocurrencies. In 2018, Cblocks moved its headquarters from Miami, Florida to Canada to avoid the uncertain regulatory landscape in the U.S.
Biden’s Mixed Signals on Bitcoin
Now that President-elect Joe Biden is beginning to unveil his incoming administration, the blockchain community is studying every pick. So far, the reviews are mixed. 2 key cabinet picks are in the spotlight: tech entrepreneur and former Democratic presidential candidate Andrew Yang, who Biden is eying as Commerce Secretary, and former Fed Chair Janet Yellen, who the incoming president has said he would nominate for Treasury Secretary.
Yang and Yellen, however, are on opposite sides of the bitcoin aisle, which is causing some to worry that the long-awaited blockchain reform could be placed on hold even longer.
Yang is a friend of the cryptocurrency community who has embraced blockchain technology. He was known for his Universal Basic Income (UBI) plan and lauded by blockchain enthusiasts for his willingness to implement reforms. He bemoaned the state of crypto and blockchain regulation in the U.S., describing it as a “hodgepodge” and understands that a streamlined regulatory framework is needed.
Conversely, Yellen was considered to be in the “blockchain, not bitcoin” camp. While she sees the value in the blockchain, calling it an “important, new technology,” she’s been spooked by some of the nefarious activity that has occurred using bitcoin. As a result, she’s in less of a rush to accept it, having admitted that she’s “not a fan” of bitcoin and cautioning that “it is not a stable store of value.”
The cryptocurrency community seems to agree that the addition of Yang to a Biden cabinet would be a step in the right direction for the blockchain industry. He’d represent the pro-bitcoin side of the equation that has largely been missing from Washington, D.C. Yang’s pro-bitcoin stance, coupled with his well-known tech-savvy, suggests that he’d be able to push through clear and robust legislation that’s crypto-friendly.
Some states have been more successful than others.
In some cases, states like New York have a regulatory approach that involves what’s known as a BitLicense, a license issued by the state to cryptocurrency businesses. It’s blamed, however, for “regulatory overreach” that caused companies like cryptocurrency exchange ShapeShift to pack up and leave the state.
On the other side of the coin, states like Wyoming, which are trailblazers for blockchain innovation, boast laws that have paved the way for crypto-friendly banks. In addition, the University of Wyoming recently unveiled a Center for Blockchain and Digital Innovation, which is designed to prepare university students for jobs in the blockchain industry.
New Jersey and California are also making strides, thanks in large part to industry involvement from the likes of the Blockchain Advocacy Coalition and industry leaders like leading Bitcoin ATM operator CoinFlip. On California’s path to regulating digital currencies, CoinFlip and the Coalition have been pushing crypto legislation known as AB 2150, which would help provide for a clear taxonomy and possibly encourage Washington to clarify its position.
In New Jersey, CoinFlip COO Ben Weiss supports Assembly Bill 2891, which he said “is likely to increase innovation by protecting consumers, legitimizing the blockchain industry, increasing transparency, and shutting out bad actors.”
Fork in the Road
While Andrew Yang is widely deemed to be an asset for the incoming Biden administration, all eyes are on Janet Yellen. That’s because cryptocurrency companies are currently grouped as money services businesses (MSBs), which means they must comply with standards such as know-your-customer and anti-money-laundering protocols. MSBs fall under the purview of the Financial Crimes Enforcement Network (FinCEN), which in turn is underneath the Treasury, where Yellen will soon be calling home.
If the diverging views of the new administration can meet in the sensible middle, the blockchain industry can expect new waves of growth in the years ahead.