The policy environment for crypto in 2022 began full steam ahead. The industry had grown significantly, institutional adoption was growing by leaps and bounds and policymakers had taken notice. Many of the players on the financial side of crypto, including the exchanges and those building financial products on blockchain, ramped up their involvement in the policy conversation in Washington, D.C.
Policymakers that had been historically skeptical began to see the value of the technology and the growing impact it could have on traditional financial markets. Critics were being increasingly sidelined, given the perception of tremendous opportunities in the space, and friendly regulation appeared to be in the offing. With regulatory certainty being addressed, the industry could flourish. In May 2022, that positivity in the policy community came to a screeching halt.
Chris Hayes is a senior government relations executive focused on financial regulation. He previously led global government relations for a layer 1 blockchain. This article is part of CoinDesk’s Crypto 2023 series.
The collapse of Terra’s UST stablecoin (which, behind closed doors, some in Web3 talked about as being inevitable) as well as that of many centralized lending platforms in the crypto space sent the industry into a cold winter and provided a strong narrative to skeptics of not only the crypto industry but, worse, the usefulness of blockchain technology itself. The implosion of FTX in November has provided more fuel to this narrative, with significant consequences for policy making. An organization that presented itself as the poster child for responsible management and consumer protection turned out to be a house of cards, even worse than the Enron example.
For all the losses to depositors, customers and damages to the industry’s reputation, the FTX implosion surprisingly has also resulted in an opportunity. There now appears to be some bipartisan consensus in the U.S. Congress that new digital assets legislation is needed to protect consumers. The 118th Congress that begins its work in January will likely pass some sort of regulatory framework for crypto and blockchain technology in 2023 or 2024. This framework will shape the way the industry operates for years to come. This is why it’s critical that the entire Web3 industry be involved in that conversation, and most critically, layer 1 blockchains and the 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 of the blockchain technology, but that crypto is worthless.” Unfortunately, these comments are common by those who don’t realize that a blockchain needs native cryptocurrency to process transactions, incentivize validators and secure the network. Those less familiar with the technology, including many policymakers hostile to crypto, still haven’t heard of the job creation and economic growth potential of the companies building on top of blockchain infrastructure. Layer 1s, as the building blocks to 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 technology-forward message is needed now, not a financial message.
See also: The End of Crypto Twitter as We Know It? | Opinion
Any new crypto legislation or Securities and Exchange Commission (SEC) regulation must provide clarity for layer 1s and their native tokens while ensuring sufficient consumer protections. This means finally addressing the lack of clarity around the application of the Howey Test to these types of digital assets, including delineating whether they belong under Commodity Futures Trading Commission (CFTC) or SEC jurisdiction. Should certain layer 1 native tokens ultimately be considered securities, any legislation or SEC rulemaking must provide safe harbor for those existing blockchain tokens in circulation and must arrange for an updated SEC registration regime that addresses the technological differences presented by digital assets. If the SEC will not begin a rulemaking process utilizing its existing authority, Congress must require the regulator to do so.
Industry leading layer 1 blockchains must collaborate on policy engagement, delivering a uniform message that regulatory clarity is needed beyond Bitcoin and Ethereum. Only this will allow this important technology to continue to develop here in the United States, driving the technology companies of the future.