As the adoption of digital assets becomes increasingly mainstream, policymakers are looking to put regulatory guardrails around the industry. While creating a unified and well-defined regulatory framework is a worthy goal, policymakers must be cautious not to stile innovation in a sector with inordinately high potential.
Policymakers must first understand the industry they are seeking to address before creating additional laws or regulations.
What is a blockchain?
A blockchain is a distributed ledger that is shared among the nodes of a computer network. Cryptocurrencies, like Bitcoin, utilize blockchain technology to maintain a secure and decentralized record of transactions. Although the most common use of blockchain technology is to create a ledger of transactions, it can also be used for a variety of other purposes.
Unlike traditional databases, which organize information using tables, a blockchain collects information in groups known as blocks. These blocks have a specific storage capacity and, once filled, are closed and linked to previously-filled blocks that make up the chain.
The structure of a blockchain is essentially an irreversible timeline of information. Once the data in a block is filled, it is added to the blockchain and given a timestamp. This distributed ledger ensures a high degree of both transparency and security for users.
What is cryptocurrency?
Cryptocurrencies are decentralized digital assets based on blockchain technology. They enable direct online transactions without a third-party intermediary such as a bank. There are currently well over 10,000 unique cryptocurrencies in existence.
A major question for policymakers is how to approach cryptocurrencies in the modern regulatory framework. Should they be treated as securities, commodities, or perhaps something entirely different? The Securities and Exchange Commission (SEC) has previously stated that cryptocurrencies Bitcoin and Etherium are not securities while current SEC chairman Gary Gensler believes thousands of tokens are securities. This ambiguity creates industry confusion and stifles innovation.
One thing is clear: cryptocurrencies will shake up the digital and financial world for years to come, and Washington needs to learn how to appropriately adapt lest policymakers stifle one of the most promising innovations in decades.
What are stablecoins?
Stablecoins are unique from other forms of digital assets in that their value is pegged to a commodity, commonly a fiat currency. This means that for a stablecoin whose value is designed to be tied to the United States Dollar, that coin should always maintain a value of approximately $1 per token.
Stablecoins function as an alternative to high-volatility cryptocurrencies like Bitcoin as a medium of exchange. These coins accomplish a stable price point by either maintaining reserves of assets or through algorithms designed to control supply.
Stablecoins are a tremendous tool for financial inclusion. They provide an opportunity for millions of unbanked and underbanked Americans to participate in the financial system that they otherwise were precluded from or distrustful of.
What are non-fungible tokens (NFTs)?
NFTs are digital assets with unique identification codes to distinguish them from each other. Whereas cryptocurrencies are identical to each other (one bitcoin is equivalent to any other bitcoin), NFTs are unique digital assets that exist on a blockchain and cannot be replicated.
These tokens can represent a variety of real-world items and can be used to reduce the probability of fraud. For example, an NFT can make it easier for different actors in a supply chain to track the production and sale of goods throughout the entire process. They can even be used to track vehicle registrations and medical records in a safe, secure, and streamlined manner.
How to move forward.
The next phase of the internet is fast approaching, one that is decentralized, open, and offers users greater utility. Digital assets and blockchain technology are at the center of this rapid shift and upending the way we think about both the digital and financial world.
There’s no doubt that these innovations offer tremendous potential, which makes it all the more important that policymakers take a careful approach and don’t risk quashing this exciting technology.
The current ambiguity that surrounds digital assets harms innovators as they are unsure of the rules of the road that govern this space. With thousands of unique digital assets on the market, it is impossible to fit all of them into one neat bucket. Those that act like commodities should be treated as commodities, and those that act like securities should be treated as securities.
It is the role of Congress to construct a clear regulatory framework that defines how these assets should be treated. That framework must work to bring digital assets into the fold of the traditional financial system and recognize the nuances between different products and how they operate. Critically, any framework must also take a light-touch approach to government involvement. The objective of any framework must be to foster innovation, not regulate this promising industry out of existence.