The 21st century has ushered in a new era of technological innovation that reaches into almost every aspect of our daily lives. From the creation of social media to emerging technologies such as driverless cars and the Internet of Things, technology is making once-complex tasks easier and transforming daily life. But innovation is disruptive and dynamic, often making it difficult to apply old rules to the new economy. This poses a particular challenge to regulators, who lack appropriate frameworks to assess cutting-edge technologies. When this happens, regulations threaten both innovation and economic growth.
The cryptocurrency revolution and the dynamic market for digital assets are fundamentally changing how businesses and consumers think about financial transactions. While these new digital currencies have the potential to expand access to financial services and foster investment and economic growth, it requires government regulators to tread lightly and let the market innovate and evolve.
Blockchain technology is redefining the rules of financial transactions. A decentralized, self-enforcing public ledger increases transparency, mitigates risks, and reduces the costs of financial transactions. Yet some have raised concerns about these new cryptocurrencies. Regulators worry about the volatility of these assets, as well as their potential misuse by criminal enterprises seeking to transfer resources beyond the reach of the law.
But when assessing such risks, it is important to remember that the current financial services sector is by no means immune to misdeeds. Money laundering and criminal activity are perhaps a bigger threat to our current financial institutions than to the emerging digital currencies. In fact, the centralized nature of the financial sector carries very real risks of data breaches and other crimes.
Cryptocurrencies are decentralized and transactions do not entail sharing the same degree of private information as does the current system. Moreover, the transaction costs associated with these digital assets are much lower because the blockchain upon which they are built is self-enforcing and instantaneous. This eliminates costly verification and authentication processes and ensures more secure dealings. Consumers can transact with confidence as the blockchain provides a public ledger recording the transaction. And the lower transactions and public verification costs allow cryptocurrencies to serve a wider population, creating the ability to serve the unbanked population, not just in the United States, but globally as well.
Overzealous enforcement, however, has the potential to wipe out the benefits of cryptocurrencies while suppressing innovation that enhances the utility of consumers and businesses alike. Importantly, digital assets must be looked at anew; attempting to apply tools developed for markets created well before the internet emerged, or attempting to define digital assets in ways that force them into old regulatory silos will unnecessarily impede the evolution of these dynamic markets.
At the same time, regulators remain unclear when assessing digital assets. Are they currencies, securities, derivatives or commodities? In certain instances, federal regulators in the United States are applying law developed in the 1940s to determine how to classify these assets. These laws are woefully inadequate for digital assets, which has created a degree of uncertainty that hampers innovation and slows the evolution of digital markets.
For the United States, developing the appropriate framework is even more challenging, given the fact that not just federal regulators but state authorities as well are actively working to classify cryptocurrencies and other digital assets, especially in the application of state money transmission laws. The resulting patchwork of regulation can effectively halt further innovation. When this happens, these new financial services technologies will be developed elsewhere in the world, where governments have implemented thoughtful, modern frameworks for oversight.
Other nations have been more adept at updating their laws and have created more welcoming frameworks for cryptocurrencies and blockchain-based assets. Countries like Singapore, Japan and Switzerland are gaining a first-mover advantage over the United States because they have taken a more forward-looking approach for dealing with cryptocurrencies, rather than simply trying to fit them into old, outdated regulatory boxes. This threatens American leadership in these technologies while pushing some of our top innovators overseas to more receptive markets.
Ultimately, the United States can — and should — maintain its lead in the development and application of digital currencies. This competitive edge starts with a clear regulatory path forward for innovators in the space, one that encourages the best aspects of these technologies while addressing head-on potential concerns. Our nation’s lawmakers have the opportunity to pave the way for the next life-changing technology of the 21st century.