Effective crypto regulation takes time and caution. here’s why

  • Premature regulation can hold back innovation and create unintended results.
  • Caution, collaboration and neutrality are essential when approaching cryptographic regulation.

The United States Congress is negotiating a bipartisan infrastructure bill in hopes of passing sweeping legislation that will invest in areas such as transportation, climate initiatives and broadband access. Buried in the text, however, was something seemingly unrelated: a proposal for the taxation of cryptocurrencies.

We will not go into the details of the proposal and the corresponding amendments (you can read more about this here if you are interested). Instead, we will focus on a subject that is not often taken to heart: premature regulation.

To begin with, let’s establish that we are not against regulation. At the World Economic Forum, a big part of our role is to work directly with a global set of stakeholders, including policymakers and regulators, to assess how to accelerate the benefits of technology and mitigate its risks. We are not naive, nor do we deny that there are risks with any new technology and its evolution. With this, crypto is no exception.

This attitude is reflected in much of the crypto community in general. Business, innovation and civil society leaders recognize the role that regulation and policy makers can play. We have seen industry leaders explicitly praise regulatory clarity. Initiatives such as the recently created DeFi Education Fund (DEF) reflect the industry’s willingness to support the education of government actors on these complex topics.

But progress on this front cannot – and should not – happen overnight.

The past decade has provided a better understanding of the shortcomings of the financial system as it stands. In the United States and around the world, we have seen the consequences of increasing inequality, stagnant growth and a lack of transparency. In some cases, the result has been disillusionment and resignation. In others, we have seen large-scale civil unrest.

At a minimum, there are aspects of the current financial system and the regulations around it that don’t work for people all over the world, including the United States. Such a situation requires personal reflection and investigation of what is wrong – and how to think creatively about new abilities and resources. This approach is essential to avoid diving head first into the possibility of recreating or exacerbating the problems of the past.

“Failure to sift through the distinctions – and regulate accordingly – could drastically stifle innovation and progress.”

This is of particular concern with cryptocurrency, where the technology is generally misunderstood by the average person. It’s no one’s fault – the space is relatively new and is growing rapidly. It really is a full time job to stay on top of everything. Crypto is one of the many new areas that policymakers and regulators are juggling, which can make it difficult to fully understand the nuances of technology and services in the space.

This is why it is extremely important to proceed with caution on these matters, ensuring that there is sufficient time to get up to speed on these incredibly complex and new issues. Take, for example, the emerging space of decentralized finance, which is building a variety of financial services on top of blockchain technology.

Decentralized Finance Decision-Makers Toolkit

Decentralized Finance Decision-Makers Toolkit

Image: World Economic Forum

As the graphic above shows, although they are grouped together for obvious reasons, DeFi services are not monolithic. They represent various parts of the technical stack, various purposes and services, and have different interactions with other services within the space. At the same time, DeFi is explicitly not identical to traditional finance, although there may be some similarities and overlaps. Failure to sift through the distinctions and regulate accordingly could drastically stifle innovation and progress.

Here are some principles that policymakers and regulators should keep in mind as they move down this path:

  • Don’t rush into regulations: Regulation can add value when it is carefully considered, evaluated and weighed. Developing legislative rules is usually a slow process for a reason.
  • Don’t fear the industry: Many industry players are clear on the potential risks in space. Honest projects welcome clarity and seek to avoid accidents on the road. Dialogue between the public and private sectors can be extremely useful and has – in our experience – led to action-oriented results like the DeFi Policy-Maker Toolkit and the CBDC Policy-Maker Toolkit.
  • Technological neutrality is essential: Regulating the underlying technology itself, especially in a space that evolves as rapidly as crypto, can be a quick path to unintentionally anointing winners who may or may not be the optimal choice for voters. Being technologically neutral has always been a fundamental tenet of policymaking for this reason, and this approach is not something that requires change at this point.

Ultimately, thoughtful, cautious and collaborative jurisdictions will find themselves attracting the new era of internet pioneers. In doing so, these jurisdictions will provide their constituents with a critical asset: frontline access to the digital economy.

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