The digital asset industry is rapidly growing, with over 18,000 cryptocurrencies and a market cap of $1.2 trillion. However, due to the lack of regulation, the industry is also plagued with scams and fraudulent activities.
Given the size and importance of the industry, there is increasing pressure to regulate the crypto market. As of March 2022, there were more than 200 bills related to cryptocurrency and digital assets pending in state legislatures across the United States, with New York, Hawaii, and Arizona being among the most active jurisdictions.
As the use and popularity of cryptocurrencies continue to grow, regulators and lawmakers are grappling with how to effectively and appropriately regulate this new asset class. The current state of crypto legislation is characterized by a patchwork of laws and regulations, with different jurisdictions taking varying approaches to how cryptocurrencies are treated under the law.
Some countries have embraced cryptocurrencies, seeing them as potential drivers of innovation and economic growth. Others have taken a more cautious approach, concerned about the potential risks posed by unregulated digital assets.
In the United States, for example, regulatory agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have been active in enforcing existing laws to regulate cryptocurrencies. However, there is still a lack of clear regulatory guidance, which has led to uncertainty and confusion for market participants.
Other countries, such as China and India, have taken a more restrictive approach to cryptocurrencies, with outright bans on crypto trading and mining in some cases.
Overall, there is growing recognition among regulators and lawmakers of the need to find a more coherent and consistent approach to regulating this rapidly evolving asset class. This has brought about a series of debates in the crypto industry. Some stakeholders are calling for a more nuanced and collaborative approach to crypto legislation, while some are totally against it. So, how do we reframe this issue to bring everyone aboard and get a consensus?
Importance of reframing how we approach the issue
Reframing how we approach the issue of crypto legislation is crucial for a number of reasons. The current patchwork of laws and regulations across different jurisdictions has continuously led to confusion and uncertainty for market participants, thus hindering innovation and investment in the crypto industry. A more coherent and consistent approach to regulating cryptocurrencies could help to reduce this uncertainty and provide greater clarity for businesses and investors.
Secondly, the current approach to regulating cryptocurrencies often focuses on the risks and challenges posed by these new assets, such as the potential for fraud or money laundering. While it is important to address these risks, a more positive and forward-thinking approach to regulation could also help to unlock the potential benefits of cryptocurrencies, such as their potential to drive innovation and economic growth.
Reframing how we approach crypto legislation can help to foster greater collaboration and cooperation between regulators, businesses, and other stakeholders. By engaging in a more open and inclusive dialogue, we can work towards creating a regulatory framework that balances the need for consumer protection and market integrity with the potential benefits of cryptocurrencies. This could ultimately help to build greater trust and confidence in the crypto industry, leading to increased adoption and growth.
Defining the Problem: The current binary perspective on crypto legislation
The current binary perspective on crypto legislation is characterized by two opposing viewpoints.
On one hand, some believe that cryptocurrencies should be regulated in the same way as traditional financial assets, such as stocks or bonds. They argue that such regulation is necessary to protect investors and ensure the stability of the financial system. This viewpoint is often associated with governments, financial institutions, and other established players in the financial sector.
On the other hand, some believe that cryptocurrencies should be left largely unregulated, as they are decentralized and operate outside of traditional financial systems. They argue that excessive regulation could stifle innovation and limit the potential benefits of cryptocurrencies. This viewpoint is often associated with cryptocurrency enthusiasts, libertarians, and other advocates of decentralized systems.
These two perspectives are often presented as mutually exclusive, with little room for compromise or nuance. However, I believe that a more balanced approach is needed, one that takes into account the unique characteristics of cryptocurrencies while still ensuring investor protection and financial stability.
The limitations of this perspective
Binary perspectives on crypto legislation typically involve viewing it as either entirely good or entirely bad, with little room for nuance or complexity. Here are some limitations of this approach:
- Oversimplification: Treating crypto legislation as a simple yes-or-no proposition fails to take into account the many different aspects and potential outcomes of any legislative action.
- Lack of nuance: Binary perspectives often ignore the many different stakeholders involved in crypto, such as investors, developers, and users, each of whom may have different interests and concerns.
- Stifling innovation: A binary perspective may prioritize either regulation or laissez-faire approaches, potentially stifling innovation and progress in the field.
- Unrealistic expectations: Expecting clear-cut answers to complex questions about crypto legislation may lead to unrealistic expectations, disappointment, and frustration.
- Political polarization: Binary perspectives may contribute to political polarization, as they can lead to the belief that anyone who disagrees with a particular stance is completely wrong or even morally corrupt.
The binary perspective often fails to recognize the diverse range of use cases for cryptocurrencies. Cryptocurrencies can be used for a variety of purposes, from online purchases to international money transfers to investment vehicles. Each use case may require a different approach to regulation, and a more nuanced perspective can help identify the appropriate level of regulation for each use case.
The binary perspective tends to view the crypto industry as a monolithic entity, ignoring the fact that there are many different stakeholders involved, from individual users to large corporations to governments. Each of these stakeholders may have different interests and concerns, and a more nuanced approach can help balance these competing interests.
In short, a more nuanced and complex approach to crypto legislation is needed to account for the complexities of the industry and to ensure that regulation is appropriate for each use case and stakeholder group.
Philosophical Considerations:
It is important to consider the potential impacts of regulation on both individual freedom and societal welfare, as well as the unique challenges posed by decentralized systems.
The role of technology in society: Technology plays a significant role in shaping society and has the potential to greatly impact how we live our lives. With regards to cryptocurrencies, they offer a new way of conducting transactions and may challenge traditional banking systems. It is important to consider how this technology can be used for the benefit of society while also being aware of any potential negative impacts.
The relationship between individual freedom and government regulation: This is a fundamental issue in any discussion about regulation. On one hand, individuals should have the freedom to use cryptocurrencies as they see fit without undue interference from the government. On the other hand, governments have a responsibility to protect citizens from harm, including financial harm. Finding a balance between these two interests is key.
The ethics of regulating decentralized systems: Decentralized systems, like cryptocurrencies, are designed to be resistant to central control. However, this also means that it can be difficult to regulate them in a traditional sense. There are ethical questions to consider around whether it is appropriate to regulate decentralized systems and if so, how to do so without compromising their core principles.
Arguments for a New Approach: The benefits of a more holistic perspective and the risks of a binary approach
A more holistic approach to crypto legislation has several benefits over a binary perspective. Firstly, it allows for a more nuanced understanding of the diverse range of activities and actors within the crypto space. This includes not only cryptocurrencies, but also decentralized finance (DeFi) platforms, non-fungible tokens (NFTs), and other innovative applications of blockchain technology. A holistic perspective recognizes that different activities may require different regulatory approaches and avoids the oversimplification of categorizing all crypto-related activities as either good or bad.
A holistic approach recognizes the potential benefits of cryptocurrencies and blockchain technology for individuals and society. These benefits include financial inclusion, increased transparency, and reduced transaction costs. A binary perspective that sees all crypto-related activities as inherently risky or criminal can overlook these potential benefits.
It can lead to overregulation, stifling innovation, and hindering the potential benefits of blockchain technology. It can create a false sense of security by assuming that all risky activities have been effectively eliminated through regulation. This can lead to complacency and a failure to address emerging risks and challenges.
Case studies of successful regulatory frameworks
Several successful regulatory frameworks take a more holistic approach to crypto legislation. For example, Let’s take a look at Japan. The Bank of Japan (BOJ) neither supports nor prohibits the use of crypto-assets. Its laws recognize bitcoin and other crypto assets as a form of payment method, not a legally-recognized currency. Hence the birth of the Payment Services Act.
Japan’s Payment Services Act distinguishes between different types of virtual currencies and regulates them accordingly. The legal status of tokens is determined based on their functions and uses. It also requires exchanges to register with the Financial Services Agency and comply with strict security and governance requirements/legislation for Anti-money laundering and combating the financing of terrorism (AML/CFT).
In 2017, the National Tax Agency of Japan determined that earnings on cryptocurrencies should be classified as “miscellaneous income”. Hence purchasers of these cryptocurrencies should be compensated accordingly. This approach has helped to establish Japan as a leader in the crypto space while also protecting consumers and preventing illicit activities.
Another successful example is Switzerland’s regulatory framework, which takes a principles-based approach that emphasizes transparency, stability, and innovation. This approach has attracted many crypto-related businesses to Switzerland and helped to establish the country as a leading hub for blockchain technology.
The tax rate is also favourable compared to other first-world countries. Switzerland’s Federal Capital Gains Tax for crypto caps at 7.8% and applies to crypto businesses and self-employed traders. The tax is levied on profits only, and private investors do not even have to pay the tax on their personal wealth.
Successful regulatory frameworks, such as those in Japan and Switzerland, provide valuable examples of a more nuanced and effective approach to crypto legislation.
Reframing the Conversation: How to shift the discourse around crypto legislation
Shifting the discourse around crypto legislation requires engaging diverse stakeholders, including policymakers, regulators, industry experts, academics, and civil society organizations. This is important because it ensures that different perspectives and voices are heard and that regulatory frameworks are developed through a collaborative and inclusive process.
One way to engage diverse stakeholders is through public consultations, roundtables, and other forms of dialogue. These platforms can provide opportunities for stakeholders to share their perspectives and provide feedback on proposed regulatory frameworks. It is also important to engage with underrepresented and marginalized communities, such as low-income individuals and people of colour, to ensure that their perspectives and needs are taken into account.
Another way to reframe the conversation is by shifting the focus from a narrow regulatory perspective to a broader societal perspective. This means recognizing that the regulation of crypto is not just a technical or financial issue, but also a social issue that affects people’s lives in various ways. For example, regulations that hinder financial inclusion can disproportionately affect marginalized communities that may rely on crypto for access to financial services.
Reframing can also involve reframing the language used in the discourse. For example, instead of framing the issue as a binary choice between regulation and no regulation, we can reframe it as a choice between effective and ineffective regulation. This can help to shift the conversation from a divisive debate to a more constructive dialogue focused on finding solutions that benefit all stakeholders.
This particular point of reframing the language used in the discourse has worked in other areas of public policy. So why not in crypto also?
Examples of reframing in other areas of public policy include the shift from “climate change” to “climate crisis” or “climate emergency,” which highlights the urgency and severity of the issue. Another example is the shift from “criminal justice” to “criminal legal system,” which emphasizes the need for systemic change rather than simply punishing individual offenders.
This “reframing” can help to ensure that regulatory frameworks are developed through a collaborative and inclusive process that takes into account the diverse needs and perspectives of all stakeholders.
Closing thoughts!
The thesis statement of my article is that there is a need for a more nuanced and collaborative approach to crypto legislation, as opposed to the current binary perspective. I have argued that a more holistic approach can bring about several benefits, such as recognizing the potential benefits of blockchain technology and avoiding overregulation, while also addressing risks and challenges.
I have also emphasized the importance of engaging diverse stakeholders in the regulatory process, reframing the conversation to focus on broader societal perspectives, and learning from successful regulatory frameworks such as those in Japan and Switzerland.
I call for a more nuanced and collaborative approach to crypto legislation that recognizes the diverse range of activities and actors within the crypto space while balancing the potential benefits of blockchain technology with the need for consumer protection and the prevention of illicit activities.
I urge policymakers, regulators, industry experts, academics, and civil society organizations to come together in a collaborative and inclusive process to develop effective regulatory frameworks that benefit all stakeholders. By doing so, we can ensure that the crypto space continues to innovate and grow while also protecting consumers and preventing illicit activities.
