Because no one seems quite sure how to treat cryptocurrency, proposals to regulate it tend to pop up in unexpected places. The most recent is the federal infrastructure bill making its way through Congress. The bill includes a provision that would give federal regulators the ability to impose new tax reporting obligations on cryptocurrency brokers. This particular provision may or may not be the right policy, but if we want to be thoughtful about how we finally regulate cryptocurrency, we should take the issue head on and develop a real regulatory framework.
That starts with understanding what we want from crypto. The knee jerk reaction from the left tends to be: “capitalism is evil, banking is evil, and so therefore crypto must be really evil and we need to regulate it out of existence.” Not surprising. Nor is the knee jerk reaction from many on the right: “crypto represents the personal freedom to choose whether or not to participate in the traditional financial system and we’re not going to abridge those rights.” Also not surprising.
But here’s perhaps a better way to look at it: Like all forms of investing, crypto comes with risk and exposure to some bad actors. But crypto also resonates with many millennials and Gen Z’ers and it’s here to stay. So either we can capture this industry to keep as much of its wealth and revenue generation in the United States as possible or we can drive it away. Keeping it here doesn’t mean anything goes. It just means being thoughtful about how we regulate.
Different federal and state agencies have taken an uncoordinated and largely reactionary attempt at crypto regulation. The SEC has prosecuted fraudulent Initial Coin Offerings, while the CFTC has been shutting down unregistered crypto derivatives trading platforms. The OCC has granted a handful of conditional bank charters to crypto-focused financial institutions. But no one has tried to offer a broader vision. As Congress, the Biden Administration, and different states start accepting the need to regulate crypto more robustly, here are some ideas they should consider.
1. Crypto needs one regulator
By definition, crypto believers are distrustful of the government. Because cryptocurrencies like Bitcoin are sovereign-less, adherents could choose to ignore the U.S. regulatory approach if they think it’s unfair. The more they’re subject to scattered and seemingly arbitrary bureaucracy, the less likely they are to take any of it that seriously. That’s why creating a single regulator for the industry would go a long way toward a coherent, common-sense legal framework. This regulator has to be able to offer both clear guidance on what is and isn’t acceptable and offer safe harbor to actors in the space who aren’t quite sure what the rules are. The regulator also has to see crypto as more than a headache—if that’s all it were, it wouldn’t have this many adherents. The SEC, because of its traditional focus on protecting retail investors from scams and ensuring market integrity, seems like a natural choice. But more importantly, Washington just needs to put someone in charge.
2. That regulator should bring the crypto world into the fold
Rather than treating them like weirdos or outlaws, acknowledge that they’ve built something tangible and give them the recognition they deserve. The SEC should approve crypto ETFs and create a framework to encourage responsible innovation in the DeFi space. Federal regulators should also demand more transparency and accountability for stablecoins, or better yet, seriously evaluate the merits of a digital dollar backed by the Federal Reserve.
3. Tax policy around crypto should be deliberate
That means it shouldn’t be shoehorned into law just because members of Congress are looking for extra revenue to help fund an infrastructure bill. We should have clear tax policies for crypto based on the needs and interests of people participating in the crypto market itself. For example, rules should be developed to account for situations unique to crypto, like fair and clear rules for taxing crypto generated from validating transactions. Additionally, if investors in the stock market can pay a lower capital gains rate on their investments, crypto investors should be able to as well.
4. More states need to get involved
Some states do regulate crypto in different ways—New York requires a BitLicense for crypto exchanges, while Wyoming has created a banking framework to accommodate crypto-focused businesses. But most states have done very little, not even adjusting basic money transmitter license rules and insurance requirements to fit this new sector. That means there’s a lot of uncertainty for crypto businesses about what requires compliance, since the laws predate the technology’s existence. However, oOne of the great benefits of state government is the ability to serve as a laboratory for new policy ideas. States can incentivize the crypto community to invest, to partner, to trust each other. State governments could spur real innovation in areas of traditional state regulation—like insurance and banking—by fostering a safe regulatory space for experimentation.
These ideas would require seeing crypto as a way to capture more global revenue share. If we want more wealth in this country, we should help Americans and American businesses become leaders in this growing space of financial and technological innovation. And since some crypto mining is currently a huge drain on already scant energy resources, the federal and state governments should work with the crypto community to incentivize and promote the growth of proof of stake protocols, which are cleaner alternatives to energy intensive protocols like Bitcoin.
Crypto is not an inherently American innovation, but it is right up our alley. New ideas, new risks, new markets, and new frontiers is what we do best. Yes, protecting retail investors from bad actors is critical, but our regulation and policies can do so much more than that. They can be thoughtfully designed to encourage the development of a new industry.
There are risks at hand with crypto, but also opportunities. So let’s take the time to treat crypto thoughtfully and regulate it with both consumer protection and growth in mind. The infrastructure bill provision certainly isn’t a comprehensive answer to crypto regulation. But it provides an opportunity to debate how smart policies could help make the U.S. a crypto powerhouse in the years to come.
Bradley Tusk is a venture capitalist, political strategist, philanthropist, and writer. Jon Sabol is a managing director at Tusk Strategies, where he focuses on regulatory issues in the fintech, blockchain, and crypto sectors.