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Innovation is essential to economic growth and higher living standards. Better tools and techniques that make us more productive are requirements of wealth creation. Still, innovation attracts its fair share of skeptics whose fears about where new technologies may lead are ripe for exploitation.
Helming the regulatory agencies in Washington, today, are many who seem to prey on fears about the nefarious misuse of technology or how innovation will send our jobs and way of life into obsolescence. Yet, with every new wave of technological uptake, the U.S. economy has created more and better paying jobs than existed before, owing to the increasing abundance produced and invested. Such progress would be impossible without entrepreneurs and their innovations.
Consider blockchain – one of the most important innovations to emerge from the financial technology revolution of the past couple decades. Blockchain is most commonly associated with cryptocurrencies—digital currencies that users exchange through decentralized computer networks—and is valued for its ability to reduce the time, cost, and security risks of transactions. But new and evolving applications will amplify the utility of blockchain in a wider variety of industries – that is, unless regulators kill it in the crib.
The technology’s early application by pioneering firms operating in the financial sector has created linkages in the public’s mind between blockchain and cryptocurrencies. And, it has given U.S. financial regulators initial dibs on determining who gets to police the crypto companies and how. The experience is a teachable moment.
Securities and Exchange Commission Chairman Gary Gensler has been aggressive in the crypto space, which he says is “rife with hucksters, fraudsters, scam artists.” Gensler considers cryptocurrencies to be securities and his agency as empowered to regulate them (as well as the websites and apps on which those assets are bought and sold).
The SEC has taken actions against numerous crypto companies, including Coinbase, Binance, and Ripple, which operate platforms that see billions of dollars of digital assets exchanged or used each day. The agency’s “regulation by enforcement” approach casts a wide net, which Gensler claims is necessary because writing laws and regulations cannot keep pace with new industry practices and products. This power grab is akin to jamming square pegs into round holes.
Should these companies be regulated? Yes. But are their assets securities? Do the firms’ activities fall within the SEC’s domain? Are they assets to be regulated by the Commodity Futures Trading Commission? Are they something else to be regulated under a different authority by a different agency?
While the SEC sees most cryptocurrencies as the same kind of investment that has been classified as securities for decades, the industry sees securities law as unfit for digital assets and seeks new laws and regulations. Indeed, most current finance rules were created before cryptocurrencies came into existence, yet no new regulatory framework is even being considered in the Biden administration. Meanwhile, the absence of regulatory clarity continues to impede investment in and development of U.S. blockchain applications.
A 2023 decision from the Southern District of New York in the SEC’s lawsuit against Ripple offered some clarity. It ruled that the XRP digital token does not meet the definition of a security when traded on public exchanges. That would seem to put most XRP activity outside the regulatory ambit of the SEC. But the decision also said that Ripple’s XRP sales to institutional investors in the company did meet the definition of a security, preserving the SEC’s enforcement role, however tenuously. One option would be to appeal this and other rulings to the Supreme Court, which has expressed growing wariness over federal agency overreach.
Ultimately, Congress must get back in the game of legislating. It must write and pass new statutes to provide new authorities for new and more appropriate regulations. Although various bills to this effect have been introduced, they remain stuck in a divided Congress, prolonging an absence of the regulatory clarity needed to encourage innovation not only in the crypto space, but in supply chain management and logistics, health care, real estate transactions, election integrity, and other industries and applications where middlemen of intermediate processes create inefficiencies. In the meantime, Bitcoin and XRP are the only digital assets that have achieved any regulatory clarity.
Innovation is crucial to economic development and rising living standards. It is often greeted with trepidation because of the disruptions it may cause. But there are first mover advantages to developing and adopting new technologies. Jurisdictions that welcome innovation as a catalyst for evolution earlier tend to get a head start on investment. The melding of artificial intelligence and blockchain will be a hotbed of innovation, for example. But in order for these and other technologies to take root and enable activities that were far more costly or difficult in the past – and to plant the seeds of spin-off technologies that will comprise a burgeoning ecosystem of life-enhancing, cost-reducing technological applications – regulatory frameworks must be put in place. Whereas regulations, even well-intentioned regulations, can stifle investment in innovation, so too can the uncertainty that stems from an absence of regulations.
In 1997, as the promise (some, at the time, would have said “threat”) of e-Commerce was dawning and terrifying brick-and-mortar businesses, the Clinton administration offered a bold vision of regulatory clarity. It laid down pioneering rules of the road with publication of its “Framework for Global Electronic Commerce.” At the time, Amazon.com was a money-losing online bookstore, Netflix had just begun offering DVD rentals by mail to compete with dominant video rental stores, and the internet was portrayed in much of the business media as a fad or a haven of criminals and scammers.
After the e-commerce rules were issued, everything began to change. Investment flowed into legacy companies using the internet to reduce costs, increase sales, and reap larger profits. Technology also got much better: the internet got faster, bigger, and went wireless; devices got smaller, more powerful, and cheaper. The wealth created increased incomes and living standards in the United States and around the world. That’s the nature of innovation.
The economic success stories of American technology show that if we want to reap the benefits of innovation in our economy, we need to provide early regulatory clarity to let the technology develop and yield its bounty. It was true for e-commerce 30 years ago, and it is true for innovations such as blockchain and crypto today.
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