The persistent disconnect between policymakers and technology invariably results in proposed and approved regulations overlooking pertinent parts of new technologies. US lawmakers and regulators face the challenge of regulating emerging technologies across blockchain and AI. Policymakers, like Senator Cynthia Lummis, have acknowledged the need for innovation in the financial sector and proposed legislation like the Digital Asset Innovation Act to address concerns. However, the SEC’s recent actions against Ripple Labs highlight the current “regulation-through-enforcement” approach, which critics argue stifles innovation.
To be effective, policymakers must become well-versed in cryptocurrency and its underlying technology. As an example, public blockchain assets allow any person or entity to mine coins and tokens; there is a significant threat to the end consumer and national security if mining activity is unmonitored and unchecked. That said, the push has been to regulate blockchain under current regimes that, while exerting their best efforts, cannot create a framework to effectively address the real risks that could threaten our financial markets.
Senators Elizabeth Warren and Roger Marshall are sponsors and supporters of the Digital Asset Anti-Money Laundering Act of 2022, which would provide specific rules for crypto. The drawback is that the rules look like rules we currently have forced to fit blockchain technology. A 51% attack is a significant threat to national security, especially as more users enter the crypto market. Although the bill calls for certain entities to register as Money Services Businesses, it does not address blockchain as a global activity. The influence of USA regulation is significantly diminished outside of our borders.
Policymakers often respond to public concerns. Because they are usually reacting, solutions are sometimes superficial at best and create rules without a nuanced understanding of the technology. This oversight results in attempts to fit crypto into existing regulatory frameworks, disregarding the complexities inherent in new technology. A proactive regulatory approach is likely the most effective for regulating blockchain technologies. Lawmakers and regulators should probably start with a task force that comprises industry leaders, consumers, miners, and keen regulators to determine the regulations, rules and laws that would be most effective. Major crypto players have looked to regulators for regulatory clarity to ensure consumer protection.
Instead of providing comprehensive new frameworks, policymakers are wielding enforcement actions against the industry, as evidenced by SEC lawsuits and high-profile settlements against major crypto companies. This “regulation-through-enforcement” approach is fundamentally flawed; it creates adversaries, not allies, and stifles innovation that the government could leverage to improve itself. Uncertainties of the legal status of digital assets hinder progress. Instead of relying on traditional lobbying efforts, policymakers must actively engage with the crypto community and industry professionals. The lack of defined precedents from unresolved court rulings in crypto cases is detrimental to both sides.
The realization of crypto’s full potential hinges on policymakers grasping its intricacies. It’s time to move beyond superficial approaches and embrace a more informed regulatory environment supporting innovation and security. The crypto community is prepared to engage in constructive dialogue, bridging the gap between technological advancements and effective regulation.
The disconnect between policymakers and technology in regulating blockchain and AI poses significant challenges that need to be addressed through informed, proactive, and collaborative approaches. Policymakers must prioritize engaging with the crypto community, understanding the intricacies of new technologies, and developing regulations that protect users while fostering innovation. Only through a well-informed and inclusive regulatory environment can the US maintain its global leadership in innovation and security in the digital asset space.
