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In 2022, many consumers suffered from fraud, scams (CA DFPI has a crypto scam site), bankruptcies, and failed projects in the crypto industry.  These incidents have led some to question whether the crypto industry is doing more harm than good for consumers.  However, there are many potential benefits to crypto technology and the industry should not be painted with a broad brush.  For example, smart contracts and stablecoins can more efficiently and cost effectively provide escrow and payments to consumers respectively.  Consumers could generally benefit from broader blockchain financial solutions and regulators should strive to support this innovation in a safe and sound manner.

Based on the negative incidents in 2022, regulators have justifiably taken a more aggressive stance toward crypto.  For example, the recent joint statement by bank regulators states that holding or issuing crypto-assets is “inconsistent with safe and sound banking practices.”  This has led many banks to stop banking crypto companies, which threatens to divorce fiat and crypto.  Chokepoint 2.0 is an attempt to ringfence banks from crypto and thereby protect the safety and soundness of the banking system.

While bank regulators have largely avoided regulating cryptocurrency, the Securities and Exchange Commission (SEC) has stepped in to become the primary regulator for this emerging industry. The SEC has taken an approach of ramping up its regulation through enforcement actions. One recent example of this was its enforcement action against Kraken’s staking program, which received one dissent from Commissioner Hester Peirce.  Peirce argues that “using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.” Furthermore, regulation through enforcement action creates uncertainty for companies seeking to comply with regulations. Companies cannot rely on regulatory rulemaking and are left guessing which activities regulators will target with enforcement next. This creates a dynamic where companies that do not prioritize compliance have an economic advantage over those that do. A more efficient and fair approach to regulation would be to propose rulemaking, allow stakeholders to comment, and finalize regulations that protect consumers, allow compliant companies to operate with certainty, and take action against non-compliant companies.

As we zoom out from the United States, we see that regulators in other jurisdictions are adopting a more progressive approach towards crypto. The European Union has passed the Markets in Crypto-Assets (MiCA) regulation, Dubai has established the Virtual Assets Regulatory Authority (VARA), and the Monetary Authority of Singapore (MAS) has adopted a balanced regulatory framework for crypto. Not only do these jurisdictions provide regulatory clarity, but they also take a systematic approach towards protecting consumers. Unfortunately, the US policy approach is diverging from these jurisdictions, putting it at risk of falling behind in crypto innovation or pushing consumers towards more crypto-friendly foreign jurisdictions.

To better support innovation in a safe and sound manner, the US can implement several methods. Firstly, Congress should establish a committee to monitor new innovations that may require regulation. The committee should designate an existing or new regulator to oversee emerging enterprises related to the innovation. Currently, regulatory jurisdiction over crypto is contested among the SEC, CFTC, and bank regulators. Although Executive Order 14067 aimed to clarify jurisdiction, it increased the number of agencies involved in policy, guidance, and regulation over crypto. A congressional arbiter could quickly resolve jurisdictional issues and provide proper authority to the designated regulator. Additionally, regulating new innovations extends beyond crypto to artificial intelligence and emerging technologies.

To stay up to date on new innovations and their impact on consumers, regulators must take a more proactive approach and engage with the industry. The Consumer Financial Protection Bureau’s (CFPB) Project Catalyst is a successful example of how regulators can promote consumer-friendly innovation by collaborating with the industry. Through this initiative, the CFPB has increased its outreach to FinTech companies to gain a better understanding of how new technologies can benefit and potentially harm consumers. Project Catalyst has also advocated for revamping legacy regulations, reducing regulatory uncertainty, and other regulatory barriers to innovation. Regulators can also use no-action letters to review new experiments on a controlled and small scale to benefit consumers.

Overall, while there have been some challenges in the crypto industry, there is significant potential for crypto to benefit consumers in a number of ways. By taking a more balanced and proactive approach to regulation, regulators can help ensure that this potential is realized while also protecting consumers.

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