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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is president of Coinfund, a crypto asset-focused investment firm
For the crypto industry, the 2024 US election was an important turning point on its road to redemption and legitimacy as an investable asset class. With more than 290 pro-crypto members of Congress and a president-elect who has proclaimed that the US will be the crypto capital of the planet, the crypto industry finally finds itself being supported, rather than fought, by the government.
This change can help the US boost its status as the global leader in technology and innovation as the new internet powered by blockchains, artificial intelligence and cryptocurrency takes shape.
But progress is only possible if the post-election exuberance translates to thoughtful policy. For starters, regulators must immediately change their approach to the markets they regulate.
During the Biden administration’s regulation by enforcement regime, agencies — confronted with a new asset class that did not fit neatly into decades-old regulations — prioritised extending their jurisdictional reach.
The fundamental principle — preventing bad actors from doing harm — must remain a foundational goal. But the enforcement actions and lawsuits under Biden blurred regulatory boundaries, drained agency (and taxpayer) resources and cost American companies more than $400mn, according to industry estimates. While regulators squabbled, fraudsters perpetrated some of the largest criminal frauds in US history — right under their noses. Market watchdogs do not need new laws or regulations to stop bad actors. It’s a matter of focus and priorities.
To reach its full potential, the crypto industry needs new policies that understand the nuances of technologies built on decentralised blockchains. One overarching principle must prevail: while companies, institutions and their activities should be regulated, the technology itself should not.
An analogy is the internet as it stands today. It is not illegal to create a website or an app, and nor should it be — but how that service is used is governed by law. As Judge Katherine Polk Failla noted in her dismissal of a lawsuit against crypto trading exchange Uniswap, to do otherwise would be like attempting to hold a payments app such as Venmo liable for a drug deal that used the platform to facilitate a fund transfer.
Clear, transparent and predictable policies, which should include important principles such as client asset protections and disclosures, also should be driven by legislation, not regulatory whims. Clarity will unleash a new class of institutions and attract a generation of intrepid entrepreneurs — the lifeblood of our economic future — who will no longer be burdened by the legal risks and personal liabilities of what has been an all-too-uncertain industry.
Public policy support is long overdue. Bitcoin, the original cryptocurrency, which has hit new highs of more than $100,000 per digital coin, emerged from the ashes of the global financial crisis. The crypto industry, over its decade-and-a-half history, has suffered a series of booms and busts. Along the way, though, the technology matured with the birth of “smart contracts” that unlocked new crypto-powered applications, including decentralised finance (DeFi), gaming, social media and even a 5G wireless network. Today, about $200bn in dollar-pegged stablecoins are already playing an exciting role in extending the greenback as the global reserve currency. Stablecoin issuers already serve as a top 20 holder of Treasury bills in the world.
New normalisation and de-risking paves the way for accelerated adoption. This could not come soon enough. In traditional financial markets, outdated, legacy infrastructure is struggling to handle the load of 24-hours-a-day, seven-days-a-week activity. In crypto markets, though, public blockchains power around-the-clock markets with ease. At a time when economic inequality continues to plague the global population, the universal accessibility of DeFi opens the door for a more equitable system.
The accelerating development of artificial intelligence will also bring opportunities. The openness, transparency and scale achieved by integrating crypto and AI could pave the way for responsible innovation. One example is the World app that Coinfund is an investor in. This allows users to prove, in an anonymous and secure way, that they are indeed a human.
Today, the economic and reputational risks of not having a digital-asset strategy now exceed those of adopting one. With the thoughtful support of policymakers let’s build the system we deserve, together.
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