What Lessons From U.S. history Can Help Inform and Predict Future Outcomes for Crypto Regulation?
Thinking a lot lately about how crypto depends on the law to survive, yet is also in constant conflict with the people making those laws. And, what if any lessons from U.S. history can we draw on to help predict the outcome of all this?
Cryptocurrency and blockchain technology today can be seen as being in a similar situation as other disruptive technologies in the past—including the mass adoption of railroads, telegraphs, and the internet. Each of these technologies transformed society and economies in their own unique ways and led to the passage of new regulations and policies by law makers that worked to manage and temper their impact.
Let's look at a couple of examples:
Railroads and the Sherman Antitrust Act: Railroads in the late 19th century transformed the American economy, making it possible to ship goods and people across the country quickly and efficiently. However, the railroad companies also had a great deal of power and were able to fix prices and create monopolies, which led to widespread public outrage and calls for regulation. In response, the U.S. government passed the Sherman Antitrust Act in 1890, which prohibited business activities that federal government regulators deemed to be anticompetitive. This law set a precedent for government regulation of powerful industries and could be a predictive model for how governments may ultimately regulate the cryptocurrency sector. Like the railroads, cryptocurrencies and blockchain technology have the potential to greatly transform economies and societies, but they also present threats and challenges in terms of monopoly power (in the form of mining pools or large holders), fraud, and criminal use. This may particularly true with respect to the ongoing struggle between centralized and decentralized approaches to blockchain technology—specifically the continued assault on unheated wallet providers due to KYC and AML concerns.
Telecommunications and the Communications Act of 1934: This law created the Federal Communications Commission (FCC) with the goal of regulating interstate and international communications by radio, television, wire, satellite, and cable. The establishment of a regulatory body for the industry helped promote competition, ensure service across the country, and manage the limited resources (like radio frequencies). In the area of crypto, it’s still unclear what regulatory agencies should be in be policing the space—CFTC or SEC? Could a hybrid regulatory body emerge from the current legislative debate and regulatory power-gap that might fabric a specific framework for blockchain technologies that ensures competition and promotes fair and lawful use-cases.
Internet and the Dotcom Bubble: The internet, much like cryptocurrency today, was seen as a revolutionary technology with the potential to change the world. However, in the late 1990s, over-enthusiasm led to a speculative bubble, where many internet-based companies ("dotcoms") were vastly overvalued, which eventually led to a crash. This led to tighter regulation of securities, as well as a greater emphasis on business fundamentals rather than hype. We are currently witnessing the exact same pattern unfold in crypto as we slog through the current bear market. Just as in the post-Dotcom bubble era, government was forced to step in with regulations to protect investors and limit speculative trading. This is no doubt one of the greatest driving factors in the current clammer for more reforms in crypto and provides an excellent predictive model for what we can expect to see come out of the current legislative process.
It's of course worth remembering that cryptocurrency sector is still relatively young, and the regulatory environment is constantly changing. Changing so fast that I can barely keep up most days! However, these historical precedents can offer valuable lessons in how regulation might evolve. The goal, as with previous disruptive technologies, will be to strike a balance between allowing innovation and preventing misuse.
Here are several lessons from these historic events that can be applied to the ongoing development of cryptocurrency regulation:
Regulation is inevitable: As seen with railroads, telecommunications, and the internet, whenever a new technology has the potential to significantly disrupt society or the economy, regulation is inevitable. As cryptocurrencies continue to grow and become more integrated into the financial system, it is likely that more comprehensive regulations will be implemented.
Regulation usually aims to protect consumers and promote fair competition: The Sherman Antitrust Act and Communications Act both had the intention of protecting consumers from monopolistic behaviors and promoting fair competition. For cryptocurrencies, regulations might aim to protect investors from scams and market manipulation, ensure transparency of transactions, and prevent large entities (like mining pools, whales and unregulated platforms) from having too much control over the market.
Regulation may not kill innovation, but it can change its direction: The introduction of regulatory frameworks can influence how technology evolves. For instance, after the Dotcom Bubble, regulatory changes and shifts in investor behavior led to more emphasis on sustainable business models over mere speculation. In the crypto space, regulations might lead to the rise of more compliant, transparent, and sustainable projects. This of course must be balanced with the need to maintain and protect as much of the the decentralized ethos that started the crypto revolution in the first place.
Regulation is typically reactive, not proactive: Historically, regulation often comes after significant events, such as market crashes or scandals- (FTX and Celsius for example). Similarly, crypto regulations could be triggered by significant events, such as large-scale frauds, hacks, or market crashes that harm consumers. There is no shortage of news reports about these fiascos.
Balancing regulation and innovation is a challenge: Striking a balance between fostering innovation and protecting consumers and financial stability is complex and often leads to regulatory lag. The speed at which crypto technology is developing could further complicate this.
Global coordination might be necessary: The nature of cryptocurrencies is borderless, making them inherently international. Therefore, it's likely that effective regulation will require international cooperation to prevent regulatory arbitrage. Some of the current proposed legislation aims to infuse a global awareness when it comes to blockchain regulation and enforcement. That’s a good thing
Given these lessons, it's my hope that the US will continue to develop and implement measured and responsive regulations for cryptocurrencies. These requires establishing clear legal definitions for different types of crypto assets, setting rules for initial coin offerings (ICOs), implementing security measures to prevent hacks and fraud, and developing guidelines for how crypto assets should be taxed and KYC’d. Until this is all resolved, it’s likely we'll continue to see more enforcement actions against non-compliant actors in the crypto space and more anti-crypto rhetoric from both sides of the political isle in the U.S..