Crypto Regulation Is Finally Starting To Catch Up To Market Innovation

Regulation is rarely celebrated by any market sector, nor the investors in those sectors, but the news that an Executive Order pertaining to cryptoassets was to be signed was greeted enthusiastically by virtually all market actors in the crypto space. This is even more interesting when the executive order itself is reviewed, with no specific actions, policies, guidelines, or other rules delineated within this document. Despite this, bitcoin and other cryptoassets rallied on the news of the order being signed, albeit briefly, and there seemed to be a shift in sentiment in the marketplace as a whole. Even though there was no substantive change in policy, nor a timeline produced or even alluded to, there was a feeling of real progress as a result of this announcement.

This positive sentiment is even more interesting when viewed through the lens of the still murky valuation and tax treatment of cryptoassets. As tax season is firmly underway at this point, and tax practitioners the world over (but especially in the U.S.) continue to grapple with the ambiguity and uncertainty surrounding crypto, there are still plenty of questions left unanswered. Setting these taxes issues aside, which is easier said than done, there are several reasons why investors were correct in responding to the news around this order in a positive way.

Let’s take a look at why, despite the lack of specifics, this announcement contains positive news for the crypto space.

Crypto will not be banned. Despite the increased interest from investors, individual users, and institutional funds in the cryptoasset space, there has been the threat of a ban or crackdown lurking the background. Although the United States has not made any moves to this effect, several other major markets – including China – have actively and vigorously moved to squash private sector innovation. With several prominent lawmakers continuously focusing on the potential negative effects of cryptocurrencies, this possibility was remote, but not entirely unthinkable.

Upon reviewing the actual text of the order itself, and in spite of the lack of definitive rule-making guidance, the acknowledgement of the benefits of crypto was significant. By publicly mentioning the risks and benefits of crypto on equal footing it seems like a significant crackdown or partial ban around certain crypto activities is off the table.

In other words, policymakers have publicly recognized the fact that crypto can be a force for innovation and economic progress.

Crypto competition is real. Another additional aspect of the order that is worth analyzing is that the order made several prominent mentions of the competitive nature of the blockchain and cryptoasset space. Mass media might focus on price volatility, trading volumes of certain specific cryptocurrencies, scams, and frauds, but the implications of blockchain-based assets expand far beyond those headlines. Blockchain and cryptoassets have been proven to work and deliver value to the marketplace, and this value is continuously reinforced by the continued – and increasing – investment in the sector by institutions and nation-states alike.

As has been mentioned in numerous media outlets, both written and otherwise, the global reserve currency status of the US dollar provides lower borrowing costs and an almost endless demand for the dollar. This in turn provides the U.S. with an economic advantage, objectively speaking, over any nation in the world. Such as position, however, is not guaranteed, and like any other financial instrument or technology, currencies also should be periodically updated and upgraded.

The mention that the administration is publicly considering and discussing a digital dollar is a positive step forward in the direction of modernizing the dollar, and positioning the currency for continued leadership in the global ecosystem. While doing so will be a long and complicated process, the fact that this initiative is part of the administrations plans for crypto was celebrated by proponents of a crypto-dollar.

Comprehensive policy is coming. One last component of this executive order that is cause for celebration is that, throughout the order, there was a consistent and recurring theme of the need for U.S. regulatory policy to be developed and implemented on a comprehensive basis. The current approach, as outlined in the document itself, has been a scattershot technique that has just led to confusion, ambiguity, and uncertainty for all market participants. Virtually every regulatory agency related to financial markets and instruments has been issuing pronouncements and updates since bitcoin burst into the mainstream conversation.

This executive order, not a cure-all by any stretch of the imagination, issued a clear mandate for U.S. regulatory agencies to coordinate on a comprehensive cryptoasset policy. In addition to removing the possibility of a ban, shadow-ban, or crackdown on the sector at large, a more holistic approach to crypto will 1) encourage thoughtful and deeper conversations, and 2) create more comprehensive regulation that reflects the growing complexity of the space.

Executive orders are not the same as Congressional legislation, nor are they always associated with reasonable and well thought out positions. That said, the recent issuance of an executive order by the administration connected to the crypto sector is cause for cautious optimism for several reasons. Competition and innovative thinking require comprehensive regulation that balances private sector creativity with the needs to protect investors and institutions, and this executive order is a good step in this direction. A first step, but positive progress toward developing flexible and market friendly regulation for the fast growing and job creating crypto space.