In reaction to the volatile events of the last few weeks, both the stock and cryptocurrency markets have taken a deep dive. While this downturn is distressing to many, it has emboldened progressive politicians and activists whose motto is “never let a crisis go to waste.”
Critics of cryptocurrency have doubled down on their calls for heavy-handed regulation. They have seized on the struggles of stablecoin TerraUSD
Yet there are some important facts to keep in mind before we rush into panic-driven regulation. One is that TerraUSD appears to be an outlier among stablecoins — cryptocurrencies pegged to hard assets such as the dollar – and nearly all of the leading stablecoins have so far held their value.
As listed on CoinMarketCap as of this writing, the top stablecoins by volume and market cap — including USD Coin
Further, regulation that is arbitrary and overly burdensome actually adds volatility to the cryptocurrency and stablecoin markets. As I wrote in a 2019 paper on cryptocurrency, “Protecting entrepreneurs from government overreach is important not only to ensure that society gains from beneficial innovation, but also to moderate the kind of volatility that arises from government intervention.”
For instance, when China banned certain cryptocurrency exchanges in 2018, the price of Bitcoin
Arbitrary regulatory crackdowns in the U.S. have had similar negative effects on the cryptocurrency market. When the U.S. Securities and Exchange Commission (SEC) threatened various punitive actions against cryptocurrencies as an asset class in January and February of 2018, Bitcoin’s price plummeted by 36 percent.
Currently, the arbitrary “regulation by enforcement” in which the SEC deems cryptocurrencies as “securities” without authority from Congress or even formal rulemaking also creates uncertainty that weighs down the markets. As does the stifling regulatory framework for stablecoins proposed last fall in the report of the President’s Working Group on Financial Markets (PWG) that would effectively limit stablecoin issuance to large banks.
The volatility in the crypto and stablecoin markets should indeed get the proverbial ball moving forward on regulatory policy, but with a focus on the right type of regulation. Policymakers should start designing a regulatory framework that focuses on disclosure and the prevention and punishment of fraud but otherwise leaves consumers, entrepreneurs, and investors free to make their own choices and take their own risks. They should also utilize the concepts of “competitive federalism” and “competitive regulation” to give stablecoin buyers and issuers the choice of a primary regulator.
Draft legislation from Senate Banking Committee Chairman Pat Toomey (R-PA) is a big step in the right direction. Toomey’s Stablecoin Transparency of Reserves and Uniform Safe Transactions (Stablecoin TRUST) Act creates a regulatory framework that zooms in on disclosure and preventing fraud yet preserves and enhances competition and choice in the stablecoin market.
Under Toomey’s bill, most stablecoin issuers would be required to disclose the precise assets that back the stablecoin and how the redemptions work. In return, the issuers could operate with their choice of primary regulator and with limits on the authority of other regulatory agencies over their businesses.
The bill allows stablecoin issuers to either choose a federal license from the Office of the Comptroller of the Currency or a money transmitting or other stablecoin-issuing license from a state. The bill also allows banks to issue stablecoins that meet the disclosure requirements if they create legal entities for the stablecoins separated from depositor funds.
Issuers who meet these requirements will be shielded from arbitrary actions by the SEC, as the bill explicitly bars the SEC from regulating these stablecoins as securities. This would greatly reduce regulatory uncertainty, as the SEC has taken the position that virtually any circulating cryptocurrency may be deemed a security and be subject to many of the regulations that have driven companies away from the stock market.
The bill’s giving stablecoin issuers the choice of receiving their licenses or charters from the federal government or the states is consistent with the system of “competitive federalism” envisioned by the Constitution’s framers. As George Mason University Law Professor and CEI board member Michael Greve writes in his book Real Federalism, “Real federalism aims to provide citizens with choices among different sovereigns [and] regulatory regimes.”
My CEI colleagues and I have called for bolstering the optional federal chartering that exists for banking and utilizing it for small-dollar lending and insurance. Such a system would also be the best approach for regulation of the frontier industry of stablecoins.
It is especially important that the federal government not be the sole licensor for stablecoins given the dearth of its approval for new – or “de novo” – bank charters since the Obama administration. As I have written, the federal government only approved one new bank from 2010 to 2015, and only a handful since then. This type of bureaucratic backlog creates a risk of stagnation in an already troubled economy.
In uncertain and volatile times, created in significant part by government spending and shutdowns and lockdowns of businesses, it’s more important than ever to not add more chaos to cryptocurrency or any other sector with sweeping and unfocused regulation. Instead, policymakers must create regulatory frameworks that are stable applications of the rule of law.
John Berlau is a senior fellow at the Competitive Enterprise Institute and author of the book George Washington, Entrepreneur: How Our Founding Father’s Private Business Pursuits Changed America and the Word
Former Competitive Enterprise Institute Research Associate Christian Johannessen contributed to this column.
Source: https://www.forbes.com/sites/johnberlau/2022/05/20/panic-driven-crypto–stablecoin-regulation-would-create-further-instability/