Jamil N Jaffer is the founder and executive director of the National Security Institute at George Mason University. He previously held senior management and national security roles at a publicly traded cybersecurity company.
John Poulson is manager of public policy and government relations at GMU’s National Security Institute. He previously served as Special Assistant to the Advisor for International Affairs at the US Treasury Department.
This summer saw chaos in the cryptocurrency market, with significant corrections in digital currencies and major crypto institutions. Many looking at this scenario, including former Clinton-era Labor Secretary Robert Reich, believe that these events highlight the need for sweeping new regulation of this nascent market, including treating cryptocurrencies as tradable securities.
In our view, this is exactly the wrong time to introduce massive new securities-style regulations. The result would be to stifle this new industry, or worse, push it out.
The right approach is to recognize the latest correction for what it is: markets acting appropriately—albeit belatedly—to eliminate widespread overextension. The cryptocurrency market could benefit from some broad regulatory guidance and basic safeguards to protect consumers and national security, but we must not allow our regulatory effort to accommodate this important industry.
As many have pointed out, there can be little question that cryptocurrency has long been overvalued relative to its fundamentals.
So not only was the final fix likely, but it was also a much-needed vehicle for overheated speculation. This demonstrates that traditional market mechanisms can still work well and that feverish growth in the prices of both cryptocurrencies and crypto companies is overblown.
Crypto’s dramatic rise and disruptive influence have also created problems. The presence of unsavory early adopters, including disinformation-prone state actors, hackers exploiting weak security to extract payments, and governments concealing illicit funding schemes by terrorists and other criminals, has prompted a strong backlash from many government officials. seeing cryptocurrency as a legitimate private store of value.
However, if we do what many long-time regulators and academics like Reich and SEC Chairman Gary Gensler want — like imposing securities laws that don’t fit this new industry — we could seriously stifle the U.S.’s ability to stay at the forefront of this transformation. technology.
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While there is no doubt that cryptocurrencies can pose a critical threat to our economic and national security if misused, if used properly, cryptocurrencies can help preserve America’s leadership in free and open markets. Likewise, appropriately limited regulation could easily correct some of the excesses we’ve seen to date.
To that end, Congress should first create a broad policy framework in bipartisan legislation, such as the one proposed by Senators Cynthia Lummis and Kirsten Gillibrand. It sets key policy goals for cryptocurrency regulation, including accounting for national security concerns, and seeks input from the executive branch on what, if any, agencies should regulate in this space and what regulatory approaches they will propose in light of Congressional mandates. policy framework.
Only after such a framework is established and executive input is received should Congress grant detailed and narrow regulatory authority to one or more federal agencies.
Such a process can be longer and more involved than usual. But it’s especially important where economic, national security and innovation imperatives intersect, as with cryptocurrency. Moreover, given the pace of evolution in the cryptocurrency industry, a careful, more deliberate approach to regulation, including significant, detailed buy-in from congress, seems like a better way forward.
To be sure, any regulation will have to address the real problems of money laundering, sanctions evasion, terrorist financing and other criminal behavior we see in the cryptocurrency market, as well as the implications of this new technology for the traditional nation-state. monopoly in monetary policy.
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Many of these problems can be seen in the Treasury Department’s decision to sanction Tornado Cash, a virtual currency mixing service, for its use in money laundering and sanctions evasion. A heated debate has erupted over the legality of using property-based sanctions.
It is critical to ensure that cryptocurrency innovation takes place in free economies and creates greater financial inclusion, rather than being hijacked by authoritarian nation-states seeking to control their own people and export repression abroad. The open, rules-based, private market system built by the United States and our allies is the right home for this innovation, not the land of digital authoritarians and human rights abusers.
As the cryptocurrency industry works through a correction, we recognize and encourage its development as a transformative capability with the potential to advance important U.S. economic and national security goals that are now more important than ever. Of all the areas that government can regulate, this is one where there is a strong bias in favor of innovation and against hasty action.
By keeping these principles in mind as regulators act and Congress enacts legislation, we can effectively balance the need to protect America’s national security while also promoting our economic interests.
This article was published by Barron’s, a Dow Jones Group affiliate