The Crypto Correction Shows the Market Working

This summer has seen chaos in the cryptocurrency market, with major corrections in digital currencies and key crypto institutions. Many looking at this scenario — like former Clinton-era <a href="https://www.theguardian.com/technology/commentisfree/2022/jun/19/the-crypto-crash-all-ponzi-schemes-topple-eventually" rel="noopener ugc nofollow" target="_blank">Labor Secretary Robert Reich</a> — believe these events highlight the need for extensive new regulation of this nascent market, including potentially treating cryptocurrencies as tradable securities. In our view, this is exactly the wrong time to be imposing massive new securities-style regulations. The result would be to strangle this new industry or worse, push it overseas. The right approach is to recognize the most recent correction for what it is: the appropriate — albeit belated — functioning of markets to address widespread overextension. The crypto market may be able to benefit from some broad regulatory guidance and basic guardrails to protect consumers and national security, but we ought not let our zeal for regulation drive this important industry into the ground. There can be little question, <a href="https://www.cnbc.com/2022/06/15/bill-gates-says-crypto-and-nfts-are-based-on-greater-fool-theory.html" rel="noopener ugc nofollow" target="_blank">as many have noted</a>, that crypto has long been dramatically overvalued relative to its fundamentals. As such, not only was the recent correction likely, but it is actually a much-needed remedy to overheated speculation. It demonstrates that traditional market mechanisms can still work well, and that the feverish increase in valuations of both cryptocurrencies and crypto companies was overblown. Crypto’s dramatic rise and disruptive impact also created challenges. The presence of unsavory early adopters — including nation-state actors bent on disinformation, hackers exploiting weak security to get paid, and those hiding illicit financing schemes by governments, terrorists, and other criminals — has sparked a valid backlash from many government officials when it comes to seeing crypto as a legitimate private store of value. However, if we do what many long-time regulators and academics like Reich and SEC Chairman <a href="https://www.barrons.com/advisor/articles/gensler-toomey-hearing-crypto-regulation-51663273585?mod=article_inline" rel="noopener ugc nofollow" target="_blank">Gary Gensler</a> want — like applying ill-fitting securities laws to this new industry — we may severely stifle our nation’s ability to remain at the forefront of this transformative technology. Though there is little doubt that cryptocurrencies can, if misused, pose a critical threat to our economic and national security, it is also true that, if harnessed correctly, crypto can help maintain American leadership of free and open markets. Likewise, appropriately limited regulation can easily correct some of the excesses we’ve seen to date. To that end, Congress should initially set out a broad policy framework, ideally in bipartisan legislation, like the <a href="https://www.congress.gov/bill/117th-congress/senate-bill/4356/text" rel="noopener ugc nofollow" target="_blank">proposal</a> by Sens. Cynthia Lummis and Kirsten Gillibrand. It sets out the key policy objectives for crypto regulation, including accounting for national security issues, and seeks input from the executive branch about which agencies, if any, ought to regulate in this space and what regulatory approaches they would propose in light of the congressional policy framework. Only after setting out such a framework and getting input back from the executive branch should Congress provide detailed and narrow regulatory authority to one or more federal agencies. <a href="https://thescif.org/the-crypto-correction-shows-the-market-working-b0cdc3d0146f">Learn More</a>