Federal regulators should trust progress, avoid blockchain red tape

Federal regulators should trust progress, avoid blockchain red tape
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Despite the unbelievable price surging of cryptocurrencies such as Bitcoin over the past year, these technologies and its investors flexed their resilience.

Although it’s famous for creating a new class of millionaires, blockchain technology provides many services beyond cryptocurrencies such as identification, verification, immutable databases and much more. Since blockchain is an infant technology, it will see even more hiccups on its journey to becoming a mature and widely-adopted technology. Unfortunately, regulators such as the Securities and Exchange Commission (SEC) have begun scrutinizing the legality of cryptocurrency exchanges and initial coin offerings (ICOs) at the expense of innovation. If their scrutiny breeds paternalistic regulation, it will jeopardize the United States’ leadership in digital technology and finance.  

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As with any technology, blockchain can be used for good or bad. Technology itself is neutral and therefore leaves humans to determine its uses. Thus, cryptocurrencies such as Bitcoin don't only enable political and human rights activists in countries like Venezuela by providing an avenue for funding, but also can facilitate the financing of terrible crimes such as human trafficking.

Nevertheless, the potential of blockchain technology can lead humanity to a more prosperous and inclusive society by providing services like immutable property registries in developing countries, ensuring data safety including  the ownership of medical records, and provide easier access to lending.

It’s necessary to acknowledge that with every new technology there will be friction. The most prominent frictions in the short story of cryptocurrencies is probably best illustrated by the scandal at Mt. Gox, the Japanese bitcoin exchange. Mt. Gox held hundreds of millions in stolen money and the notorious bankruptcy of its operator. Similarly, the founders of Tezos – one of the largest ICOs – are battling out fraudulent accusations in court. Investors and entrepreneurs react to such hiccups in the use of innovative technology by offering more secure products and emerging independent auditing and transparency institutions. Those exact frictions are the costs we need to bear for a free society. By embracing progress and understanding the role of creative destruction, we can better navigate such hiccups in the future.

The free market has already addressed these issues before the SEC. Companies such as Trezor started offering hardware wallets that are nearly impossible to hack. Websites like ICOrating.com started offering comprehensive information on ICOs. Within just a few years of blockchain, private innovation has already led to better governance and more transparency for customers and investors. Markets and technology require learning and trial and error. Friction is a necessary byproduct of progress.

China seems to be committed to fully depriving its citizens from access to crypto exchanges. On the other hand, countries and cities like Switzerland, Abu Dhabi, and Singapore are much more receptive towards blockchain technologies – embracing its progression and attracting greater talent and capital.
Many regulators share a static mindset that ignores the emergence of institutions that tackle problems with new technology.

This mindset is harmful for the U.S. economy. Regulators tend to have a myopic viewpoint and react to problems that appear ex post by banning innovation instead of creating institutions that these technologies can be governed with. Bureaucrats get rewarded when they make something “safe” – mostly after something bad happened. They don’t get rewarded for allowing solutions for social problems to emerge organically

Blockchain technology is here to stay and it will eventually transform many parts of our lives, including how we send money, store data, conduct audits, enforce contracts, and save for our retirement. Regulators can slow down its diffusion but not indefinitely halt it. We cannot allow regulators to take over this technology by enacting static rules which will likely be outdated by the next round of brewing innovation. The U.S. is already comparably hostile towards blockchain investments and ICOs. If the SEC and Department of Justice tighten their regulatory grip even more, we might risk losing our lead in digital technology and finance. The bay area would then become the next rust belt.

We need to have an appetite and acceptance for things to go wrong. We must trust emerging institutions that self-govern problems in the marketplace. Self regulating organizations are nothing new but have driven industrialization and the emergence of modern financial markets. Stock market exchanges like NASDAQ require even more governance and compliance from listed companies than the law does. Rating agencies such as Moody’s help with independent assessments of investment risks. Private clearing houses enforce strict rules of transparency and good book keeping on member banks.

Probably one of the least-known but most significant self regulation organizations is the German Institute for Standardization, founded in 1917, responsible for standardizing tens of thousands of product classes and best-known on the international level for defining the standard size of a piece of paper.

The U.S. must embrace new technologies and marketplace innovation but also acknowledge that the price of progress includes occasional wrongdoing. The solution for said wrongdoing is not through paternalistic regulation and government intervention, but is best fixed through innovative responses that directly address the problems at hand.

Dr. Wolf von Laer is the CEO of Students For Liberty with a PhD in Political Economy from King’s College London. Fred Roeder is the managing director of the Consumer Choice Center.