Over the last several months, the American people and lawmakers in Congress have gotten a crash course on cryptocurrency. Unless something changes, they might think twice before enrolling in the next semester. The current environment represents an existential threat to digital assets, but also has considerable implications for the future of traditional market participants and the broader economy.
Before the FTX crypto exchange’s collapse, most Americans were vaguely aware of digital assets. A small number held cryptocurrencies, others had relatives or friends who dabbled in it,and many more saw commercials for it during last year’s Super Bowl or other sporting events. What came across then as innovative and perhaps a bit quirky now has the look of the financial equivalent of Operation Varsity Blues.
John Rizzo is senior vice president for Public Affairs at Clyde Group where he provides strategic counsel and communications. He most recently served as the senior spokesperson at the U.S. Department of the Treasury covering digital assets, fintech, climate finance, financial stability, domestic finance and economic policy. This op-ed is part of CoinDesk's Policy Week.
As we enter a year of likely regulatory and legislative action, cryptocurrency is indeed in a moment of crisis. The so-called crypto winter could easily turn into an ice age unless market participants work to define the digital asset ecosystem outside of what the American people and lawmakers are seeing on their screens every day. It’s a tall task given the gravity of what’s taken place, but a necessary one given the implications for American economic competitiveness and traditional market participants as well.
When thinking of what’s at stake, we have to consider digital assets in their appropriate context. While digital assets represent a new financial innovation, they also reflect a broader trend of digitization in finance that has occurred over decades and is unlikely to change. Observers of financial innovation have seen this cycle before during other periods of disruption. Innovation occurs among a host of new market participants – many fail and some succeed but along the way, and perhaps most impactfully, traditional market participants seize certain elements of the innovation, use them for their own ends and normalize them in the everyday economy. We’ve seen this recently as companies deploy blockchain technologies and banks experiment with stablecoins to more quickly and efficiently move resources.
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As many observers recognize, the cryptocurrency ecosystem is largely contained within itself – for now. Forward-thinking market participants understand the trend: The future of the economy is digitized, tokenized and potentially decentralized. The rules of the road that are put in place for crypto-asset innovations will impact traditional financial market participants as they seek to harness crypto-asset innovation for their own ends.
The policies we put in place now will impact the bottom lines of crypto companies and traditional financial institutions. But it’s also about the future of the American economy. To continue to lead the global economy, America must continue to set the policy pace in a financial system that will be increasingly digitized and tokenized.
The moment to seize the policy initiative will not last long. Already, several countries are ahead of the U.S in the creation of central bank digital currencies, including China, and Europe is further advanced than the U.S. in putting in place comprehensive regulatory frameworks for digital assets. We can either shape the future economy to best serve our citizens and businesses or other nations will bring further innovation, efficiencies, and jobs to their shores rather than our own.
With the future of the financial system and American competitiveness on its shoulders, the digital asset industry must move quickly to repair the damage from the recent months' scandals. That begins with meeting policymakers and the American people where they are, namely a place of deep skepticism about digital assets. Happy talk about a utopian crypto future isn’t going to cut it with Congress, regulators or the public. There will be no one taking the digital asset industry for its word on anything.
Unfortunately, the actions of a few bad actors may have squandered that opportunity. Those who believe in the power of digital assets must move quickly to define the current environment, show real-world use cases for digital assets and demonstrate how this era of financial innovation can positively impact everyday Americans.
FTX’s collapse was about the corruption, not crypto per se, and the digital assets industry must speak clearly with one voice about this. Sam Bankman-Fried committed old-school theft of assets, misuse of funds and straight-up dishonesty with customers. He didn’t need crypto to commit his alleged crimes; it was merely the venue for his misdeeds. Unfortunately, Bankman-Fried’s alleged malfeasance has become the image that lawmakers and the American public have about digital assets, when most in the community are driven by a hunger to reform the financial system and improve the lives of people who exist outside of it.
The cryptocurrency industry must also come together to hold its own accountable and embrace appropriate regulation. Refusing to tolerate fraudsters, scammers and money launderers will strengthen the case for lawmakers and the American public for the continued existence of its innovation.
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Moreover, an industry that recognizes that it must exist within a regulatory perimeter as part of the regular economy will be in a better position to argue for rules that are tailored to its unique innovations.
The industry’s North Star cannot be "growth at any cost” and musing about numbers going up. A desire for sugar-high growth must be replaced by demonstration of real value. Many in the digital assets community have been fighting for these exact things for years, only to be washed over by the wave of FTX’s misdeeds.
The digital assets industry has a significant responsibility to right the ship following FTX’s collapse, but Washington, D.C., has a responsibility as well. For digital asset innovation to benefit the economy and regular Americans, it must be taken off the table in the partisan food fight. Those on the right who see cryptocurrency as a means to starve the government beast and those on the left eager to smear genuine financial innovation as a mere Ponzi scheme have forestalled desperately needed bipartisan compromise. Digital assets aren’t going away. They can’t be banned practically. Policymakers should recognize the undercurrents of digitization and tokenization in the economy instead of wishing digital assets would just go away.
The public’s crash course on cryptocurrency will continue as proceedings related to FTX play out. The industry is at deep risk of seeing this educational course turn into an empty section in next semester’s catalog, but it does not have to be that way. A practical commitment to basic rules of the road paired with an honest effort at bipartisan compromise in Washington can have a positive impact, leaving traditional market participants seeking to harness this innovation, and a country hungry to remain competitive and set the rules for the future economy.