Crypto is keeping lawmakers busy on both sides of the Atlantic.
They really should be working together – and, for that matter, with other legislators around the world. When you’re dealing with a technology that pays scant regard for borders, a more borderless approach is needed.
In the past month, U.S. senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) announced their co-sponsorship of comprehensive crypto legislation, Sen. Pat Toomey (R-Pa.) filed a detailed proposal for regulating stablecoins, and five Democratic congressmen introduced the Electronic Currency and Secure Hardware (ECASH) Act. to develop a cash-like digital dollar.
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Meanwhile, in Brussels, the European Union’s landmark Markets in Crypto Assets (MiCA) legislative framework has moved to “trilogue” discussions among the European Parliament, Council and Commission, with the goal being a single model for licensing providers of crypto asset services that “passportable” across all 27 EU member states. After a knife-edge vote last month, the bill was stripped of draconian provisions that would have prohibited proof-of-work mining on environmental grounds and is now heavily focused on stablecoins.
From the crypto community’s perspective, there are pros and cons in these different U.S. and European approaches. But it all could be a moot point. Developments outside of the big Western economies are a reminder that crypto is global by nature and will grow wherever it faces the least resistance. That raises huge implications for whatever decisions to control or manage the industry are taken in Europe and the U.S.
In Africa, for example, a partnership between mega crypto exchange FTX and Nairobi-based AZA Finance is poised to open a network of on- and off-ramps for Africans using a variety of national currencies to engage with Web 3 commerce and systems.
This comes as crypto activity in Africa is booming. According to Chainalysis’s 2021 global crypto adoption index, Kenya and Nigeria – with a combined population of around 260 million people – were ranked fifth and sixth in the world, respectively. As of June last year, Nigeria was the biggest market for Paxful, a leader in peer-to-peer crypto payments, accounting for 1.5 million users. And as we learned in an episode of our “Money Reimagined” podcast last year, crypto innovation hubs are thriving in Lagos, Kenya, Johannesburg and Cape Town, with decentralized finance (DeFi) and non-fungible token (NFT) projects taking off everywhere.
Meanwhile, the biggest exchanges are rushing to set up shop in the Middle East. Binance recently obtained relatively liberal licenses to operate in Bahrain and Dubai and has received an approval in principle to operate as a broker-dealer in Abu Dhabi, with new accommodative laws being established in the United Arab Emirates. Around the same time, FTX got a Dubai license.
And let's not forget what’s happening in Ukraine. Even before the Russian invasion, which prompted an unprecedented inflow of crypto funds into Ukraine to support both the war effort and humanitarian causes, Ukraine was a world leader in adoption. Now, with President Zelenskyy hurrying through a new law legalizing cryptocurrencies, it is now perhaps the world leader in crypto usage.
Crypto is a slippery target for regulators
If you’re a crypto developer, these places are where the action is right now. Not only are they friendlier regimes, but the rapid pace of adoption there is creating a virtuous circle of growth that’s encouraging developers to offer profitable crypto services.
And because digitally nomadic developer teams don’t even need to physically move to such places to take advantage of these opportunities, the speed with which they are seized upon is very fast indeed.
What this means is that, independently of efforts by the U.S. and EU to contain and manage the development of cryptocurrency services, the wider ecosystem around crypto will continue to develop and grow.
Whether it does so in a way that is beneficial to the U.S. or EU is by no means assured, however.
Indeed, the argument that killed the attempt to impose an EU ban on proof-of-work mining was that it would create opportunities for greenhouse gas-producing energy providers to woo bitcoin miners to their locations – Kazakhstan’s coal-based mining boom being a case in point. If the goal of regulation is to achieve some benefit for the world at large – which is the case for any climate-related rules – then its designers have to be wary of such perverse outcomes.
Regulating bankers is comparatively easy. By definition they need a license, their very existence defined by their relationship to the central bank’s monetary provisions. Take the license away and the entity is literally no longer a bank.
It’s much harder to regulate open-source developers, especially if they aren’t paid by a centralized company per se but instead are remunerated by the open network they serve with tokens generated and issued by a protocol. While there are concerted efforts by policy designers in the U.S. and Europe to impose licensing constraints on DeFi coders – we addressed one example last week – it’s very difficult to force people who can be anywhere and who are answerable only to themselves not to write open-source code.
I’m not arguing that crypto projects should not be regulated, by the way. There’s a real societal interest in trying to steer such projects toward the protection of a public good. It’s just that regulating crypto needs a more nuanced, accommodative and, most importantly, internationally coordinated approach if it is to be effective.