Over the past few months, the American people and lawmakers in Congress have been given a crash course on cryptocurrency. If nothing changes, they might think twice before enrolling for the next semester. The current environment poses an existential threat to digital assets, but also has significant implications for the future of traditional market participants and the economy at large.
Before the collapse of crypto exchange FTX, most Americans were vaguely aware of digital assets. A small number owned cryptocurrencies, others had relatives or friends involved, and many more saw commercials for it during last year’s Super Bowl or other sporting events. What seemed innovative and maybe a little quirky back then now looks like the financial equivalent of Operation Varsity Blues.
John Rizzo is senior vice president of public affairs at the Clyde Group, where he provides strategic advice and communications. Most recently, he served as senior US Treasury spokesman on digital assets, fintech, climate finance, financial stability, domestic finance and economic policy. This comment is part of Policy Week by CoinDesk.
As we enter a year of likely regulatory and legislative action, the cryptocurrency is indeed in a moment of crisis. The so-called crypto winter could easily turn into an ice age if market participants don’t work to define the digital asset ecosystem outside of what the American public and lawmakers see on their screens every day. This is a tall order given the gravity of events, but a necessary one given the impact on America’s economic competitiveness and also on traditional market participants.
When considering what’s at stake, we need to place digital assets in their proper context. While digital assets represent a new financial innovation, they also reflect a broader trend of digitization in finance that has evolved over decades and is unlikely to change. Financial innovation observers have observed this cycle in other periods of disruption. Innovation occurs in a variety of new entrants – many fail and some succeed, but along the way, and perhaps most effectively, traditional entrants take certain elements of innovation, use them for their own ends, and normalize them in the day-to-day economy. We’ve seen this recently as corporations adopt blockchain technologies and banks experiment with stablecoins to move resources faster and more efficiently.
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As many observers realize, the cryptocurrency ecosystem is largely self-contained — 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 being introduced for crypto asset innovation will impact traditional financial market participants as they seek to leverage crypto asset innovation for their own ends.
The policies we are now introducing will impact the bottom line of crypto companies and traditional financial institutions. But it is also about the future of the American economy. To continue leading the global economy, America must continue to set the political pace in a financial system that is increasingly digitized and tokenized.
The moment to take the political initiative will not last long. Already, several countries are ahead of the US in creating central bank digital currencies, including China, and Europe is more advanced than the US in adopting 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 more innovation, efficiency and jobs to their shores rather than our own.
With the future of the financial system and America’s competitiveness on its shoulders, the digital asset industry must act quickly to undo the damage from the scandals of recent months. That starts with meeting policymakers and the American people where they are, a place of deep skepticism about digital assets. Happy talk about a utopian crypto future will not go down well with Congress, regulators, or the public. There will be no one taking the digital asset industry at its word.
Unfortunately, the actions of some bad actors may have squandered this opportunity. Those who believe in the power of digital assets must act quickly to define the current environment, show real-world use cases for digital assets, and show how this era of financial innovation can positively impact everyday American life.
The collapse of FTX was about corruption, not crypto per se, and the digital asset industry needs to speak loud and clear on this. Sam Bankman-Fried committed old-fashioned theft of assets, misuse of funds, and outright dishonesty with clients. He didn’t need crypto to commit his alleged crimes; it was merely the scene of his misdeeds. Unfortunately, Bankman-Fried’s alleged misconduct has become the image lawmakers and the American public have of digital assets, while most in the community are driven by a hunger to reform the financial system and improve the lives of those living outside of it exist.
The cryptocurrency industry also needs to come together to take their own responsibilities and adopt proper regulation. The refusal to tolerate scammers, scammers, and money launderers will strengthen the case for lawmakers and the American public for its innovation to continue.
Read more: Jesse Hamilton – Post FTX: How Congress is preparing to regulate crypto
Additionally, an industry that recognizes that it must exist as part of the regular economy within a regulatory perimeter will be better able to argue for rules tailored to its unique innovations.
The industry’s north star cannot be “growth at any cost” and brooding over rising numbers. The desire for sugary growth must be replaced by a demonstration of real value. Many in the digital asset community have been fighting for these same things for years, only to be swept away by the wave of FTX’s misdeeds.
The digital asset industry has a significant responsibility to put the ship back on track after the FTX collapse, but Washington, DC also has a responsibility. For innovation in digital assets to benefit the economy and ordinary Americans, it must be taken off the table in the partisan food fight. Those on the right who see cryptocurrencies as a way to starve the government beast and those on the left eager to denigrate genuine financial innovation as a mere Ponzi scheme have stymied a much-needed bipartisan compromise. Digital assets are not going away. They practically cannot be banned. Policymakers should recognize the undercurrents of digitization and tokenization in the economy, rather than wishing that digital assets would just disappear.
The public’s crash course on cryptocurrency continues as FTX-related proceedings play out. There is a real risk in the industry that this educational course will become an empty column in next semester’s catalogue, but it doesn’t have to be that way. A practical commitment to the rules of the road, coupled with a genuine effort to reach a bipartisan compromise in Washington, can have a positive impact, leaving behind traditional market players trying to capitalize on this innovation and a country striving to remain competitive and set the rules for the future economy.