Volatility continues in every aspect of the market, and many believe it will continue through Q4 2022 as the economy heads toward additional contraction. But even as the equities markets fall in and out of bear market territory, crypto and its close relative, the stablecoin, have taken a monumental beating, with Bitcoin down significantly since the beginning of the year.
The Crypto Bill at a Glance
A bipartisan bill proposed in June by New York Democrat Kirsten Gillibrand and the Wyoming Republican Cynthia Lummis is in part a response to the crypto crash, but also to a growing chorus of institutional market participants demanding more sensible guardrails to foster growth. Coined by the bill’s authors, “the most substantial and comprehensive bipartisan effort to provide certainty and clarity to the growing digital asset and blockchain industries.”
The Responsible Financial Innovation Act (RFIA) attempts at conquering the following:
- Make transactions of less than $200 tax-free—potentially clearing a path for a cryptocurrency that acts more like a currency
- Grant new powers to the Commodity Futures Trading Commission (CFTC) and not the Securities Exchange Commission (SEC)
- Set new federal regulatory measures for stablecoins by requiring that issuers maintain 100% reserves and publicly disclose the assets backing their token
- The creation of an advisory committee—comprised of private and public sector members
However, with the current dysfunction of the U.S. legislative process, major decisions on a “highly significantinnovation in American money” and its financial system may not likely happen any time soon.
Washington Dysfunction Could Block Progress and Innovation
It’s no secret that the deadlock in Washington is wreaking havoc on progress. However, the U.S.’s ability to regulate and innovate the future of the world’s digital economy is paramount. Unfortunately, the deeply divided and highly partisan state of the U.S. government is causing the country’s financial leadership status to wane, which could have catastrophic consequences in the future.
The U.S. has a long history of leading the world in innovation. We continue in that tradition when it comes to blockchain-based digital securities, banking, payments, insurance, etc. However, leadership is falling short with regulation and implementation of digital assets like crypto and Central Bank Digital Currency (CBDC). The lack of action now will impact U.S. leadership for decades, along with the innovation and financial benefits that inherently come with leading a domain.
The world is watching, but not waiting. Instead of following Washington’s lead, other countries are stepping up.
Where Countries Stand on Digital Economy Regulation and Innovation
Because of its tradition of collectivism that drives both its corporate culture and its approach to regulation, Japan has been early to normalize cryptocurrencies — making it ripe for increased participation and mass adoption of digital assets. The country’s public and private sectors have come together to define a regulatory frameworkfor executing a more digital economy driven by blockchain technology, including the integration of digital assets like crypto, security tokens and a CBDC.
The EU and Switzerland:
The EU is wasting no time in its effort to legislate and regulate crypto assets and market service providers. Policymakers introduced the “Markets in Crypto Assets (MiCA) framework” that sets clear guardrails for crypto issuers, large stablecoins and more.
Switzerland has a fairly comprehensive cryptocurrency regulatory framework and established itself as one of the leaders in this domain, while the U.K. will introduce legislation on a regulatory system for stablecoins later this year.
As far as CBDCs go, the EU has made significant progress with its “five-year plan” for a digital euro. The European Commission proposed a digital euro bill for 2023 that will support the European Central Bank‘s (ECB) test and deploy its own CBDC.
Cryptocurrencies are not considered legal tender in China, but it’s going all-in on its CBDC, the digital yuan. The digital yuan has been aggressively rolled out with more than 260 million using it already, completing more than $13 billion in transactions.
Meanwhile in the USA…
Earlier this year, President Biden issued an executive order calling for more research on developing a national digital currency through the Federal Reserve Bank. While the U.S. had been exploring the creation of a CBDC before the executive order, no concrete steps had been taken to move forward. Discussions of a digital dollar continue, but the U.S. is moving slowly with no action plan — mirroring its stance on RFIA.
What Investors Can Do in the Face of Inaction
Given the inability to pass any comprehensive meaningful legislation, regulatory bodies are more likely to take the enforcement route against market players. This enforcement route can be directed at any companies or any market participants seen as problematic by the government.
All of this means that investors must be aware of risks and do their homework. From tracking regulatory news to having an exit strategy, investors must play an active role regardless of market movement.
No Action Means the U.S. May Have To Play by Someone Else’s Rules
Given the recent stablecoin crash, combined with the newness and prevalence of the crypto asset class, which is not currently regulated here, the U.S. must accelerate its legislative process and act swiftly to advance a cryptocurrency regulatory framework.
Will the U.S. dollar lose its position as the international currency of choice because of the country’s inability to move? It’s unlikely—especially in the short-term. However, if the U.S. does not get its legislative act together and take a clear leadership role, other countries will step into the white space (some already have) and define the standards, regulatory framework, technology and systems to be used globally — all based on their own agenda and perspective.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.