By Faryar Shirzad, Chief Policy Officer
Today, we are pleased to introduce our new regulatory framework titled Digital Asset Policy Proposal: Protecting US Financial Leadership (dApp). We hope that this document will stimulate an open and constructive discussion on the role of digital assets in our shared economic future. Our goal is to engage the discussion in a thoughtful and respectful manner, and to offer well-meaning suggestions for how the United States’ financial regulatory framework can adapt to two important developments:
1. The decentralized and blockchain-based development of the Internet
2. Emergence of a premium asset class that is digitally native and enabling unique economic use cases
We understand that high-profile proposals don’t become law overnight – and they shouldn’t. But what they can do is advance the debate in ways that are beneficial to everyone, including members of Congress who are increasingly focused on this area.
A number of us have been working hard on this for some time, in consultation with experts, cryptocurrency builders, opinion leaders, and policy makers from across the country. We’ve also seriously read commentary produced by our peers and others who push the discussion forward in creative and thought-provoking ways. This process of investigation and discovery has been remarkably amazing and invaluable for helping us think deeply about the potential of these new and unique democratic financial innovations.
Here are three consistent themes that have emerged in the past few weeks of intense meetings:
- A broad awareness is emerging regarding the blockchain and the possibilities of distributed ledger technology; A person recognizing cryptocurrencies can be an important catalyst for innovation, economic growth, and financial inclusion in an increasingly digital world.
- Cryptocurrency adoption is growing rapidly, and regulation plays a vital role in protecting consumers and providing certainty to market participants
- American geopolitical power and leadership are closely linked to the United States, which maintains its technological leadership
We would like to personally thank everyone we met for their feedback, candor, and willingness to share some of the deeper and more complex economic and social questions we face. Let’s dive in.
Digital assets such as Bitcoin, Ether, Stablecoins, and other cryptocurrencies are now an essential part of the financial market ecosystem. In 2013, the market capitalization of the entire cryptocurrency market was around $1.5 billion. In 2021, that market capitalization grew to $2 trillion. Adoption rates have seen a similarly staggering growth rate with an estimated 1 million crypto users in 2013 to an estimated 330 million users worldwide today, with tens of millions in the United States alone.
But like the early days of the internet, cryptocurrency use cases are still in the development and adoption stage. However, what we see is socially powerful. Blockchain and distributed ledger technologies have accelerated the democratization of finance that began with the advent of mobile payments. Whether factors such as a lack of wealth, inaccessible infrastructure, or a combination of societal factors have historically contributed to the 1.7 billion unbanked adults today, the evolution of decentralized protocols and peer-to-peer markets have the potential to resolve deep inequalities. And injustice.
Digital asset markets have emerged to offer a platform that facilitates the demand from Americans to access certain innovations in the way financial assets are moved and traded. Retailers and institutions have direct access to platforms that carry out transactions 24 hours a day, seven days a week. Real-time settlement of transactions. There is no longer a need for multiple intermediaries as the infrastructure of the digital asset market has evolved so that exchange, trading, clearing, settlement and custody services can be provided by the same entity effectively and more efficiently.
We are seeing the start of more efficient, transparent and cost-effective operations compared to those in the traditional financial markets. These developments, in turn, will enable market participants to have greater and more direct control over their business decisions, increase access to financial services, reduce the excess costs of the current system – costs often borne by retail customers, and create more transparency for regulators, who already benefit Of new ways to engage in market surveillance and the fight against illicit financing.
Laws drafted in the 1930s to facilitate effective oversight of our financial system could not have contemplated this technological revolution. Elements of these laws have no room for the transformative potential offered by digital assets and crypto innovation. They do not capture the efficiency, fluidity, and transparency of digital asset markets, thus risking acting as an unintended barrier to current innovations in the digital asset economy. For example, well-established, widely recognized, and completely decentralized digital assets, such as Bitcoin and Ether, have technical characteristics that are well understood by the public. There is no information void that must be resolved immediately. Not only are some of the paper-based system financial rules outdated, but they are also a hindrance to innovation, inclusion, and social well-being.
Forcing an entire pool of digital assets into codified supervisory classes before computers are used risks stifling the development of this transformational technology, thus pushing the innovative center of gravity currently in the United States offshore. Doing so would have very adverse economic effects and undermine US leadership at a time when technology is critical to this country’s geopolitical strengths. We’re seeing some state legislatures taking important steps to give their residents access to these innovations, but there’s still more work to be done.
Fostering this innovation is also critical because there are a lot of people in our society who don’t see a place for themselves in our current financial system. According to the Federal Reserve, as many as 22% of American households could be unbanked or underbanked. This could mean that as many as 55 million American adults do not have access to the key functions of our critical financial and societal structures. Moreover, even for those who have a bank account and are aware of the huge advances in financial technologies, payments remain slow and cumbersome. Millions keep paying a lot and waiting a long time to transfer money to loved ones abroad or invest their money directly in projects and ideas they care about.
This exclusion is happening to millions from the financial system as more and more Americans look for alternatives to traditional finance. Surveys show that a diverse group of Americans are taking advantage of the unique and powerful financial opportunities that crypto offers. To help the public and the companies that will provide services to this burgeoning new financial ecosystem, regulatory certainty is required for all.
Digital Asset Policy Proposal: Protecting US Financial Leadership (dApp)
Pillar One: Regulating Digital Assets in a Separate Framework
As we mentioned at the beginning, the crypto economy is defined by two simultaneous innovations, both of which have multiple impacts on our financial system. The changes brought about by these two innovations are transformative, but they do not fit easily into the current financial system, which assumes that the structure of our financial markets will remain largely the same as in the past. Our financial regulatory system relies on the continued existence of a series of separate financial market intermediaries—exchanges, transfer agents, clearinghouses, custodians, and traditional brokers—because it has never considered the possibility of distributed ledger technology and blockchain technology. The new framework for how digital assets are regulated will ensure that innovation can happen in ways that are not hampered by the difficulty of moving from the old market structure.
Pillar Two: Designation of a Single Regulator for Digital Asset Markets
To avoid fragmented and inconsistent regulatory oversight of these unique and concurrent innovations, responsibility for the digital asset markets should be assigned to a single federal regulator. Its authority will include a new registration process established for entities that act as marketplaces for digital assets (MDAs) and a proper disclosure system to inform buyers of digital assets. Platforms and services that do not hold or otherwise control customer assets — including miners, miners, and developers — should be treated differently. In addition, according to the tradition of other markets, a self-regulatory organization (SRO) should be created to strengthen the control system and provide more accurate supervision of MDA. Together, they must craft new rules that allow the full range of digital asset services within a single entity: digital asset trading, transfer, custody, clearing, settlement, payout, staking, borrowing, lending, and related spin-offs. This two-tiered organizational structure will ensure effective and streamlined regulation and oversight, and develop elements of the existing frameworks to meet the requirements of our new technology driven financial system.
Pillar Three: Protecting and Empowering Digital Asset Owners
This new framework should have three objectives to ensure that digital asset holders are empowered and protected:
- Promote transparency through appropriate disclosure requirements,
- Protection against fraud and market manipulation, and
- Enhance efficiency and strengthen market flexibility.
Each of these goals must be achieved in recognition of the unique characteristics and risks of the core functions of digital assets.
Pillar Four: Promoting Interoperability and Fair Competition
Innovation continues to evolve in the development of decentralized protocols and the peer-to-peer marketplace to produce new approaches that allow greater financial access across all aspects of society. To realize the full potential of digital assets, MDA must be interoperable with products and services across the crypto economy. If fully achieved, it can foster fair competition and responsible innovation and foster a thriving consumer and developer ecosystem.
We hope you will take the time to evaluate our proposal. And if you do, consider sharing your thoughts. We’re also sourcing the framework through GitHub, so let us know what you think, express your opinions directly to our elected officials, and be part of the conversation that will shape our shared financial future. We will also hold a number of opportunities to hear from others who have made thoughtful contributions to the discussion we hope you advance today.
thank you for reading.
The Digital Asset Policy Proposal: Protecting America’s Financial Leadership was originally published on the Coinbase blog on Medium, where people continue the conversation by highlighting and responding to this story.