Should crypto advocates be seeking regulation?

Digital finance is booming, with the value of cryptocurrencies outstanding reaching more than $2 trillion from almost nothing a decade ago — almost entirely without regulatory oversight to protect investors and the broader financial system. This is not likely to end well, unless officials intervene in a thoughtful way.
So what should they do? One option is to avert disaster by clamping down. But there’s still an opening for a more balanced approach that doesn’t inhibit useful innovation — as long as regulators act soon.
For all its drawbacks, the blockchain technology underlying digital finance has several attractive potential uses. It could create a better system for identity and privacy. It could help keep track — and verify the ownership — of goods sold internationally. It could vastly improve payments, making them available 24/7 to more people and at lower cost, particularly for the smaller, frequent transactions undertaken by migrant workers.
And while President Joe Biden’s recent executive order on the subject sets the right tone, it doesn’t do enough to ensure that action is taken before the industry’s unfettered growth generates significant disruptions and losses.
Why have officials moved so slowly? One reason is a fragmented regulatory system: Responsibility is spread across various entities, including the
Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Treasury Department — a setup conducive to turf battles in which, for example, regulators argue about whether cryptocurrencies are securities and who should oversee them.
Beyond that, the regulatory community lacks the in-house expertise needed to understand new business models and technologies, and to make informed decisions about them.
And officials are naturally risk-averse: They would rather err on the side of doing nothing, of delaying and asking for more information, than approve some new activity — for fear of unleashing forces that could have unpredictable and not necessarily always positive consequences.
The Biden administration can help overcome the first obstacle, by clearly delegating responsibilities. But more steps will be needed. First, regulators need to bolster their understanding by setting up committees of industry experts and hiring their own well-informed advisers.
Second, officials should take an iterative approach, in which they place emphasis more on their objectives — say, combating money laundering and protecting consumers and investors — than on the means by which those objectives are achieved. Set a clear goal and let the participants take the lead in figuring out how best to get there in practice.
The longer officials wait, the greater the risks to consumers, markets and the economy — and the greater the chances that large losses due to cybertheft or a market crash in crypto assets will force an innovation-killing crackdown. It’s thus in everyone’s best interest that the process start now.

—Bloomberg