By Jack Solowey, Cato Institute
U.S. regulators are cracking down on crypto. Aggressive enforcement actions, cautionary guidance, and continuing refusals to provide crypto projects with clear approval pathways are threatening to make the U.S. an increasingly difficult place for crypto entrepreneurs, developers, and users.
Some welcome this, considering hostility to crypto a policy feature, not a bug. However, wishing and pushing away a potentially disruptive technology is no long‐term solution, even for those who fear disruption. Instead, policymakers should take a risk‐based approach to crypto technology, addressing potential downsides with tailored mitigation strategies (such as relevant disclosureframeworks and actions against fraud) while otherwise letting technological experimentation and progress proceed. Nudging crypto development away from American shores would not only be a loss for Americans’ autonomy and choice, but also a strategic mistake for the United States across multiple domains: hard power, technological innovation, and economic dynamism.
That the United States will lose the hard‐power benefits from the dollar’s status as the world’s reserve currency is a perennial concern. But as my colleague Nick Anthony explains, both non‐pegged cryptocurrencies and dollar‐denominated stablecoins can serve to strengthen the dollar’s global role by providing healthy competition and complementary enhancements (e.g., faster and cheaper cross‐border payment in dollars) respectively. In addition, as Jim Dorn notes, rule of law and strong private property rights are essential to trust in a jurisdiction’s financial system. Aggressive enforcement actions against crypto projects for failing to register with regulators coupled with regulators’ passive‐aggressive inaction when it comes to allowing those very same registrations is antithetical to the predictability and accountability at the heart of the rule of law.
Showing crypto the door is particularly counterproductive for those concerned with seeing U.S. interests represented in the architecture of global financial infrastructure. In open source, decentralized crypto projects, control is pushed to network edges (e.g., node operators and governance token holders). Users of crypto networks participate implicitly and explicitly in governing those networks by voting with their “feet” (i.e., deciding which tokens and protocols to use) and by voting with their tokens (i.e., participating in formal votes on software upgrades). Therefore, when those who wish to see Americans take leading roles in maintaining the world’s financial plumbing also work to toss crypto out of the United States, they are cutting off their noses to spite their faces.
Crypto has roots in American innovation that should not be abandoned. The authors most cited by the Bitcoin whitepaper are Stuart Haber and W. Scott Stornetta, who pioneered the ability to verify the authenticity of digital documents at Bell Communications Research (Bellcore) in the 1990s. Their work to make digital documents tamper‐resistant over distributed networks (by digitally fingerprinting (“hashing”) their timestamped and digitally signed contents) helped pave the way for the secure blockchain ledgers underlying major cryptocurrencies. This work has direct roots in the American industrial research and development firmament. Why now throw away the intellectual return on that R&D investment?
Assuming that the crypto ecosystem has nothing more to offer technological progress—for example, in maintaining the security, authenticity, and privacy of digital records and communications—at this point would be as foolish as assuming in the 1990s that Haber and Stornetta’s work would never give rise to novel applications like cryptocurrencies.
Prejudging and dismissing potentially disruptive technology is by nature a mistake. Disruptive innovation, according to the father of the theory, the late Harvard Business School Professor Clayton M. Christensen, is characterized not by projects exceeding the value propositions of existing solutions but rather by projects providing new value propositions, or creating new markets. Critically, as Christensen argues in his seminal work The Innovator’s Dilemma, these endpoints are hard to predict: “The ultimate uses or applications for disruptive technologies are unknowable in advance,” as “the information required to make large and decisive investments in the face of disruptive technology simply does not exist.” Part of the challenge of disruptive innovations is that although they are rife with risk and uncertainty at the outset, such advances also “entail significant first‐mover advantages.” Therefore, in Christensen’s words, “Leadership is important.”
This challenge counsels in favor of policy that is open‐minded about, not categorically hostile to, crypto. There are obvious differences between the job of managing a private firm and that of crafting public policy. The point is not that policymakers ought to be in the business, like corporate managers, of placing strategic bets on products and services. To the contrary, the point is that policymakers should not be in that position at all. If the ultimate shape of disruptive innovation is unknowable in advance even to businesses on the ground, it is even more opaque to policymakers. If policy treats uncertain technology paths as suspect and forbidden, innovation and economic dynamism will necessarily become suspect and forbidden as well. If the United States adopts that posture, it will perpetually forfeit all first‐mover advantages. To put things in concrete terms, it’s hard to find wisdom in turning away the projects attracting the next generation of cryptography talent, especially in an age when data authenticity and cybersecurity are critically important.
Sound U.S. financial policy does not require an opinion on whether crypto will realize the upside of disruptive potential. Rather it requires policymakers to refrain from thwarting that prospect. Mitigating risks from specific applications of crypto technology—be they stablecoins, other types of crypto tokens, or crypto exchanges—does not demand outright antagonism to crypto’s development. Tailored risk mitigation that allows for the crypto ecosystem’s natural evolution would leave the United States open to potential gains in hard power, technological progress, and economic advancement.
Jack Solowey is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives (CMFA), where he focuses on the regulation of cryptocurrencies, decentralized finance, and financial technology.