Sound Digital Asset Regulation Means Enabling Innovation, Not Merely Compliance

May was a dizzying month for cryptocurrency investors, and not just because of the headline-grabbing (but not unprecedented) price movement on major assets like Bitcoin. Since May 5, regulators from Washington to Beijing have issued a near-daily stream of announcements aimed at taming cryptocurrency markets.

In Washington, there was Treasury Secretary Janet Yellen’s proposal to give the Internal Revenue Service tools to sniff out tax evasion on digital assets. There was the Securities and Exchange Commission’s warning that Bitcoin futures could prove volatile. The Office of the Comptroller of the Currency revealed it’s reviewing Trump-era actions taken at the agency to speed trust bank charters into the hands of cryptocurrency firms. The Justice Department and the IRS have launched multiple investigations into potential use of cryptocurrency exchanges to evade taxes and launder money. And the Federal Deposit Insurance Corporation and the Federal Reserve are making multiple moves toward potentially standing up regulatory guideposts for digital asset banking.

It would be a mistake to view this all as an attempt to block cryptocurrencies and fintech. Acting OCC Chief Michael Hsu said it himself at a recent House hearing: “I believe these trends cannot be stopped,” he said of fintech firms going mainstream. “They bring great promise, but also risks. Banks and the regulatory community must adapt to them.”

This is what we’re watching take shape — adaptation. The Biden administration and independent regulatory agencies are playing catch up, to be sure, but as they do so, they’re sending a clear message to the cryptocurrency world: Pay your taxes, obey the laws and don’t take shortcuts, but otherwise go forth and innovate.

The task now before the government is to follow through on its side of that promise. The feds have made clear they have no intention of crushing cryptocurrency and fintech; next they must ensure they don’t accidentally do so through poorly planned or implemented policies.

So what does sound regulation look like? One school of thought suggests it’s a fully hands-off approach. That’s the path the Clinton administration took in the 1990s when faced with the dilemma of how to handle the then-burgeoning internet. A quarter-century on, we’re still grappling with whether that was the right call — look no further than the debate still roiling over Section 230, the 1996 online immunity shield — and this time, the stakes are even higher. Permissionless innovation for the ‘90s internet meant the freedom to launch a website that no one might ever visit. With digital assets, billions of dollars are at stake. What the Biden administration and Congress do next has the power to shake the financial industry worldwide.

Fortunately, a model approach to sound regulation and oversight already exists in an unexpected place: Wyoming.

The state spent three-plus years methodically developing a legal and regulatory framework for digital assets to make them “backwards-compatible” with U.S. laws, since they don’t fit neatly into existing laws and regulations. Wyoming law defines how an owner can obtain clear title to a digital asset, clarifies its status under commercial law and defines its tax status. From that solid foundation, Wyoming then built a new type of bank charter — a special-purpose depository institution — to solve the problem of scarcity of banking services available to the industry. These banks are designed to meet the capital requirements required of banks nationally. Avanti is one such bank, as is Kraken Bank; two more SPDIs are applying to be chartered soon.

The big bank lobby has tried to stymie SPDIs’ progress. Happily, there’s a growing body of policymakers across the political spectrum likely to see through this campaign, as they understand the promise of cryptocurrency, as well as the need for smart regulation that encourages innovation rather than smothering it.

Reps. Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) support the idea of a digital dollar that the Fed could issue directly to individuals to distribute government assistance and increase financial services for the unbanked. Colorado Gov. Jared Polis, a Democrat, is an outspoken cryptocurrency advocate who co-chaired the Congressional Blockchain Caucus while in Congress. Sen. Cynthia Lummis (R-Wyo.) has owned bitcoin since 2013. She teamed with fellow Banking Committee member Sen. Kyrsten Sinema (D-Ariz.) to establish the new, bipartisan Financial Innovation Caucus.

Even in Lummis’ deep-red home state, a Democrat — state Senate Minority Leader Chris Rothfuss, a trained engineer — is currently spearheading the legislative charge to keep Wyoming in its pioneering role. Wyoming’s laws and regulations are now being copied by regulators in other red and blue states, and even in other countries.

The revolution powered by cryptocurrency knows no ideology or political affiliation. Regulating it doesn’t mean adhering to the dogma of one party or another. It just means having the vision to see how building an enabling, non-punitive regulatory framework around digital assets can make financial systems more agile, secure, and frictionless. The Biden administration clearly has the appetite to do just that. Seeing it through is the thing.


Caitlin Long is founder and CEO of Avanti Bank & Trust in Cheyenne, Wyo., a chartered bank launching later this year to provide banking services for the digital asset industry; she previously served as a managing director at Morgan Stanley and Credit Suisse in New York.

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