The Biden Administration’s Proposed Crypto Regulations Would Kill Innovation

H elen Hodler and Sam Saver meet, fall in love, and start planning their future. Sam opens a savings account and gets 0.06 percent APY (interest rate). The more adventurous Hellen buys a stablecoin — a digital currency redeemable 1:1 with a U.S. dollar — and deposits (or “hodls”) it with an exchange. She gets 8.88 percent APY. Our well-heeled financial-policy setters Federal Reserve chairman Jerome Powell (net worth $55 million), Treasury secretary Janet Yellen (net worth $16 million), SEC chairman Gary Gensler (net worth $119 million) side-eye Helen.

A recent report on stablecoins by the President’s Working Group on Financial Markets outlines official concerns. They think she is too unsophisticated for her choice. They think she and the exchange may pose a systemic risk to the entire U.S. financial system. The report asks Congress to solve these apparent issues but suggests that federal agencies will act alone if necessary.

In reality, smothering people with financial bureaucracy brings far greater risks for our nation’s economic prosperity and stability than do stablecoins. Instead, the federal government should allow stablecoin issuers, crypto exchanges, and the Web 3.0 revolution it will fuel to flourish.

Stablecoins are already vital to the crypto ecosystem. Before their advent, crypto trades paired with fiat currency. Stablecoins made trading faster, cheaper, and more liquid. Although only widely used since 2017, the market has bloomed, with a current capitalization of $131 billion.

People would marvel at the innovations rolling out in this short time if they came out of the public sector. By comparison, China began working on a digital yuan in 2014 and is only now doing pilot programs. A U.S. government version is years away.

But Helen need not wait for government to lead the way. She can choose a stablecoin backed by cash and commercial paper, or one by commodities such as gold, or one governed by algorithms. She can pick one that attests its backing quarterly, or monthly, or 24/7. The market’s “invisible hand” connotes each coin’s rising or falling fortunes.

No human system is perfect. After years of questions about its reserves, stablecoin issuer Tether settled with the New York attorney general’s office over alleged shady accounting. It also paid a $41-million-dollar fine to the Commodity Futures Trading Commission. Yet the market didn’t collapse — it incorporated this information and continued ablaze. As the market matured and new entrants arrived, issuers began attesting their reserves.

All this success outside the government’s “invisible foot” alarms Washington types. Bureaucrats and allied intellectuals worry about investor protection and “runs” to fiat currency. Ironically, one might argue a country $27 trillion in debt has bigger concerns than a smoothly functioning $131 billion market. Nevertheless, they persist.

Under the guise of technology neutrality, SEC chairman Gary Gensler has waged a frontal assault on crypto innovation. He now seeks “plenary authority” over crypto including currency-like stablecoins.

Given the attested reserves and constant market adjustments, the chance Helen will lose her shirt or risk the financial system (absent fraud) is tiny. But government regulation carries much clearer risks. Regulators could easily become beholden to the biggest businesses they regulate. “Regulatory capture” would mean the biggest players join with regulators and lawmakers to write the rules and increase barriers to entry. This isn’t theoretical. Since the New Deal’s forlorn National Recovery Act, it has been a staple of U.S. economics.

There is also the risk of stratification: Whatever rules the regulators issue freeze current technologies at that time. This is particularly benighted given stablecoins’ role in fueling the unforeseen innovations of Web 3.0, where potentially billions of microtransactions occur every second. Helen may not only have her interest rate reduced, but the government could also deny her the benefit of the brightest minds currently conceiving ways to make her life richer and easier.

The Helens and Sams of this country ought to be able to choose the vehicles they wish for passive income and accept market risks that suit their appetites. Given the stablecoin market’s transparency, variety of choice, and constant adjustments, regulators have no problem to solve. Regulators themselves are the problem.