Cryptocurrencies raise potential benefits and risks. They represent a break from the traditional model of so-called “fiat currency,” which gives government bodies inherent regulatory power. Their use offers potential for criminals to escape the oversight of the government, but they also present potential benefits for individuals who wish to gain greater autonomy over their finances. Maintaining a balance between these risks and benefits is the dilemma that regulators face at present. With more and more countries proposing legislation to ban, limit or enable the use of cryptocurrencies, it is the right moment to know whether regulation is needed and if so, what the scope of this regulation may be.
The articles in this new edition of the TechREG Chronicle address these (and other) issues raised by cryptocurrencies, and explore potential issues that may present themselves in the near future.
By Sean Stein Smith (Professor, City University of New York – Lehman College)
While the blockchain and cryptoasset sector has continued to grow, mature and expand at a rapid rate, the regulatory outlook has simply not kept pace. In almost every market where cryptoassets have become more mainstream, there are substantial questions regarding how these assets should be taxed, valued, and treated from a financial reporting standpoint. This article provides action steps and processes for policymakers to develop a commonsense regulatory framework for cryptoassets moving forward.
By Bianca Kremer (Research Fellow, Wharton Blockchain and Digital Asset Project) & Kevin Werbach (Professor, The Wharton School, University of Pennsylvania)
In this article, we take a bird’s eye view of the global state of digital asset regulation, which now extends beyond token offerings and exchanges to include stablecoins, decentralized finance (“DeFi”), non-fungible tokens (“NFTs”) and decentralized autonomous organizations (“DAOs”). While some countries have adopted a hostile posture, most regulators are attempting to balance concerns about potential harms against potential benefits.
By David S. Evans (Chairman, Global Economics Group)
Payment methods have a high degree of inertia, making change slow and challenging for new alternatives — so it is not surprising that cryptocurrencies based on public blockchains are not broadly used 13 years after bitcoin launched. The future of the largest public blockchains is limited because they cannot provide stable currencies or operate efficient payment systems and other transactional services at scale. Meanwhile, payments and financial services are not standing still. Real-time payment methods, mobile money platforms, non-crypto FinTechs and private permissioned blockchains are developing innovative payment and financial services. In the end, it is a race to see who prevails in this competition. Could crypto fix itself in time to win this race? That is possible, but far from sure.
By Lin William Cong (Professor of Management at Cornell University) & Claire Wilson (student fellow at Cornell University)
We discuss some of the core regulatory issues concerning crypto-tokens and digital currencies. While regulation can potentially address the needs of market participants and enhance market confidence, current approaches are either excessive or too light. As a start, we need to categorize different types of tokens, consider what protections are needed, and then model regulation around them. In particular, we highlight why token classification matters for regulation and present a classification framework based on the economic functions of tokens.
By Florian Deuflhard & C.-Philipp Heller (NERA Economic Consulting)
The regulation of cryptocurrencies and the application of antitrust law to cryptocurrencies is still in its infancy. As the definition of relevant markets may play a role both in antitrust law and other areas of the law, we discuss how existing methods to delineate relevant markets may be adapted to cryptocurrency market in relation to consensus mechanisms, crypto exchanges and transactional money.
By Christian Catalini (Founder, MIT Cryptoeconomics Lab; MIT Sloan School of Management) & Scott Duke Kominers (Associate Professor of Business Administration, Harvard Business School)
Like the early internet, blockchain and Web3 applications promise a new wave of decentralization and competition – yet at the same time, it is unclear which of the dynamics that drove concentration in online platforms and services will remain in force under the Web3 paradigm. In this piece, we highlight three fundamental costs that Web3 technology can potentially reduce: the cost of verification, the cost of interoperability and portability and the cost of composability. We then explore how reducing these costs may influence the design of digital ecosystems, as well as the resulting market structure and competition.
By Richard B. Levin, Craig Nazzaro, Brian Russ & Kevin Tran (Nelson Mullins Riley & Scarborough)
Innovation in the financial services sector sparked by blockchain and digital assets have caused U.S. federal and state regulators to devote more resources to better understanding this technology and the potential impact a digitized financial system could have on consumer protection, the “traditional” finance industry and the overall safety and soundness of the financial system. As a result, regulators are taking steps to develop the tools and regulatory infrastructure to better ensure that innovation is being done responsibly.