Crypto Advocates Should Be Begging for 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.

But as Carolyn Wilkins and I wrote in a brief published by the Bretton Woods Committee, a desirable future for digital finance requires prudent regulation. 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.