The passage of the European Union’s new licensing regime for crypto companies is a major pivot point in the industry.
While the EU has taken a cautious, but open-minded, approach toward crypto, the United States has lately taken a divergent path, becoming increasingly antagonistic toward the industry in recent months.
The US has made similar mistakes in the past, prioritizing reactionary policies at the expense of long-term technological competitiveness.
Take just one example: the Foreign Dredge Act of 1906 prohibiting non-US ships from working to expand the nation’s ports. Even though this law was enacted over a literal century ago, and foreign-built ships today could make a huge difference in expanding US ports, efforts to repeal the law have failed — demonstrating just how hard it is to dislodge bad policy that has obviously run its course.
The US is setting itself up for the same policy failures in crypto.
Lurching about in response to the failures and frauds of 2022, the country is on the verge of shutting itself off from a technology and an industry that will change the global economy this century.
US regulators take a stand
Even though the EU’s Markets in Crypto-Assets (MiCA) has drawbacks and leaves important questions unanswered, it stands in depressing contrast to the approach of American regulators in recent months.
SEC Chair Gary Gensler’s actions reveal that he has unilaterally decided on behalf of the country to try to ban crypto; he’s even bragged recently about the number of enforcement actions the agency has brought (many of those against crypto companies).
The glee is akin to a fire department chief highlighting the number of fires his company responded to in the past year. Should we seek to prevent fires or seek to put out as many fires as possible? Why haven’t we focused on rules to make safer, less fire-prone buildings?
Senator Elizabeth Warren also recently noted her aim to raise an “anti-crypto army” as a central plank in her reelection campaign: Alongside the reintroduction of her anti-money laundering bill that unfairly targets US crypto miners and validators, it’s clear the US is on its way to an all-out war on crypto.
The antagonistic approach of these powerful figures, contrasted with the patient and deliberate approach of the EU, is beginning to have an impact on where crypto companies are being formed, funded or relocated. In the first quarter of 2023, venture capital investment in EU crypto companies accelerated, gaining share over US allocation and overtaking American investment for the first time.
Coupled with recent data showing the US steadily losing its lead in the number of developers working on crypto in the country, we can see that the federal government’s approach to the sector is driving away investment and jobs.
Setting an example
There is still time to right the ship, and the EU’s approach, while imperfect, is a good-faithed yet careful embrace of crypto.
Importantly, the framework intentionally focuses on centralized actors, and EU policymakers have committed to taking the time to properly study DeFi and NFTs before deciding whether to push forward another comprehensive package.
However, MiCA also includes requirements for issuers and grants significant power to the European Securities and Markets Authority (ESMA), which could result in a centralized regulatory approach that may not be well-suited for the rapidly evolving crypto market.
The next year and a half is critical in the battle for which jurisdiction will win out in the race to properly embrace crypto as a durable economic and technological force.
While the EU has a major head start, MiCA’s regulations don’t take effect immediately, instead allowing for a 12-18 month grace period of design and implementation.
Congress should use this opportunity to follow suit and pass legislation to manage centralized stablecoins and exchanges with a comprehensive, national framework.
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