In the wake of sustained market turmoil in the crypto ecosystem, federal regulators in the United States and relevant authorities abroad are reassessing the fundamental question: how much should we integrate or corral this emerging technology?
Much of the recent focus, at least since the collapse of FTX, has been on containment and often punitive action against the broader crypto ecosystem. In the United States, banking and financial markets regulators have clamped down on crypto through numerous enforcement actions, while the first evidence of a developer brain drain from the country is starting to materialize. In the European Union, the picture is also mixed, but bloc-wide legislation may create a new haven for crypto development. Authoritarian governments such as China have launched centrally-controlled competitors to crypto and attempted to outlaw decentralized infrastructure, leveraging the super-surveillance capabilities of central bank digital currencies (CBDC) to control and suppress their populations. These three divergent paths offer different visions for crypto’s global growth and the fundamental promises of decentralization.
In the United States, the tension around supporting the growth of decentralized, peer-to-peer consumer services lies at an intersection between the country’s historical support for emerging technology and the need to preserve both government control, broadly, and the American financial system’s global power. Take the debate over whether it would be prudent and power-enhancing for the United States to develop and deploy a CBDC. Other countries, such as China with its digital yuan, have already developed and launched such technology, and while it may lower the barriers some consumers face when navigating the marketplace for goods and services, this technology has enhanced the power of that country’s surveillance capabilities to a remarkable degree.
An alternative option, one that might both support the U.S.-led global financial system and show that America remains committed to free markets and free enterprise, is developing a regulatory regime that would allow a dollar-denominated stablecoin to flourish. This regulatory open-mindedness would enhance U.S. soft power and global influence, particularly as other countries look to the United States for leadership and guidance on emerging technologies. Making the case to federal regulators and lawmakers that crypto technology can be a benefit to the United States, rather than a challenge to its soundness, is the fundamental challenge in promoting crypto policy in the country.
The European Union has taken a more comprehensive perspective, pioneering the MiCA legislation, which creates a licensing regime for digital asset businesses. While the legislation places new requirements on crypto businesses, the level of comprehensiveness is a welcome sign that, at the very least, the EU has accepted that crypto is here for good. The MiCA legislation does not offer a complete embrace of decentralization’s core properties — far from it. It does, however, offer an implicit recommendation: Web3 is big enough and permanent enough that we feel the need to regulate it. Ironically, the EU may become a more attractive jurisdiction than the United States for decentralized technologies to flourish.
The less-than-democratic governments of the world offer a far bleaker vision of the future of decentralization. Some authoritarian governments, seeking ever-greater control over their societies, have embraced the surveillance-enhancing aspects of CBDCs, restricting their citizens' financial freedom and personal liberty. In systems where a full CBDC is implemented, governments could financially exclude individuals or entire groups of people with the press of a button, leaving them with nothing. The recordability of open blockchain systems, a pioneering aspect of true peer-to-peer systems, would be deployed to eradicate rather than enhance a population’s trust and financial future. Needless to say, these governments view true decentralization as a threat to centralized state control. In China, and in other like-minded regimes, Web3 is akin to the introduction of the internet itself: a new technology that threatens to empower the average citizen.
So where is the sweet spot for the future of Web3?
It may be in the EU, where recently passed legislation outlines new rules but also provides a workable pathway for compliance and growth. But it could yet still be the United States, where recent punitive actions may be a short term spasm as the government looks to wrest the narrative of innovation from the cryptocurrency community and put the economy back in “safe hands.” Wherever the future of the cryptocurrency community lies, we will get there because those jurisdictions recognized some core ideas: trust in our institutions of government and business is broken, and we lack a coordinated strategy for the development of new digital-forward solutions to some of our core problems, including digital identity, accessible financial services, individual data sovereignty, privacy architecture, and better cybersecurity.
Embracing the benefits of decentralization does not mean that a government has to relinquish control or drop any of its core competencies. It does mean, however, that leveraging those benefits can lead to a more open, more equitable, and more trusting community, worthy of the best visions for a 21st century society.