Bitcoin, the original cryptocurrency, was launched in 2009. The market for digital, blockchain-based currencies has since exploded, surpassing $3 trillion in late 2021. Once a fringe investment class, cryptocurrencies are now must-haves for many institutional investors — from banks and insurers to hedge funds and pension funds.
A reputation for spectacular growth is not the only marker of cryptocurrencies, however. Because of their penchant for extreme volatility, cryptocurrencies have also become a symbol of risky investing; daily price swings of 10 percent or more are routine. Such developments have, in turn, prompted calls for greater government oversight.
Building a Regulatory Framework
Hermine Wong, Head of Policy at Coinbase, one of the world’s largest crypto exchanges, is helping to lead efforts to create a more stable and predictable regulatory framework for the industry.
“One of the overriding narratives, when it comes to crypto and the regulatory regime, is that it’s the Wild West, and it doesn’t want to be regulated,” she says. “For Coinbase, that couldn’t be further from the truth: We have a history of leaning into regulation, seeking out state licenses when no other licenses were available, and developing a best-in-class compliance program.”
Nevertheless, crafting effective regulation for such a fast-evolving industry poses considerable challenges. “What was true of this space 10 years ago is already very different,” says Wong. “The explosion of NFTs [non-fungible tokens] in the last year is a good example of how innovation quickly alters the [crypto] landscape.” Yet there are time-tested ways to overcome such hurdles, she adds. “Having robust public comment and data to rely on makes regulatory endeavors much stronger, as well as much more representative of the harms you’re trying to prevent and the benefits you’re trying to achieve.”
Wong would certainly know. Before joining Coinbase, she served as a special counsel at the U.S. Securities and Exchange Commission. “When I was at the SEC, I was drafting regulations; I was helping a lot of agencies think through their regulation,” she says. “Regulatory work is hard work because you’re trying to find a one-size-fits-all solution to a particular problem.”
Foresight, pragmatism, and the ability to weigh tradeoffs are also vital qualities when crafting effective regulation, Wong adds. “The role of government [regulation] is not to freeze everyone in some moment of time, but rather to think about how to continue to bring value to citizens over time.”
Winning the Crypto Regulatory Race
One way to create value over time is to build a regulatory regime that protects investors against fraud and other abuse, while also attracting entrepreneurs. Here, America’s longstanding dominance in global capital markets can be a hindrance, as well as a strength. “We have all this expertise and [legacy] regulatory infrastructure in the United States. This can make trying to be very nimble in this [regulatory] space even harder,” she says.
Just as the U.S. enjoys numerous benefits from having both the world’s reserve currency (the dollar) and international language of business (English), so too would it reap the advantages of becoming the global hub for transparent, effective, cryptocurrency regulation. Yet such leadership can’t be taken for granted, Wong argues.
“Because countries can now leapfrog traditional brick-and-mortar regulatory infrastructure, if the U.S. does not catch up to the latest [crypto] technology, the jurisdictions that were behind in a financial intermediary-based world are now going to be ahead in a non-disintermediated-based world,” she says.
In short, if America is to become a global leader in cryptocurrency regulation, the nation’s public and private stakeholders must be “really forward-leaning in how to think about risk, how to think about value, and how to encourage competition and innovation,” Wong says.
