The recent run on stablecoin TerraUSD and its sister token Luna sent shockwaves through crypto markets and heightened calls for regulators to get more involved in the regulation of cryptocurrencies. Some see federal regulation in the US as a potential roadblock to innovation in the burgeoning Bitcoin ecosystem fearing it will send assets out of the US to less regulated jurisdictions. Heavy-handed regulation definitely has the potential to stifle the Bitcoin community. If enacted correctly however, federal regulation can help provide the necessary on ramps to fully integrate Bitcoin into the financial system.
Greater regulatory guidance for Bitcoin, if well constructed, could bring more stability to the Bitcoin market, increase investor confidence and protection, and provide for a more secure and robust Bitcoin ecosystem. Less speculation could lead to higher investor confidence and attract more long-term investors who have so far avoided Bitcoin because of its high price volatility. Investor protections like FDIC insurance requirements for Stablecoins can boost investor confidence, which often means greater value over the long term. Better fraud protection and security requirements will also help to reduce the more the $14 billion worth of crypto stolen by scammers in 2021.
The most recent policy put forward in the Senate by Cynthia Lummis, a Republican senator from Wyoming, and Kirsten Gillibrand, a Democrat senator from New York, the Responsible Financial Innovation Act, aims to do just that. As Senator Lummis stated, “We hope this hits the sweet spot between regulation that is clear and understood and does not stifle innovation.” The legislation is part of the current regulatory regime for assets and does not create any more regulatory bodies. It clarifies the roles of the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), and will not require that miners be broker-dealers.
The legislation will also make Bitcoin more attractive to use for payments by exempting people from having to report and pay taxes when pay with Bitcoin if their resulting capital gains are $600 or less. It also provides significant protection to consumers by requiring that stablecoins be either FDIC insured or more than 100% backed by hard assets. The legislation is not likely to make it through Congress until next year as it still has to be reviewed by at least three Congressional committees before going to Congress for a vote.
All in all the new regulation has the potential to protect long-term investors, prevent fraudulent activity within the Bitcoin ecosystem, and provide clear guidance to allow companies to innovate in the Bitcoin economy. Such efforts will help make Bitcoin more mainstream as consumers who have been watching from the sidelines feel safer with Bitcoin as an asset. It will also lead to tighter integration with traditional financial institutions such as Fidelity’s recent move to allow 401k retirement savings plan holders the option of investing in Bitcoin.