How Cryptocurrency Regulation Boosts Innovation and Drives Growth

Mainstream adoption of cryptocurrencies soared over the course of the COVID-19 pandemic, catapulting crypto further into the purview of investors worldwide. The increased attention also brought the question of regulation to the fore: to regulate or not to regulate? With respect to oversight of digital assets, there are two sides to the crypto coin, and debates rage over whether regulation stifles growth or encourages it.

Those who decry regulation insist that it is a hindrance to innovation and experimentation. It is said that regulatory constraints are stifling, applying rules and restrictions to an industry that would benefit from unfettered growth. 

Proponents insist that the lack of regulation is the true hindrance and assert that universal parameters set on products and companies by regulators help create clarity, instill confidence, lead to wider spread adoption, and spur innovation. At Arca Labs, we agree with this viewpoint and are confident that regulation can encourage innovation without capping the industry’s potential.

Throughout the years, regulators have increasingly focused on establishing precedents using frameworks that enable innovation. For example, the Electronic Fund Transfer Act (EFTA) passed in 1978 established standards and protections for the emerging electronic payments market. The EFTA allows consumers to challenge transaction errors and have them corrected within a timely window, as well as limits consumer liability for lost or stolen credit. This legislation was fundamental to enabling global financial systems that cut across sectors, incorporating technologies from varying industries, such as telecommunications, retail, and e-commerce. Businesses like PayPal, Apple, and Facebook have all thrived offering mobile payment services due to this regulation’s transparency and vitality.

Further, regulators devise laws specifically aimed to encourage the creation of new products and companies to drive competition, such as The Antitrust Laws. These laws prevent corporations from monopolizing an industry, thereby incentivizing business creation. Increased business competition stimulates product development and creativity in order to gain market share, thus breeding innovation.

History reminds us that there is a time and a place for regulation. Complex systems operating unchecked can inflict questionable investment practices and lead to devastating material and physical damages, as we saw with the financial crash of 2008, which wreaked havoc on individuals, businesses, and the financial system at large. The silver lining of this crisis was the acknowledgment of our flawed system and the recognition of the need for an alternative solution. This and other catastrophic events have ushered consumers, investors, and businesses to seek alternative financial services outside the centralized nature of traditional banking. 

The Bitcoin blockchain, born out of the uncertainty aftermath of the financial crisis, introduces a transparent and decentralized replacement to our current financial system. The intent of a self-regulated system is euphoric and gradual, thus the ecosystem has experienced certain repercussions from a lack of regulatory oversight:

1. Interesting and innovative projects like XRP were created and shut down, creating turnover and turmoil in the market  
2. Projects like Binance have been banned from certain jurisdictions
3. Fraudulent companies have taken advantage of investor sentiment and sold them false projects and visions, i.e., ICOs
4. Institutional investors are left on the sideline due to compliance restrictions 
5. Criminal activity is exacerbated  

We advocate for appropriate regulation. It is true that dated and burdensome red tape policies can be costly and restraining, deterring new creators from entering the ecosystem, but these are not the types of regulations we support. Thoughtful, informed, and thoroughly vetted guidance on products and businesses that would help protect end-users and stimulate institutional adoption is the regulatory oversight the industry would ultimately embrace.

The United States has an opportunity to become a leader in the blockchain and digital asset industry by implementing regulations that incentivize entrepreneurship and invention; similar to how The Corporate Average Fuel Efficiency (CAFE) regulations helped foster the creation of Tesla by encouraging the development of more efficient vehicles with generous tax credits. Recent centerstage activities in the digital asset ecosystem have opened the potential for widespread innovation and adoption if addressed thoughtfully. 

Stablecoin regulation in the U.S. has remained indecisive thus far, calling into question the ability for stablecoins to self-regulate. Treasury Undersecretary for Domestic Finance, Nellie Liang, explained,  “You aren’t helping the system at all if what is called a stablecoin is actually not stable.” The industry needs stablecoins due to the demand for digitally-based USD equivalents. Stablecoins also offer stability, internal and external connectivity, and a flight from volatility and, therefore, have the potential to be systemically important. The industry would benefit if regulators found a middle ground between the current lack of regulation and cutting stablecoins off at the knees, which would cause serious disruption to the way the market is evolving and substantially stifle further innovation within the ecosystem. 

We believe that instituting regulation and compliance will be powerful tools that will allow the digital asset market to flourish. Currently, hundreds of financial institutions are unable to hold stablecoins, as they cannot pass corporate compliance standards. This is antithetical to the purpose of stablecoins. A uniform and regulation-first approach to stablecoins could allow this market to continue to flourish while introducing mass-scale institutional adoption.

This is a pivotal moment for the digital asset ecosystem’s lifecycle that requires careful attention and consideration. The continued lack of clear regulation can lead to detrimental consequences for the industry, while overly stringent legislation will choke innovation before it has a chance to get started. Historically, we have experienced both, and that is why the operative attention and proactive collaboration with regulators to communicate and inform industry needs is vital to its future success. We, at Arca Labs, innovate responsibly and continue to create products designed to democratize the financial system.

"At Arca Labs we're breaking through the current limitations, we're developing cutting-edge solutions, and really we're accelerating the evolution of finance."

Watch Our Founders Video