Clear Regulation Is the Only Way To Civilize the Digital Asset Wild West

We know regulation always trails innovation, but this extraordinary innovation requires an equally extraordinary response from regulators.

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The Wild West of the 19th century U.S. was a period and a place of no laws, no courts and little to no government authority. The only sheriff in town was, well, the sheriff, but even that role was often contested and unclear. Moreover, there was only so much the sheriff could do when there were little to no rules to enforce and no established accountability protocol to enact. I guess they called it "wild" for a reason.

Nearly two centuries later, the narrative surrounding the present state of cryptocurrency and the digital asset market is heavy with "wild west" references. While it's meant to be hyperbole, it's hard to ignore the similarities: No clear sheriff in town, no clear rules or laws, perpetrators ready to take advantage of the lawlessness, an apprehensive but determined portion of the investment population ready to participate, but still in need of guardrails and security.

So, who's the sheriff in the wild west of the digital economy? As with sheriffs of old, it's a bit unclear. The same is true in the world of digital assets. Depending on how the asset is used or behaves, either the Security and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) or the Treasury has jurisdiction. With that being said, the CFTC, which has regulatory authority over derivatives transactions and commodities markets, has been taking a much more proactive role in "policing" various aspects of the digital asset ecosystem.

Policing Without Regulation Will Lead to Digital Economy Ghost Towns

Much like the old sheriffs of the Wild West who tried to find some semblance of law and order without the legal tools to do so, the CFTC is faced with similar dilemmas. That's because without regulatory clarity that provides sufficient and consistent guardrails, the CFTC is constantly in "enforcement mode." In fact, of the 82 enforcement actions brought by the CFTC this year alone, more than a fifth were crypto-related.

With a reputation as the "good cop" of regulation and enforcement of the digital asset ecosystem, versus the Security and Exchange Commission' (SEC) "bad cop" association, the CFTC has had to step up its enforcement game in light of a series of questionable (at best), fraudulent (at worst) actions made by a few market players—negatively impacting the legitimacy of the entire ecosystem. Using what little tools they have, many of which are based on antiquated rules for traditional markets, the CFTC has identified and pursued these actors, including high-profile shakedowns of Coinbase, BitMex, Kraken and Bitfinex (to name a few).

Even when leveraging the enforcement tools available, the CFTC will be stuck in a doom loop of bounty hunting without a clear mandate or direction. The solution is not more enforcement. It's legislation and regulation.

The Doom Loop Ends With Regulatory Clarity

Summer K. Mersinger, a commissioner on the CFTC, recently noted that, "Congress must set some rules on regulation. Without more clarity in the laws without some sort of statutory change, we're going to continue to see any kind of regulatory-related regulatory framework on the federal level in digital assets coming out of enforcement decisions in court decisions. Unfortunately, that bypasses kind of the public legislative process, the public input and it's not an ideal way to govern."

While die-hard crypto enthusiasts want to see the original vision of decentralization live in the digital economy—a utopian scenario where the Wild west characters suddenly start policing themselves (spoiler alert: this never happened)—others understand that "if you don't build it, they won't come." The lack of clarity is driving instability in the market, creating a cascade of skepticism. Without clear regulation and protections in place, "big money" institutional players won't fully participate in the market, and without them, the average consumer won't feel comfortable taking, what they believe is a risk, to participate in what could become a wealth of opportunities.

The fact of the matter is that a certain amount of regulation is good for investors of digital assets so they know that they are being protected to the degree possible from fraud and scams. More importantly, it's also being called upon by the majority of crypto, blockchain, and digital economy entrepreneurs and business leaders.

Not everyone living in the Wild West was a criminal. But, how did they know if they were doing something wrong if there were no laws to reference and rules to live by? The same holds true with today's most innovative and pioneering companies shaping the digital economy. They too need to operate with clear regulations in order to continue to invest in, and innovate for, an inevitable digital transition of our entire financial system.

We know regulation always trails innovation, but this extraordinary innovation requires an equally extraordinary response from regulators. Enforcement is still part of the plan, penalizing the criminals that blatantly violate the laws. However, to close with another blatant Wild West reference, right now we've got the cart before the horse. The rules need to be in place first in order to have a civilized and thriving digital economy. Without them, the sheriff will always be shorthanded and outmatched.

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