Ever since Facebook unveiled its plan to launch a cryptocurrency, Libra, policymakers around the world have been up in arms. Beyond core concerns of trust, they are worried Libra could be used to launder money, finance terrorism or destabilize central bank fiat currencies.
They’re right to be worried. Libra should not move forward until all concerns are fully addressed. But the debate surrounding Libra underscores a larger issue with the lack of clear regulation of cryptocurrencies at large.
Policymakers must first understand that comparing Libra to other cryptocurrencies is like comparing apples to oranges. These differences between Libra and other cryptocurrencies are not just semantics. They define how technology is deployed and used, and they also define how we need to think about regulation.
Libra is a permissioned, centralized platform that plans to issue asset-backed coins. What does that mean? According to the whitepaper, the Libra Association intends to grant permission to upwards of 100 members to centrally manage and control Libra. This is a closed system with the Libra Association serving as a centralized intermediary. Also, the value of the Libra coins will be “pegged” (much like how the US dollar was originally pegged to gold until 1971) to a variety of government-backed currencies, suggesting that over time it will compete directly with fiat currencies.
In contrast, other innovators are deploying technologies built on fully decentralized, permissionless platforms that are open to all to monitor, verify and innovate upon without a centralized intermediary.
For example, the XRP Ledger is one such platform that is being used by a variety of companies. Ripple, the company I work for, is deploying this technology to remove friction from financial services and alleviate the high cost from cross-border payments. Other companies like Coil are using this technology to create alternate business models for online content creators.
As highlighted in the recent Senate Banking Committee hearing on Libra, there’s an imminent need for clear cryptocurrency regulation. Today in the US we’ve been left to oversee the industry through a roughly stitched patchwork quilt of agencies and regulations. The Internal Revenue Service taxes them as property. The Commodities Future Trading Commission oversees virtual currencies as commodities. The Securities and Exchange Commission believes that, in some cases, they may be securities as they use a nearly 75-year-old Supreme Court case to determine whether certain digital tokens are securities. And cryptocurrencies must also contend with state regulatory regimes.
Granted, it’s not entirely uncommon for a multitude of regulators to exercise parallel jurisdiction over a product or even an industry, but we expect regulatory lines and standards to be clearly drawn. Here they are not. The result is confusion and uncertainty. And that is hurting responsible US companies that are committed to delivering real innovation.
As the blockchain and cryptocurrency industries mature, regulation needs to also mature. We need regulation based on principles, not static and dated rules, so that crypto can evolve as the industry, and the innovation behind that industry, evolves. For example, in 1997, the Clinton administration released The Framework for Global Electronic Commerce, which outlined a set of principles to help accelerate the growth of global commerce across the internet.
We also need regulation that recognizes the differences between technologies and doesn’t paint them all with the same broad brush. This is like classifying all activity on the internet the same. An ecommerce site, a blog and an online bank all exist on the internet, but we understand their differences and regulate each accordingly.
Finally, we need regulation that doesn’t disadvantage US companies so they can fairly compete globally. We have already started to see the departure of American companies and their innovations to other countries who have more clearly defined regulatory frameworks.
The United States has a history of being a leader in both policy and technology. In the mid-1990s the United States recognized that for the internet to reach its then-futuristic promise, it couldn’t be regulated by laws meant for rotary telephones and transistor radios. We have an opportunity here to lead again. Let’s come together and seize the moment.