(Con) Cryptocurrency: State Regulation Superior to Federal Regulation

Federal regulation should be avoided, any innovative regulation should come from the states

Eric Peterson, 9-23, 21, Regulators Threaten Coinbase and Cryptocurrency Innovation, https://reason.com/2021/09/23/regulators-threaten-coinbase-and-cryptocurrency-innovation/

The cryptocurrency market continues to grow across the world as new products make it easier for people to invest, sell, and trade with cryptocurrency. But without changes to the mindset of regulators, many of these products will fail to make it to consumers.

Look no further than Coinbase, which last week stopped plans to offer its new lending product due to threats of legal action by the Securities and Exchange Commission (SEC). The "Lend" program would have allowed users to earn interest on their holdings if they held specific types of cryptocurrency. The SEC rationale for the lawsuit is that the Lend program violated longstanding security regulations, even though it's more akin to a traditional savings account.

This is unfortunate. Not only does it stall financial technology innovation, but it also denies consumers the ability to earn high interest rates at a time of rising inflation. There's a better way to deal with innovative financial products than through threatening lawsuits. They're called regulatory sandboxes, and the SEC should take after forward-thinking states and adopt one.

A sandbox is an alternative regulatory structure to deal with products that come with regulatory uncertainty. Companies that have such products can apply to test their products for a set period of time as long as they still comply with consumer protection standards. If they are accepted into the sandbox, they can offer it to consumers. When the testing period ends, they either comply with existing regulatory standards or they work with regulators to change those standards based on their experience in the sandbox.

The first regulatory sandbox was deployed in the United Kingdom in 2014. It's had 700 participants since 2015 with approximately 80 percent of those companies still in existence, a much higher rate than non-sandboxed firms. Companies in sandboxes were also more likely to raise money, raised more venture capital funding, and made it to market faster.

There are now 70 different sandbox programs in 57 jurisdictions and countries. Arizona was the first state to adopt a sandbox in 2018, and the Consumer Financial Protection Bureau (CFPB) has recently updated its sandbox program at the federal level. The most common type of sandboxes across the world are within financial technology. There are 27 companies in financial technology sandboxes across Arizona, Hawaii, and West Virginia, with the CFPB sandbox granting regulatory relief across 10 different financial products.

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