Crypto needs a global view to build better regulatory models

The crypto industry is increasingly worried that U.S. regulators are clamping down too hard on the space. Predictably, that’s making companies in the space look outward to regions that have clearer guidelines in place, and it seems there are lessons the industry, and regulators around the world, can learn from looking beyond their borders.

“Hopefully, we’ll see the U.S. take a stand,” Denelle Dixon, CEO and executive director of the Stellar Development Foundation, told TechCrunch+ at Consensus 2023. “If we don’t, there’s going to be a lot of chaos.”

She’s not the only one who thinks so. Rebecca Rettig, chief policy officer of the layer-2 blockchain Polygon, told TechCrunch+ that she spends a lot of time in D.C. to meet policy makers, regulatory agencies and other groups for a variety of reasons. Some conversations are to help educate people, while others are “pressing” meetings over crypto policy. “We have a big divide between industry and regulators, and to bridge that gap, industry has to move a bit.”

Among the conversations in Congress: market structure, stablecoins and the industry after FTX’s collapse.

“Regulators are applying the law as it is written today and as they see it.” Rebecca Rettig, chief policy officer, Polygon

“Regulators are applying the law as it is written today and as they see it,” Rettig said. “That’s why we’ve seen some hostility, or a ‘regulatory crackdown,’ as people are calling it. The industry needs to understand that they need to comply with the ethos we’re talking about where there aren’t intermediaries.”

Regulators and policy makers also want to see nonfinancial use cases for crypto. Last month, Polygon launched a crowdsourced database called Community Policy Initiative No. 1, which aims to share real-world use cases of web3, ranging from social impact to gaming applications. The database will be published once it has collected enough from the community, according to its website.

“Because we’re building utility around the technology, I think we’re going to see interest and acceptance from regulators around the world, including the U.S.,” Dixon said. “It’s about showing we’re solving problems.”

There’s lots of regulatory engagement in the European Union, United Kingdom and Asia and “it’s a very different environment and ‘vibe’ when you’re engaging there. They’re welcoming, intellectually curious and savvy about the technology and terminology,” Rettig said.

In late April, the EU adopted a regulation called Markets in Crypto-assets (MiCA) for cryptocurrencies and stablecoins that are not regulated by its existing financial services legislation. Meanwhile in the U.K., the Financial Services and Markets Bill (FSMB) will be up for a vote in the next couple of weeks. Hong Kong and Singapore are looking at stablecoin regulation, too.

“MiCA is the most comprehensive regulation anywhere in the world, with the exclusion of DeFi and NFTs,” said Teana Baker-Taylor, the VP of policy and regulatory strategy at Circle. “Holistic end-to-end regulatory packages are a big ask.”

The regulatory environment in the U.S. is more aggressive, not just by SEC Chair Gary Gensler, but by the industry as a whole, Rettig said. “We have [a] more enforcement-driven culture than other countries generally.”

While this crackdown may scare some crypto companies, Rettig and Dixon don’t think it will chill innovation in America. “[Companies] have consumers in the U.S. and need stability here,” Dixon noted.

Still, lots of crypto businesses are trying to figure out the best way to set up overseas, Rettig said. “A lot of founders tell me they don’t want to set up here and ask, ‘Where should we go?’”

The number of blockchain developers in the U.S. has declined every year since 2017, according to a recent report by Electric Capital. While it’s arguably a bad signal for U.S. innovation, it also points to a globally growing remote crypto ecosystem and workforce in a post-COVID world. According to the report, the U.S. share of blockchain developers has fallen 2% per year in the last five years, dropping to 29% last year from 40% in 2017.

“If you’re a company in this ecosystem, everything is digital, business sits on servers as opposed to in brick-and-mortar buildings,” Baker-Taylor said. “So you can pick up and move, and we are seeing some companies suggesting they might. That would be detrimental to countries, not only the U.S.” If talent leaves a country, it can take money, long-term innovation and technological advancement with it.

Baker-Taylor expects stablecoins to be more regulated globally in the next 12 months. “I do think we’re going to see a significant amount of adoption in the payment space because traditional players, banks and merchants are going to have comfort in using a regulated asset deemed electronic money, like PayPal, and that will create flywheels for adoption.”

There were significant failures in the crypto industry in the last year, from the Terra/LUNA collapse to other centralized crypto organizations like Voyager, Celsius, Three Arrows Capital and FTX, but that could lead to change.

“We’re going to move to a period to have more proactive work done and get legislative work done around the world,” Baker-Taylor said. “And with enforcement action, in a lot of cases, it will be necessary.”