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Wharton: Why the U.S. Government Should Regulate Cryptocurrency

Wharton’s Kevin Werbach explains why the Biden administration’s executive order to develop a national policy on cryptocurrency is an important step forward.

Published with permission from Knowledge @ Wharton, Wharton's online business journal.

The Biden administration’s executive order to develop a national policy on cryptocurrency and digital assets is an important first step in setting some guardrails around a global market now worth more than $3 trillion, said Wharton legal studies and business ethics professor Kevin Werbach.

The executive order issued in early March calls for government agencies to coordinate on six key priorities: protecting consumers and investors, preserving financial stability, mitigating risks from illegal digital assets, promoting American competitiveness, ensuring financial inclusion, and guiding responsible innovation.

“We need experts working on these issues and working through the mechanisms of these agencies, so I give the administration a good deal of credit for how much work it must have taken to align all of these different groups to move forward,” Werbach said during an interview with Wharton Business Daily.

Werbach, who wrote a recent opinion piece about the executive order, said the concerns and confusion around cryptocurrency remind him of the early days of the internet when companies like Yahoo, Amazon, and eBay were launching consumers into an uncertain new world of online shopping.

Under President Bill Clinton in the late 1990s, Werbach served as counsel for new technology policy at the Federal Communications Commission. He helped lead a number of stakeholder agencies to develop the Framework for Global Electronic Commerce.

“There was this whole wave of e-commerce that was starting, and it raised all sorts of legal and regulatory questions. There were some who said we should beat this back, we should stop it, we should tax it, it’s unfair competition with existing services,” Werbach recalled. “It was clear there needed to be some level of coordination. It was clear the White House, the U.S. government, should express its views. The rest of the world was looking at us, trying to understand how government should deal with the internet.”

Back then, the internet had about 100 million users who were mostly in the United States and a handful of other countries, so America emerged as the leader in guiding internet policy. But now there are billions of people around the world with access to the internet, and other countries are moving forward with their own regulations on cryptocurrencies. That’s why the time for the U.S. to act is now, he said. In addition to its $3 trillion market capitalization, cryptocurrency and digital assets involve major financial services companies, billions of dollars in transactions on decentralized finance platforms, and a multibillion-dollar mining industry.

“Many other governments are looking to either shut this down or looking to attract activity,” Werbach said. “It’s not true at all to say that digital assets are not regulated or the U.S. has done nothing. But the U.S. government didn’t have a coordinated approach. That, to me, is similar to what happened with the internet.”

The professor said the global nature of digital finance presents a puzzle on how to impose national laws on an international system. Werbach directs the Wharton Blockchain and Digital Asset Project, which develops business and regulatory insights on distributed ledger technology.

“It’s a big question, it’s a challenging question, but it’s a solvable question,” he said. “We addressed it with the internet, and we can address it with digital assets as well.”

Fighting Digital Currency Fraud

Werbach is a proponent of incorporating new technology into the existing financial infrastructure to ward off fraudulent activity with cryptocurrencies and digital assets. Just because digital currency is new doesn’t mean that it shouldn’t be treated with all the seriousness of traditional currency. But it may require some creativity because the market is structured differently.

“If we’re concerned about protecting investors from scams and fraud and market manipulation, then we’re concerned about that regardless of whether that’s happening on a traditional stock exchange or whether that’s happening on a digital asset exchange or some other platform,” he said. “The question isn’t, can we avoid having the rules that protect investors applied to investors in these assets? The question is, how can we do that in a way that doesn’t do too much damage to these markets?”

Werbach also champions the opportunities for financial inclusion that come with digital currency. Financial inclusion is one of the more difficult priorities in the executive order, and Werbach wants to make sure it actually happens. An estimated 5.4% of American households were unbanked in 2019, according to government data. Although financial inclusion is rising globally, the World Bank estimated in 2018 that 1.7 billion people still didn’t have access to banking services.

Overall, Werbach said he’s pleased that the federal government is moving forward because digital currency is “the future of the financial system.” To put that in perspective, conversation around cryptocurrency used to be about avoiding government regulation. It’s evolved now to recognize that the government has an important regulatory role.

“Government doesn’t necessarily stop innovation,” he said. “Government often encourages and facilitates innovation because it creates those guardrails for trust for people to adopt these things.”