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Critics have called cryptocurrency the “Wild West of finance” due to its largely unregulated and highly-volatile nature. While it is understandable where this perception comes from, it isn’t an entirely accurate assessment of the situation. Indeed, the ways in which the government is hoping to regulate the crypto market has the potential to wreak havoc in the same way that we previously saw in the rideshare industry.

In March, President Biden signed an Executive Order intending to ensure the responsible development of digital assets. Despite many years of crypto “studies” and several major regulatory enforcement actions against crypto firms, it seems as though the government still  doesn’t see how continued study and ambiguous cautions by regulatory officials can be counterproductive for the growth and development of the crypto market. The industry is rapidly approaching an “inflection point” where these delays threaten to cause more damage to the market than it will benefit. In particular, continued disjointed messaging  from government bodies, such as Secretary of the Treasury Yellen, will only push innovation - and thus opportunities - away from the US and into more dangerous, less protected jurisdictions.
 

The dangers of the “Uber Path”

We are seeing the cryptocurrency market follow much of the same path as the rideshare industry took in its infancy. Companies like Uber (UBER), Lime, and others were initially unregulated as they brought new opportunities to the industry, only for a regulatory push to stall business growth for new entrants. This allowed for the industry’s most powerful competitors to tighten their grip and force the smaller people out.

Like Uber and the rest of the rideshare industry, the crypto market is developing as a result of fundamental structural and logistical problems with the status quo. Rideshare apps were designed to respond to taxi service issues and costly airport fares. In contrast, cryptocurrencies were developed as a response to the difficulties that consumers have faced with exchanging money electronically, such as delays and fees attributable to traditional banks and money transmitters..

As is the case with any industry, technological developments tend to occur more quickly than regulations can keep up with. These technologies — rideshare apps and cryptocurrencies — both developed due to a need; a need which evolves and changes over time. The need for Uber started as an alternative to taxis and black cars, but then also addressed the need for a carpool alternative and cheaper transportation. While cryptocurrency may have begun as a way to make money transfers and online payments safer and more transparent, it is quickly becoming more than that. 

Many fail to realize that having imperfect solutions is better than having no solution at all. The needs that these companies are fulfilling are pervasive and painful for consumers, so these solutions should be of the highest priority. These technologies have flaws of their own — Uber has its fair share of complaints, as does cryptocurrency — but we believe that their flaws are significantly less burdensome than the issues they were created to solve.
 

How overly broad regulation hinders innovation

Consumers can also expect consolidation within the industry to be rapid, especially once regulation occurs. We saw this in the food delivery industry when the initial boom brought several startups to the table before acquisitions narrowed it down to the big players — Doordash, Postmates, and Uber Eats — with only a few smaller companies left to pick up the scraps. Right now, we are seeing an ecosystem of abundance, with several new crypto offerings entering the market. Should poorly-designed regulation occur, we can expect a significant decrease in this competition - and thus consumer choice.

The founding principles of cryptocurrency are transparency through distributed ledgers and resiliency through decentralization. We believe that regulations can be - and should be - reasonably designed to encourage decentralization through restricting anti-competitive behaviors, manipulative practices, and the spread of false or misleading information.

If regulation is instead overly focused on existing market participants to the point that it entrenches those firms or projects in superior positions, we could see an outcome which neither adds to investor protection nor encourages innovation by US firms in the space. . Instead, we could see that investors end up with their crypto bets unintentionally concentrated on unpredictable, uncontrollable regulatory events. For example, take what happened with California’s Prop 22; if something similar happened in the crypto market, the potential consequences on the industry could be catastrophic.

To prevent cryptocurrency from going down the same disastrous path as Uber, investors must speak up about their fears of the impending regulation of the crypto market. In the spirit of developing digital assets as referenced in the Executive Order, we must encourage regulators to focus on encouraging innovation in the industry through fair competition. Poorly-focused regulation will only result in the major companies taking hold of the industry, causing harm to both consumers and investors.