In 2008, Satoshi Nakomoto’s white paper introduced Bitcoin, a “trustless,” decentralized, and immutable ledger that can be used to transfer value digitally over the internet. Bitcoin’s groundbreaking innovation quickly expanded beyond value transfer, and today, the US$1.3 trillion crypto industry includes thousands of protocols that deliver a variety of functions from specialized ledgers, decentralized finance (DeFi) applications, and a diverse array of open marketplaces.
Web 3.0 is a conceptual innovation on the current phase of the internet that, today, is dominated by centralized networks operated by technology behemoths like Google, Facebook and Twitter. In Web3, individuals and communities use distributed ledger technology and open-source software to engage with decentralized and democratized networks on the internet that are secure, open, self-governing and permissionless.
With nearly infinite use cases, Web3 innovators are unlocking new concepts, ideas and philosophies that extend beyond finance to impact art, science, culture and politics. In the last year alone, non-fungible tokens (NFTs) have played a key role in popular culture, empowering content creators while vastly improving their livelihoods. Decentralized autonomous organizations (DAOs) are emerging as a tool for community organization and transparent, predictable governance. CityCoins are driving a new form of municipal revenue. Right now, the Ukrainian people and their government are leveraging blockchain technology by using crypto to secure desperately needed humanitarian aid and support.
Though concerns continue to circulate about the use of cryptocurrencies to avoid U.S. sanctions due to the innate transparency delivered by blockchain technology, cryptocurrencies are not proving to offer a scalable means of evasion in their current form. In fact, according to blockchain analytics firm Chainalysis, transactions involving illicit addresses represented just 0.15% of crypto transactions in 2021.
As these rapid advancements in blockchain technology take hold, the policy response around the world has differed. On one end of the spectrum, China with its single-party system has banned transactions involving private cryptocurrencies but fully embraced its own, centrally-controlled digital yuan while filing dozens of international patents on blockchain technology. On the other end of the spectrum, El Salvador has established Bitcoin as an official legal tender.
The Biden Administration’s recent Executive Order on Ensuring Responsible Development of Digital Asset is a positive step forward in recognizing a policy imperative for national leadership in global technological exploration and development. It should lead to a robust and principles-based policy response that upgrades the decades-old statutory and regulatory structures that have failed to deliver sufficient clarity on the treatment of crypto assets.
Consider the following: Roughly 90% of trading volumes in crypto markets for spot and derivatives trading take place outside the U.S., with only around 10% on U.S.-based exchanges, according to our own estimates. Meanwhile, roughly two-thirds of the most highly traded tokens relate to projects founded and run by U.S. citizens and trade on centralized or decentralized exchanges they created.
To be sure, U.S. entrepreneurialism is already driving and powering the new Web3 economy on a global basis, as the internet is transformed from a centrally-controlled, top-down ecosystem to a more democratic one with private property and democratic governance. Yet, despite the democratic American values supported by this innovation, the rewards and benefits from Web3 are accruing outside the U.S.
Legal and regulatory uncertainty around the treatment of crypto assets is standing in the way. Unanswered policy questions have left too many innovators, consumers and investors on the sidelines, hindering national economic growth and greater financial inclusion.
U.S. policymakers should recognize not just the challenges posed by Web3, but also the opportunities. We believe Congress should prioritize and pass new legislation that can provide a comprehensive policy response, address outstanding novel issues, plug oversight holes, and encourage entrepreneurs to safely innovate the Web3 economy. The right approach would promote crypto innovation and national competitiveness by supporting responsible innovation, fostering economic growth, ensuring consumer protections, furthering financial inclusion, and supporting law enforcement, including efforts against fraud and manipulation, money laundering, and other illicit activity.
In the interim, the public interest can be served through many applications of this technology if entrepreneurs are encouraged to proceed in a responsible manner following clear and predictable regulatory guidelines. Regulators can use their existing authorities creatively and responsibly by granting safe harbors where appropriate while continuing to serve their regulatory mission.
The arrival of Web3, powered by blockchain technology, could potentially transform the global economy into a more creator-led, open, inclusive, and democratic ecosystem. In previous technology waves of this scale, like the birth of the commercial internet, the U.S. was at the forefront of allowing and encouraging entrepreneurial activity that cemented the U.S. as a global technology leader. A balanced, modern regulatory framework that catalyzes innovation and allows for economic transformation is urgently needed to advance bipartisan goals of economic progress, inclusive markets and job creation.