Beware of the proposed US cryptor regulation-it could be a Trojan horse

The author is a legal professor at the American University Washington College of Law

After the spectacular failure of the crypto exchange FTX International, there were again demands for crypto legislation (also from the industry itself). But many of the previous suggestions would be worse than the status quo - at least for the general public. Crypto companies such as FTX were involved in the elaboration of many of the US laws discussed. The implosion of the stock exchange should not become an excuse to bring it into the law.

Unfortunately, it is true that many users of FTX have suffered a lot. However, the good news is that the overall economy did not suffer from its failure (the economic consequences of crypto flops such as Terra/Luna and Celsius were similar this year). Since crypto is not integrated into the traditional financial system, the pain has not extended to those who have decided not to invest in crypto at all.

In particular, the US banking authorities have decided against the merger of crypto with traditional financing. Laws that legitimize crypto could very cancel this, in which case future crypto failures will rather disturb the general economic growth. Government officers could even feel forced to intervene with rescue campaigns if the next crypto company implodes. Political decision -makers should be careful of legal provisions that position crypto as another financial market that is "Too Big to Fail".

There is also a risk that crypto legislation as a state "seal of approval" will be misunderstood and skeptics encourage them to invest their money. This is in particular a risk of the proposed StableCoin legislation. At the moment, the primary application for stable coins is speculation in decentralized finances, not - as often claimed by supporters in the industry. For a number of reasons, stablecoins are not a good opportunity to make payments, but the proposed legal templates would all expand a kind of state security network for them. If this encourages people to start using them for payments, then it may shake governments and central banks in the event of future stable coin runs.

Legitimization is not the only Trojan horse that is embedded in these crypto calculations. Any legislation that creates a tailor-made crypto regulation framework will create opportunities for traditional financial investments to migrate into the new regime and thus avoid existing financial regulation. This problem is inevitable because it is impossible to define "crypto assets" (or "digital asset" or "digital goods") so that traditional financial assets are excluded.

Ultimately, crypto-assets are nothing special. They are only computer files whose property is recorded in a blockchain (a kind of database). Pretty much every financial asset could be presented as a computer file, and ownership of such a computer file could be recorded in a blockchain. If the tailor-made crypto regulatory regime is "lighter" than that for other financial systems, it will be tempting for providers of financial investments to put these systems in the blockchain (something that JPMorgan already experimented with).

This is not only a way to deregulation, but also a way to a more shaky financial infrastructure. Providers of critical infrastructure are traditionally subject to strict regulation. In contrast, blockchain's open source software, which is cultivated by non-identified and non-accountable core software developers. Do we really want our financial system to rest on such shaky foundations?

It is not yet clear what happened at FTX, although many reports indicate that illegal activities were involved. The US Securities and Exchange Commission, Commodity Futures Trading Commission and the Ministry of Justice are already examining - and within the existing legal framework. If new legal provisions is this legislation, which has been passed after FTX's failure, should make it clear that the existing law applies to crypto (and if a crypto product or cryptodic service cannot adhere to this, it should not exist). This is not the right time to say goodbye to new crypto laws that were designed at the behest of the industry.