With its history of innovation and leadership in finance and the Internet, the United States stands uniquely poised to spearhead the global development of decentralized finance (DeFi). Forward-thinking legislation can ensure we seize that opportunity. While this may seem like a no-brainer to advocates of technological progress, it remains a contentious issue. Recent headlines and legislative efforts highlight significant opposition among influential policymakers to the advancement of DeFi in the U.S.
Despite the resistance on Capitol Hill, the relentless growth of blockchain-based technology is inevitable. A dynamic, rapidly expanding network of developers, entrepreneurs, and users is driving this maturation on a global scale. Unfortunately, many U.S. policymakers fail to grasp the immense opportunities that crypto and DeFi represent. They also overlook the substantial risks of not maintaining America’s leadership in this burgeoning sector. Now is the time for legislative action that supports innovation and secures our position at the forefront of financial technology.
The United States has long held a dominant position in the realms of financial services, internet infrastructure, and entrepreneurship, yielding substantial benefits for its citizens. U.S. financial leadership has profoundly impacted global economics and has positively influenced the prosperity of American families. Over the last century, as U.S. leaders took an active role in building global financial infrastructure, the country has thrived, using its financial system to project its values worldwide.
Former Treasury Secretary Jacob Lew highlighted the importance of clear economic rules, stating, “Clear rules for global economic relations create opportunities and incentives to innovate, invest, and work—the critical drivers of economic progress. History shows that the absence of a durable framework not only squanders untapped potential during good times but also creates grave risks during turbulent times.” The U.S. naturally assumed this leadership role, emerging as the preeminent economic power after World War II, with the world’s largest and most dynamic economy and a highly regarded currency. While the global economic landscape has evolved and other nations have increased their share of economic activity, the U.S. has maintained its leading position through intentional policy choices, with the U.S. Dollar serving as the world’s reserve currency.
A parallel can be drawn with the development of the Internet. The United States is the most influential country in the development and current state of the Internet. This leadership has brought innumerable benefits to the nation and its people. From technological innovation to policy influence, economic dominance, cultural impact, cybersecurity leadership, and global connectivity, the U.S. has played an indispensable role in shaping the Internet's past, defining its present, and influencing its future.
Technological innovation in the U.S. has led to great economic success, with the country standing as the preeminent powerhouse of a thriving digital economy that significantly influences global markets. The success of American tech companies has bolstered the nation’s economic strength and positioned it as a primary driver of global technological trends. The digital revolution, enabled by a supportive policy environment that encouraged innovation, competition, and infrastructure investment.
Given its historical and current leadership in the global financial system and the Internet, the U.S. is uniquely positioned to set the standards for Web3 and DeFi, which will bring incredible benefits to citizens. Embracing DeFi means leading the way into a new frontier in financial services, offering unparalleled opportunities for innovation and economic growth. By fostering a supportive environment for DeFi, the U.S. can hold onto cutting edge startups based in the United States, and enable established firms to participate more fully, leading to greater job creation and competitive technological advancements.
The Financial Innovation and Technology for the 21st Century Act (FIT21) is the best available path for the U.S. to use legislative levers to maintain global leadership. Led by House Financial Services Chair Patrick McHenry, and Agriculture Committee Chair, GT Thompson, the bill looks to bring structure to the crypto market by settling jurisdictional issues between the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), establishing rules for issuance and secondary trading of digital assets, and providing some obvious consumer protection standards for crypto intermediaries.
And wisely, FIT21 takes care to ensure that the technological innovations of DeFi aren’t inappropriately lumped into the rules meant to regulate centralized entities holding customer funds. This most recent version of the bill includes thoughtful language to define and exclude “decentralized finance activities” from the text’s provisions. This includes activities crucial to making the nuts and bolts of decentralized blockchain infrastructure work like compiling and validating network transactions, operating a node, providing a user interface, and developing or publishing software. This is what we’ve been advocating for since the text was first made public nearly a year ago (See: Financial Innovation and Technology for the 21st Century Act from July of 2023).
FIT21 is not a perfect piece of legislation, and doesn’t give the industry exactly what it’s asked for (spoiler alert: there is no such thing as a perfect bill for any party involved), and in some cases could be ultimately harmful. The bill’s provisions to give the CFTC authority over the crypto spot market are unusual and likely unfair, as most commodity spot-markets do not have comprehensive regulatory oversight as with securities or derivatives. FIT21 also has problems regarding token classification, with hard to achieve standards for decentralization that could serve only to further intermediate the ecosystem, working counter to the ethos of crypto, stymieing innovation, and delivering less value to users.
Successful legislation is about compromise, and all stakeholders end up having to give a little to move things forward, but there are real consequences to the choices enshrined in legislation. The bill does show effort from the drafters to get these issues right, but details will need to be hammered out in the upper chamber, and further adjudicated in the regulatory rule making process, which will again open the process up to feedback from the public
The potential benefits of DeFi to the United States are too significant to ignore. By embracing this technological evolution, and supporting legislation that enables it, the U.S. can continue its legacy of financial and technological leadership, fostering innovation, promoting financial inclusion, and maintaining its influence in the global economic landscape. The future of finance is decentralized, and the U.S. has the opportunity to keep itself at the forefront of this transformation to reap the rewards and secure its position as a global leader.