Markets need rules — crypto is no different

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is Sarofim-Rock professor of business administration at Harvard Business School and a research partner at a16z crypto

With the US government finally recognising the benefits of blockchain technology, the question now is how best to harness it. Some may push for a regulatory free-for-all, but that would be a mistake. History — and economic theory — shows that thriving markets require clear, consistent rules. Crypto is no exception.

Resistance to centralised authority is baked into crypto’s DNA. Satoshi Nakamoto, the pseudonymous creator of bitcoin, designed the protocol to bypass financial intermediaries, envisioning a currency that is free from government or institutional control. But contrary to what some believe, a “free market” is not a free-for-all — it is a structured system where individuals can engage in exchanges with reasonable expectations of fairness and security. Without basic protections, markets break down and uncertainty will drive away serious investors and legitimate businesses, leaving behind only speculation and bad actors. 

As Paul Atkins, the new chair of the US Securities and Exchange Commission, noted in a recent speech, “regulators should provide the minimum effective dose of regulation necessary to protect investors while allowing entrepreneurs and businesses to flourish”.

The rules governing crypto — like those for all markets — should aim to achieve four key objectives. First, predictability and stability. A functional market requires clear, enforceable rules. Entrepreneurs need to know how their businesses will be regulated. Investors need confidence that the rules will not change arbitrarily. And consumers need to trust that their transactions are secure.

Second, protection of property rights. Secure ownership is the foundation of any market. Crypto excels at encoding ownership through blockchain technology, but legal frameworks must reinforce and complement these protections. 

Third, transparency and information clarity. Efficient markets depend on reliable information. Buyers need to understand what they are purchasing, whether it is a digital asset, a decentralised finance product, or a non-fungible token (NFT). Regulations should promote disclosures that help consumers and investors make informed decisions, while preventing fraudulent schemes.

Finally, fair competition. Rules should prevent monopolistic practices, market manipulation and fraud. Without oversight and tailored guardrails, markets can become playgrounds for bad actors who exploit information asymmetries, deceive investors, or artificially inflate asset prices. And any regulatory framework needs to be congruent with existing rules so it does not inadvertently create new workarounds to established protections. 

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Crypto today is not a well-regulated industry, although it is finally on that path. Crypto start-ups have spent years navigating a murky and often hostile regulatory landscape. As a result, while blockchain technology provides strong internal protections for property rights, the surrounding regulatory environment has been anything but supportive of a healthy market.

The SEC, for instance, has until recently pursued crypto companies for alleged violations without first establishing clear legal standards. Entrepreneurs were left guessing which rules applied, only to face lawsuits after the fact. This created uncertainty that stifled innovation, while at the same time allowing bad actors to operate.

Additionally, many current crypto regulations were built for legacy financial systems, treating blockchain-based assets as if they were merely new forms of traditional securities or commodities. But crypto is more than just finance: it is also a web infrastructure platform. Regulation must ensure that financial oversight does not choke off technological development.

Crypto has the potential to revolutionise everything from personal identity verification to global payments. But realising that potential requires guardrails like a token taxonomy that provides legal definitions of digital commodities; standards for evaluating decentralisation and disintermediation; consumer protection; tax guidelines; and a framework for how legitimate blockchain-based businesses can operate without fear of arbitrary prosecution.

None of this is radical or unprecedented. The principles that make markets work — stability, property rights, transparency, and fair competition — have long been understood. But they have yet to be consistently applied to crypto. That must change, and the industry must welcome it.