America is falling behind other nations when it comes to blockchain technology. Blockchain technology is increasingly being used in a broad range of industries, including financial services, media, telecommunications, health care, agriculture, and energy. Unfortunately, an uncertain and restrictive regulatory landscape is impeding American leadership in this sector. And it may get worse, as congressional backlash over Facebook’s proposed Libra stablecoin intensifies. As a result, Europe and Asia are poised to drive technological development, revenue, jobs, and talent within this burgeoning industry.
Many countries in these markets have smoothed the way for blockchain adoption by making innovative legislative changes, such as a flexible approach to taxation, that address the real risks. The U.S. could fall behind these more sophisticated global players, imperiling both our economic competitiveness and national security.
Blockchain technology is, at its simplest, a powerful database maintained on either a public or private computer network that uses sophisticated encryption. It provides trustworthy and, if necessary, transparent record-keeping. It could revolutionize supply-chain management, streamline medical records, and create digital identities both for enhancing consumer transactions and for other applications where trust is critical. The immense scope and application of blockchain is the foundation of the next leap forward in the digital economy. Representative Bill Foster (D., Ill.), a physicist and likely Congress’s sole blockchain coder, put it succinctly: “Blockchain is a disruptive technology that will change the way we do business in almost every sector.”
Tangible assets — such as gold, property titles, stocks, bonds, etc. — also may be digitized with ownership data archived on a blockchain. Mainstream companies have already adopted many of these applications. JPMorgan’s Quorum, Ernst & Young’s Nightfall, and Microsoft’s Azure are three marquee examples. A particular blockchain technology also may have its own native currency, or “tokens,” which consumers can use to perform specific functions, including file storage, trading rights, and media access, among many others.
Naturally, America’s competitors have not overlooked the power and the promise of blockchain technology to transfer assets and information directly and quickly across expansive networks. The Russian and Chinese intelligence services have labored tirelessly to influence blockchain security protocols. One agent of Russia’s FSB (the KGB’s successor) reportedly boasted that “. . . the Internet belongs to the Americans — but blockchain will belong to us.” And last October, Chinese premier Xi Jinping urged his people to “seize the opportunity” that blockchain offers. China already holds the greatest number of blockchain-related patents, with Chinese patent applications from 2013 to 2018 at 4,435, more than double the U.S. number. Beyond commercial deployment, the Chinese plan to use blockchains to manage the nation’s vast domestic data assets, including those related to its military hardware. Experts also expect blockchain to serve as a critical component of its global “Belt and Road Initiative,” which is at the core of China’s long-term foreign expansion plans. Even less hostile nations, such as Singapore and Germany, have led the way with legislative and regulatory support for blockchain-based companies. Consequentially, they have become blockchain-innovation hubs.
Yet as the world adapts to blockchain, U.S. investments flow offshore. American financiers remain skittish about deploying capital to domestic blockchain opportunities due to regulatory uncertainty over what instruments will be considered a security. A recent survey by the Washington-based Blockchain Association showed that 91 percent of industry participants consider “unclear regulations and guidelines” a significant barrier to their success. Furthermore, the report confirmed that 66 percent of the industry’s largest employers are now based outside of the U.S. This is no surprise, given that the industry’s decentralized nature lets businesses and workers relocate easily to more hospitable locales. This reduces America’s ability to capture a greater share of the estimated trillions in additional global GDP that Web 3.0 will generate in the years to come. Lingering regulatory questions and the lure of friendlier foreign economies jeopardize America’s competitiveness in this growing sector.
If the U.S. blockchain industry ever is to have a fighting chance in the global market, Congress must remove the anchors from the industry’s feet. Representative Warren Davidson (R., Ohio), an early reform proponent, has told me: “We might not see any action on this in the next five years unless there is a groundswell push.”
Legislation before Congress, such as the various “Token Taxonomy” bills, would clarify the designation of digital assets and assign specific agencies to regulate them. This would eliminate some of the uncertainty plaguing the industry. Congress should also ensure that blockchain companies have a level playing field by removing barriers to accessing banking and insurance products. Washington should also reform the U.S. tax code so that each movement of a digital asset does not create a taxable event and corresponding record-keeping nightmare. America should also follow the direction of China and other nations and explore the digitization of its own currency, so that the U.S. can defend the dollar’s status as the world’s reserve currency.
The U.S. economy’s resounding growth over the past three decades is largely due to America’s early and substantial investment in the Internet. American innovators helped design and build the infrastructure on which most of today’s economy rests. Thousands of companies that capitalized on this technology succeeded, some spectacularly, and put millions of Americans to work. As with other technologies, American innovators should be focused on bringing the very best products and services to market, not worrying about getting entangled in red tape.
Timothy Furey, CFA is the CEO of Brooklyn-based ConsenSys Digital Securities, one of the U.S.’s first digital asset investment banks.