Regulating the Crypto Wild West
The explosive growth of cryptocurrencies and digital assets has left financial authorities scrambling to understand what is going on. But though this burgeoning sector is known for its frontier spirit and commitment to innovation, plenty of the risks it poses should already be familiar to regulators.
A well-functioning financial system is a key component of any successful economy. Without efficient payments and broadly accessible financial services, people cannot engage easily in commerce, save for a rainy day, invest in new innovations and business models, or insure against risk. But precisely because the financial sector is so central, developments within it are highly consequential. If the digital revolution has shown us anything, it is that one seemingly minor innovation can upend or even eliminate entire industries.
The promise of financial technology (fintech) is that it will enable even faster, less costly commerce (including across international borders), improve the allocation of capital toward productive investments, and make financial services even more efficient and accessible, not least to the world’s 1.7 billion unbanked or underbanked people. But technological innovation is not inherently “good” or “bad.” Some changes yield broad benefits for society, but others may benefit the few at the expense of the many, and most will bring a mix of benefits, costs, and complications.
The rapid growth of digital assets is a case in point. Though there are many scams, there are also many opportunities, and the countries that can harness these new technologies effectively may stand to gain a competitive edge. How should governments – and democratic electorates – weigh the risks and rewards? Raghuram G. Rajan, a former governor of the Reserve Bank of India, recently offered his views on this and related questions for Project Syndicate’s “Finance 3.0” event.