Let's be blunt: The Biden administration's approach to crypto regulation feels like using a sledgehammer to crack a nut. While the intention – protecting consumers and maintaining financial stability – is laudable, the execution, spearheaded by SEC Chair Gary Gensler, has been a masterclass in regulatory overreach. It's regulation by enforcement, plain and simple, and it's creating a chilling effect on innovation in the DeFi space.

Who are the casualties? It’s not only the “crypto bros” that mainstream media like to dehumanize and villainize. It's something far more insidious.

Innovation, Not Just Speculation, Suffers

Just consider the early days of the internet. Imagine what would have happened if regulators had responded with fear instead. Or they could have regulated right from the start—suffocating innovation and growth with draconian measures to avoid any possibility of scams or misdeeds. Without ARPA, we may not have Amazon, Google or even the platform you’re reading this on. Yet that’s exactly the risk we run with DeFi due to the current regulatory environment.

Under Biden’s SEC, spearheaded by Gensler, nearly every crypto asset has been deemed a security. This potentially dangerous move exposes them to established securities laws that simply don’t work in this space. This creates a perfect regulatory minefield for innovators and entrepreneurs. How can you build something truly innovative when the rules are unclear, and the threat of an SEC lawsuit looms large?

The biggest casualty in all of this is American innovation itself. While other nations such as Singapore, Switzerland and even China have taken a more prudent and open stance towards crypto, at the same time, we are giving up turf to them. These nations understand that blockchain technology and DeFi have the potential to revolutionize finance, supply chains, and countless other industries. By driving innovation offshore, we're not just losing out on potential economic gains; we're risking our future competitiveness.

Retail Investors, Ironically, are Hurt

The Biden administration’s professed concern for retail investors is misplaced. These same people have been cast as the unintended victims of that crackdown. How? By shutting them out of some of the most lucrative investment opportunities.

I’m not here to say that every single DeFi project is a home run. It’s a high risk game, and investors should thoroughly research all investments. But shouldn't people have the freedom to allocate their capital as they see fit, provided they're fully informed of the risks?

By effectively stifling DeFi development, the SEC is creating a situation where only sophisticated investors with access to offshore markets can participate in these opportunities. It keeps the average retail investor on the sidelines, unable to enjoy the potential gains. Regulators should work to ensure a truly level playing field. Indeed, everybody should have access to financial innovation!

It’s the equivalent of saying people cannot invest in technology innovations because some tech startups will fail. It's paternalistic, and it ultimately hurts the very people it's supposed to protect.

Future of Finance, Potentially Derailed

The most important, though unseen, collateral damage may be the future of finance. Ultimately, DeFi provides an unprecedented opportunity to build a financial system that is more transparent, accessible, and efficient. Smart contracts can automate processes, reduce development costs and eliminate the need for intermediaries to save time upon approval. Imagine a future where loans immediately receive an approval. Now picture cross-border payments and financial services that can reach everyone with an internet connection. This is the promise of DeFi.

That promise is being undermined by the current regulatory approach. Excessive rules and regulatory choke points are crushing innovation and stopping DeFi from living up to its promise. Instead, we put at risk our chances of creating a more innovative, competitive and inclusive financial system.

Trump's Vision Versus Biden's Reality

The difference with the Trump administration’s approach couldn’t be more different. While Biden's SEC has pursued a strategy of "regulation by enforcement," Trump's SEC chair, Paul Atkins, advocates for regulations specifically designed for the crypto market, emphasizing collaboration with the industry and clear, predictable rules. Even Trump himself is now on the crypto train, portending a much friendlier disposition towards the industry.

Let's be clear: I'm not advocating for a complete free-for-all. Buyers still need the basic protections that regulations can provide—including protection from fraud and bad actors. Those regulations need to take into account the specific properties and behavior of the crypto market. We cannot simply superimpose existing securities laws onto this brave new world.

The Path Forward: A Call for Balance

What’s required is a more balanced approach, one that promotes innovation but assures adequate regulations and vigorous enforcement against bad behavior. This means:

  • Clear and predictable rules: Crypto businesses need to know what is expected of them.
  • Collaboration with the industry: Regulators should work with developers and entrepreneurs to understand the technology and its potential.
  • A focus on outcomes, not just inputs: Regulations should be designed to achieve specific goals, such as consumer protection or financial stability, without stifling innovation.

We need to ask ourselves: Do we want the U.S. to be a leader in the global blockchain revolution, or do we want to be left behind? The answer should be obvious. Seven steps the Biden administration should take to reorient its crypto regulation. Now is the moment to pursue a more creative trajectory that rewards creativity. The future of DeFi, and arguably the future of finance in general, rests on it.

Let’s not prematurely strangle this golden goose before it gets a chance to lay its eggs.