The two leading US-based cryptocurrency exchanges, Kraken and Coinbase, are rapidly expanding into Europe this week, obtaining key regulatory approvals from authorities in Ireland and Spain. This aggressive push comes as the regulatory environment for crypto firms in the US grows increasingly harsh under the Securities and Exchange Commission chair Gary Gensler and Senator Elizabeth Warren.
The companies cite "unfair" and "focused efforts" in the US to "curtail and kill" the crypto industry, forcing the exchanges to look overseas for growth and sanctuary. This exodus raises troubling questions about innovation, economic competitiveness and the role of regulation in the cryptocurrency space. Will Europe become the new hub for crypto innovation? Can the US salvage its position as the cradle for this potentially revolutionary technology? And how should regulators balance protecting consumers without stifling progress?
- Kraken received an E-Money license in Ireland and became a registered Virtual Asset Service Provider (VASP) in Spain.
- Coinbase also registered as a VASP in Spain earlier this week.
- The moves allow the exchanges to operate in the EU amid a deteriorating regulatory environment in the US.
- SEC Chair Gary Gensler and Senator Elizabeth Warren are seen as leading the harsh stance against crypto.
- But innovation may shift to Europe if the US clamps down too tightly on the nascent industry.
The Great Crypto Migration
Kraken and Coinbase are pillar institutions in the growing cryptocurrency industry. Kraken, based in San Francisco, caters to over 9 million clients and offers trading in more than 140 digital assets. Coinbase, also from San Francisco, is the largest US exchange with over 98 million verified users globally. Both were founded when Bitcoin was in its infancy over a decade ago.
But now the exchanges are increasingly looking beyond their home country for their future growth. Kraken recently received authorization from the Central Bank of Ireland to operate as an Electronic Money Institution (EMI). This will allow it to work with banks across Europe to expand its services. Meanwhile, Coinbase registered as a Virtual Asset Service Provider (VASP) with the Bank of Spain. This will let Coinbase directly provide crypto trading and custodial services in the country.
Regulatory Struggles in the Land of Opportunity
Why are two quintessentially American crypto success stories now fleeing abroad? The reason lies in the rapidly deteriorating regulatory environment for cryptocurrencies under the Biden administration.
SEC Chair Gary Gensler has aggressively targeted crypto projects over alleged unregistered securities offerings. He recently said the SEC will be "very active" on enforcement actions against crypto companies. Senator Elizabeth Warren is pushing legislation to severely limit cryptocurrencies over perceived dangers to consumers.
Coinbase CEO Brian Armstrong slammed these moves as "unfair" and "focused efforts" to "curtail and kill" the crypto industry at a time when it is still in an early, fragile stage. And the exchanges are voting with their feet. Kraken's Vice President of Global Operations Curtis Ting said the company is "committed to the ongoing investment in our European business" amidst regulatory struggles in the US.
Questions Around Innovation and Policy
This trend should raise serious concerns for US policymakers. Driving promising new technologies overseas through excessive regulation risks undermining American leadership in the next era of the digital economy. It also threatens the SEC's ability to effectively oversee cryptocurrencies if development clusters in locations beyond its jurisdiction.
Moreover, economist Joseph Schumpeter's famous theory of "creative destruction" argues that some upheaval is required for radical innovation to thrive. Attempting to eliminate all risks by strangling new ideas like cryptocurrency in their infancy may create more problems than it solves.
But regulation is also necessary to prevent chaos, fraud and serious economic harms. And cryptocurrencies remain a young, volatile technology with many regulatory gaps. Policymakers face an extremely complex balancing act.
Perhaps the solution lies in crafting smarter, optimally light-touch regulations tailored for the unique features of these fledgling technologies. The US led previous digital revolutions like the commercial internet by embracing regulatory innovation. Whether it can adapt its oversight to the disruptive potential of cryptocurrency may become one of the defining policy challenges of the next era.
Bitcoin: A Life Raft in the Regulatory Storm?
Yet amidst the regulatory turbulence, Bitcoin itself may offer a safe harbor for crypto innovators. As a truly decentralized currency outside the control of any company or government, Bitcoin cannot be easily banned or restricted into oblivion. This censorship resistance is its key value proposition.
Bitcoin also continues gaining mainstream adoption, with major institutions like Fidelity, BlackRock, Citibank and Morgan Stanley all offering some services around it. El Salvador even adopted it as legal tender last year. And Kraken recently touted the "market-leading position in liquidity and volume for EUR crypto pairs" as a driver of its European expansion.
So long as decentralized networks like Bitcoin continue growing, crypto innovators will likely have somewhere to turn if repressive policies try to stamp them out of existence. The cypherpunk ethos of "exit over voice" may enable crypto to survive regulatory attacks until saner policies gain sway.
This situation bears interesting parallels to some key moments at the dawn of religious freedom. The early Protestant reformation saw reformist preachers persecuted in places like Germany and France only to find refuge in Switzerland's decentralized federation. Later puritan movements fleeing repression in England migrated to America's open frontier where they planted the seeds of religious liberty.
Of course, cryptocurrencies are no panacea and come with their own flaws. But like those early religious dissidents, crypto may represent a disruptive shift in how humanity structures societal institutions - toward a world that is more open, transparent and accessible to grassroots participation. Attempts to forcibly repress it through state power could meet similar historical resistance.
Will Aggressive Regulation Backfire and Push Crypto Innovation Abroad?
Heavy-handed regulation often fails to anticipate unintended side effects. Attempting to ban social media platforms like TikTok in the US, for example, would likely just shift their development overseas while isolated Americans. Similarly, choking crypto innovation in the cradle could undermine US economic competitiveness and technological leadership.
But targeted policies that thoughtfully balance risks against rewards, like the light-touch early internet regulations, can allow transformative new technologies to flourish in a measured way. As crypto continues maturing, regulators should take care to encourage this nascent industry's vast potential while reasonably mitigating known harms. With wisdom and foresight, countries can harness crypto's power to unlock greater prosperity for their people.
Do We Face a Tragic Conflict Between Crypto Prosperity and Prudent Regulation?
There are no easy answers when disruptive innovations clash with well-intended policies. History shows that breakthroughs like electric lighting and motor transport also caused displacements that required adaptation.
Cryptocurrencies present a similar dilemma. Unquestionably, this technology enables scams, tax evasion, ransomware and other harms. But the internet's open architecture also enabled spam, piracy and other abuses, yet still yielded enormous social value.
Perhaps the solution lies in crafting smarter regulations that target specific problems without destroying the vast promise of the overall system. With creative thinking and good faith on all sides, society can resolve this tension between innovation and oversight. The ideal outcome is not anarchy nor authoritarianism, but a regulatory renaissance blending the best of both worlds.