Sound supervision is the guiding light for a long-term bull market

May has been a dizzying month for cryptocurrency investors, and not just because of the price movements of major crypto assets like Bitcoin. Since May 5, regulators from Washington to Beijing have been releasing announcements related to the cryptocurrency market on a near-daily basis.

In Washington, Treasury Secretary Janet Yellen proposed giving the Internal Revenue Service the regulatory tools to detect tax evasion in digital assets. The Securities and Exchange Commission warned that bitcoin futures could prove volatile. The Office of the Comptroller of the Currency revealed that it is reviewing Trump-era policies that directly led to trust bank charters falling into the hands of cryptocurrency companies. The Department of Justice and the Internal Revenue Service have launched multiple investigations into possible tax evasion and money laundering using cryptocurrency exchanges. And the Federal Deposit Insurance Corporation and the Federal Reserve are taking multiple steps to establish potential regulatory guidelines for digital asset banking.

There is a misconception that this is a hindrance to the development of cryptocurrencies and financial technology. But in fact, Michael Hsu, the acting governor of the US central bank, said it himself at a recent House hearing. "I believe these trends cannot be stopped," he said of fintech companies entering the mainstream. "They bring great promise, but also risks. The banking and regulatory communities must adapt to them."

This is where we are, the “adaptation phase.” To be sure, the Biden administration and independent regulators are playing catch-up, but as they do, they are sending a clear message to the crypto world. Pay your due taxes, obey the law, and don’t cut corners, but beyond that, feel free to innovate. We have no intention of holding the market back.

The task now lies ahead for the government to follow through on its promises. The federal government has made it clear that they have no intention of suppressing cryptocurrencies and financial technology; next they must ensure that they do not allow unintended consequences to occur due to poor planning or poor execution.

So what exactly does sound regulation look like?

There is a school of thought that says it should be a “free range” model. This was the approach taken by the Clinton administration in the 1990s when faced with how to deal with the then-booming internet market. A quarter century later, we are still struggling with whether this was the right decision. One look at the still-debated Section 230, the 1996 online immunity protection, shows the answer. The permissionless innovation of the internet in the 1990s meant the freedom to launch a website that might never be visited. With the development of digital assets, billions of dollars are at stake. What the Biden administration and Congress do next has the power to shake up the financial industry around the world.

Fortunately, a robust model for regulation and oversight already exists in one unlikely land: Wyoming.

The state spent more than three years methodically developing a legal and regulatory framework for digital assets that was "backwards compatible" with U.S. law, since they could not be neatly incorporated into existing laws and regulations. Wyoming law dictates how owners can obtain clear title to digital assets, clarifies their status under commercial laws, and defines their tax status. On this solid foundation, Wyoming then established a new type of bank charter, the Special Purpose Depository Institution (SPDI), to address the scarcity of banking services available to the industry. These banks are designed to meet the capital requirements required of national banks. Avanti is one such bank, as is Kraken Bank; two more SPDIs are about to apply for charters.

The big bank lobby has been trying to stop the development of SPDIs. But the good news is that more and more policymakers in the House of Cards are catching on to this revolution because they understand the promise of cryptocurrencies and the need for new-age regulation that encourages innovation rather than stifling it.

Reps. Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) support the idea that the Federal Reserve could issue digital dollars directly to individuals to distribute government aid and keep the unbanked connected. Colorado Gov. Jared Polis is an outspoken cryptocurrency advocate who served as co-chair of the Congressional Blockchain Caucus while in Congress. Sen. Cynthia Lummis (R-Wyo.) has owned Bitcoin since 2013. She teamed up with Banking Committee member Kyrsten Sinema (D-Ariz.) to form the new bipartisan Financial Innovation Caucus.

Even in the home state of Cynthia Lummis (Wyoming state senator and Bitcoin advocate), a Democrat, state Senate Minority Leader Chris Rothfuss, an engineer by training, is at the forefront of crypto regulation. Wyoming’s laws and regulations are now being copied by regulators in other states and even other countries.

The revolution driven by crypto knows no ideology or political affiliation. Regulating it doesn’t mean adhering to one side’s dogma. It simply means having the foresight to see how building a supportive, non-punitive regulatory framework around digital assets can make the financial system more resilient, secure, and stable. The Biden administration clearly has the will to do so. It’s critical that we, as crypto market participants, see through these issues.