Regulators are one of the most important parts of any system. The financial system is no different, and American financial regulators are amongst the most sophisticated in the world.

For decades, the United States Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CTFC), and several other sister organizations have dedicated their effort and resources to ensure that companies playing in the financial industry are made to follow the rules. Essentially, they build a level playing field for everyone to operate and ensure that new concepts get scrutinized with the appropriate level of seriousness.

Significant Performance Leading Up to This Point

Over the past decade, cryptocurrencies have shown to be the most interesting financial innovation in the world. Assets that started off as simply tools for making transactions or paying for services have become a full-blown financial phenomenon, with many institutions getting in.

The crypto boom has brought about an interesting financial renaissance. Last year, Bitcoin was crowned the best-performing financial and investment vehicle of the past decade – beating out the stock market, U.S. equities, bonds, and even alternative assets like gold and oil. There was a lot of hope for this year to be even better, although the coronavirus pandemic has forced a lot of that potential to get stalled in a way.

Institutional Interest Surging

Still, there is a segment of the market that is so far refusing to budge – institutional investors. High net worth individuals, companies, and conglomerates are buying into Bitcoin in their droves, and this interest has spurred the success of several companies and instruments.

Grayscale Investments, Bakkt, Fidelity Digital Assets, and more are just some of the companies that have developed tools for institutional investors to test their hand in the market.

For instance, Grayscale has the Bitcoin Investment Trust, Ether Investment Trust, and Litecoin Investment Trust. Last year, Bakkt launched physically-delivered Bitcoin futures, thus allowing investors to make speculative bids on the future price of Bitcoin and get paid. All of these companies have had to get approval from financial regulators to launch their investment instruments.

However, the regulators have still developed a reputation for taking what many believe to be a hard-line approach to policing the crypto space.

No Way for Bitcoin-Based ETFs

One of the most significant ways is through Bitcoin exchange-traded funds (ETFS). Over the past three years, several companies have filed applications to launch ETFs with the SEC – The Gemini Foundation, Wilshire Phoenix, the Chicago Board Customs Exchange (CBOE), VanEck, Bitwise Asset Management, etc.

None of them has gotten approval.

In the United States, there is no company that currently offers Bitcoin ETFs to investors. Despite the surge in institutional demand, this investment vehicle has so far stalled.

ETFs are an important financial instrument that can help to increase the access that investors have to an asset. By policing Bitcoin ETFs as much as it has, the SEC has limited innovation in the crypto space and reduced the versatility of these assets as financial tools.

A Crackdown on ICOs and Digital Tokens

There is also the problem of excessively policing companies that decide to move into the cryptocurrency space. For years, mobile messaging company Telegram has been working on a digital asset and a blockchain platform. In 2017, the company raised $1.7 billion from two separate Initial Coin Offerings (ICOS) to the development of what it would later call the GRAM tokens and the Telegram Open Network (TON).

Telegram was set to launch both projects late last year. A little less than a month before the launch, however, the SEC hit the company with a lawsuit, claiming that it had violated the Securities Act of 1934 by selling an unregistered security.

The battle between Telegram and the SEC lasted for months. However, Telegram conceded defeat in May and was made to pay $1.2 billion in fees and back-pay to its investors after it gave up on the case.

Telegram’s project would have brought crypto and blockchain access to its user base, which currently numbers over 200 million in a month.

So far, the SEC also has cases against several other companies that are looking to get into crypto – including Canadian social media company Kik.

Time to Move on From Old Beliefs

To be fair, the reason for this stringent regulation is easy to see. There is still the strong belief that cryptocurrencies are tools for criminal activities. The use of these assets on the Dark Web is still prominent, and many criminal organizations have turned to crypto as a means of evading oversight and law enforcement.

However, this belief is old and should be abolished already. Cryptocurrencies have so far proven themselves to be effective tools, and in the right hands, they can do some significant good. While there is always the place for regulation, the level of policing that the crypto space has endured has so far been excessive.

Many in the regulatory community have seen this too. In 2018, Hester M. Pierce, a Commissioner with the SEC, chided the regulatory body for hurting innovation in the crypto space and making an environment that doesn’t foster inclusiveness.

The problem here is one of inadequate inclusiveness. There are no rules guiding the use of cryptocurrencies in the United States, and as long as this problem persists, regulators will continue to employ stringent oversight tactics on companies that try to innovate with them – especially when it comes to the intersection of tech and finance.