Crypto regulation as a design problem

Crypto regulation as a design problem

This week’s blowup over crypto legislation felt sudden, but if we look harder, the underlying issues that created the latest rift between the crypto industry and regulators in the U.S. aren't exactly new. 

What looked like a dramatic breakdown (industry leaders walking away from a long-negotiated bill, congressional staff scrambling, markets wobbling) is really the latest chapter in a fight that’s been running for more than a decade. The core conflict is still how digital assets are supposed to fit inside financial law.

For years, the industry’s core complaint was simple. Lawmakers didn’t understand the technology, yet they were responsible for regulating it. That mismatch, the argument went, was stifling innovation before it had a chance to mature.

What’s different this time is that the industry believed it had finally made serious headway against that problem.

Crypto-aligned donors helped elect a friendlier administration. Lobbyists were welcomed back into the room as bipartisan bills advanced. For the first time in a long while, “regulatory clarity” felt like an achievable ambition.

And then, this week, it all came apart.

Major industry players balked at the final text of a Senate banking bill that had been framed as a breakthrough. And the familiar refrain returned: the lack of regulatory clarity is still hampering innovation.

But here’s the thing. The failure this week wasn’t just political. It was architectural.

What this episode exposed, again, is that crypto regulation isn’t primarily a question of enforcement or jurisdiction. It’s a design problem. And until that’s acknowledged, this cycle will keep repeating.

Regulation is trying to define the product

At the center of the current standoff isn’t a single provision or a single company (although media headlines are certainly setting it up that way). It’s a deeper disagreement about what digital assets actually are.

Are they purely financial instruments, best understood as securities, commodities, or deposits? Are they internet-native technologies that happen to move value? Are they organizational tools, coordination mechanisms, or programmable balance sheets?

The rub, right now, is that Congress has to pick an answer because the law can't accommodate ambiguity.

And in the latest round of legislation, lawmakers tried to do exactly that — by defining how decentralization works, what stablecoins are allowed to do, and which activities trigger which regulatory regimes.

From the industry’s perspective, that’s where things went wrong.

Provisions around stablecoin rewards, for example, weren’t seen as neutral guardrails; they were read as an attempt to decide, in statute, whether a stablecoin is closer to a bank deposit or a software primitive. Rules extending AML and KYC obligations deeper into decentralized systems weren’t interpreted as incremental compliance; they were interpreted as an implicit statement that “true” decentralization isn’t a legally acceptable end state.

In other words, the bill didn’t just regulate behavior. It encoded assumptions about design.

That’s why the pushback felt so visceral. Once definitions are locked into law, they don’t just constrain companies, instead they constrain the space of what can be built.

This is the part of the debate that tends to get lost in the noise. Regulation isn’t merely reacting to crypto products after the fact. It is increasingly upstream of product architecture, shaping what teams can design before a user ever touches an interface.

The misguided controversy around the GENIUS Act

The GENIUS Act brings clarity to stablecoin regulation, unlocking faster, cheaper, and more transparent payments. Fear-driven critiques miss the data: stablecoins aren’t a threat — they’re the upgrade path for modern money.

Daniel McGlynnDaniel McGlynn

The signal beneath the headlines

A few developments from this week are worth interpreting as signals of a larger story unfolding.

Event: After months of apparent alignment, major crypto players withdrew support from a Senate banking bill hours before a scheduled markup.
Signal: “Regulatory clarity” breaks down when legislation starts defining product form, not just oversight.
Why it matters: The hardest part of crypto regulation isn’t assigning agencies; it’s deciding what kind of systems lawmakers are willing to recognize.

Event: Congressional leadership postponed hearings and reopened negotiations rather than forcing a vote.
Signal: There is still no stable consensus on how digital assets map to existing financial law.
Why it matters: This suggests regulation will arrive piecemeal, through design compromises, not grand frameworks.

Event: Stablecoin yield provisions became a flashpoint, drawing in banks, crypto firms, and the White House.
Signal: Stablecoins sit directly on the fault line between software and banking.
Why it matters: How lawmakers treat stablecoin rewards effectively answers whether these products are deposits, payment rails, or something new.

What's next?

As this arc develops, a few questions keep coming:

• whether stablecoins are ultimately regulated as software products or balance-sheet (or banking) products
• whether decentralization is treated as a legitimate regulatory endpoint or a transitional phase (or, will some version of permissible decentralization require centralized guardrails, and if so, can decentralized technologies ever legally interoperate with the traditional financial system).
• whether “regulatory clarity” converges on a single framework or fractures by product type (will stablecoins need to be regulated differently than DEXs or will token issuers be regulated differently than crypto payment or lending protocols?)

Sure, there's nuance here, but also, each one determines what kinds of systems can exist at scale.

Closing thought

This week’s standoff wasn’t a step backward so much as a moment of clarity.

It showed that crypto’s regulatory challenge isn’t just about winning friendlier rules, but instead it's about resolving a deeper design conflict between open systems and institutional law.

That’s why this debate keeps resurfacing, and why it will keep shaping what gets built over the long term.

If this framing is useful, subscribe or reply. I’m especially interested in where you think regulation is already shaping design, quietly, in ways we don’t talk about enough.