President Trump’s recent embrace of cryptocurrencies and his vision for the United States to lead as the global hub for crypto have been met with optimism for a new era. The significant rise in cryptocurrency values, fueled by the involvement of the president and his family, has garnered attention.

However, supporters of cryptocurrencies may want to approach this initiative with caution following the executive order on Jan. 25. Cryptocurrencies present unique challenges and require a tailored regulatory approach.

While the order highlights the benefits of digital assets, it also proposes the establishment of a “working group” comprising a dozen government entities to define a federal regulatory framework and guidelines for market oversight, consumer protection, and risk management. These government interventions may not align with the preferences of crypto advocates.

The decisions made by this working group will establish the direction of cryptocurrency regulation for the next decade, emphasizing the need for certain fundamental principles to guide the process.

Firstly, cryptocurrencies, including volatile cryptocurrencies and stablecoins, serve dual functions as investments and currencies, necessitating a new regulatory framework that acknowledges their distinctive nature. Rather than fitting them into current regulatory paradigms, policymakers should craft regulations that effectively address the financial opportunities and threats posed by cryptocurrencies.

Secondly, while individuals have the right to engage in speculative investments, the unique digital nature of cryptocurrencies and their implications for economic stability demand increased scrutiny. Arguments comparing cryptocurrencies to digital gold oversimplify the intricate dynamics at play, especially considering the lack of intrinsic value in floating-rate cryptocurrencies. The potential risks posed by a significant cryptocurrency market collapse cannot be ignored.

Thirdly, the expanding presence of cryptocurrencies in traditional financial sectors has introduced new risks and uncertainties, particularly in the realm of crypto derivatives. The ballooning size of this market, coupled with leverage and margin trading, presents global economic stability concerns that must be addressed by regulators.

Fourthly, the inability of cryptocurrencies to replicate the stability of government-backed fiat currencies has hindered their mainstream adoption as viable currencies. Additionally, their prevalent role in financing criminal activities raises red flags, underscoring the need for robust regulations and oversight.

Fifthly, the distinct regulatory landscape required for cryptocurrencies demands collaboration among banking, securities, and commodities agencies. The absence of financial expertise within the digital asset working group is a notable gap that must be rectified to ensure effective oversight.

Lastly, given the complexities of cryptocurrencies and the risks they pose, the establishment of a specialized regulatory body may be necessary to ensure financial stability. Effective regulation will be crucial in fostering transparency, protecting consumers, and preventing systemic risks inherent in the cryptocurrency market.

As the government navigates this terrain through the working group, it is essential to address the risks associated with unregulated digital assets through informed dialogue to establish a balanced oversight framework. The future of the financial industry hinges on these critical decisions.

Thomas P. Vartanian, an experienced banking regulator and legal expert, leads the Financial Technology and Cybersecurity Center. His works include “The Unhackable Internet” and “200 Years of American Financial Panics.”