Investment firm a16z has warned that a rapid increase in regulatory actions poses a threat to innovation in the United States.

As the regulatory environment surrounding cryptocurrencies continues to heat up in the United States, a report released Tuesday by a16z ties the steady stream of enforcement actions and court cases to the country’s declining leadership in the digital asset space.

In a brand new section of its regular “State of Crypto” report covering regulation and policy, the investment arm of Andreessen Horowitz highlighted the decline in several metrics measuring cryptocurrency-related activity in the United States.

The report said that while the country was home to nearly 40% of cryptocurrency developers in 2018, this share has been declining over the past few years, falling below 30% last year.

Additionally, the portion of traffic to crypto-related sites coming from U.S. users fell for the third year in a row. Last year, Americans accounted for more than 15% of traffic to sites like CoinGecko, CoinMarketCap, and Etherescan, a significant drop from around 23% in 2019.

These declines may have been influenced by the decline in digital asset prices and the fact that Web3 is gaining traction around the world. However, the report then delves into a16z’s policy views and makes recommendations on how regulators should act.

“Prohibiting new business models or technologies undermines American values ​​and drives innovation and jobs elsewhere,” the report states. “Legitimate businesses and their customers deserve access to financial services and legal protections, from banking relationships to data privacy.”

The focus on regulation comes amid a cryptocurrency crackdown in the United States, with regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) increasing scrutiny of digital asset companies.

Notably, shortly after Kraken was fined $30 million by the financial regulator, leading U.S. cryptocurrency exchange Coinbase received a Wells Notice from the U.S. Securities and Exchange Commission (SEC) last month for its staking product, leading it to shut down its staking-as-a-service program entirely. Despite CEO Changpeng Zhao’s repeated requests for people to “ignore FUD, fake news, attacks, etc.”, a lawsuit filed by the CFTC for alleged violations of derivatives trading rules looms over Binance.

The report calls for new rules and guidance from government agencies to help eliminate regulatory uncertainty in the U.S., a task that a financial services subcommittee was created this year to accomplish.

The report also highlights legislation that “could provide needed clarity,” such as the Responsible Financial Innovation Act, the Digital Commodities Consumer Protection Act, and the Digital Commodities Exchange Act.

Focusing on the courts, the a16z report notes that there are multiple cases in the U.S. that will further shape the country’s regulatory landscape this year. They range from CFTC and SEC lawsuits to various bankruptcy cases for defunct companies like FTX, Voyager, and Celsius.

At the top of its list, a16z showcases the SEC’s ongoing lawsuit against Ripple, which the company has been involved in since 2020 but may soon come to an end. The SEC’s core claim is that the company raised $1.3 billion through an unregistered securities offering, and the outcome could have a considerable impact on how cryptocurrencies are classified.

The report also cites the situation surrounding Tornado Cash as an influential court case that advocacy group Coin Center is currently suing the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) over sanctions against Ethereum-based mixers.

The report added that “corporations should be the focus of regulation, while decentralized, autonomous software should not be the focus of regulation.”