U.S. regulators appear to be on a collision course with crypto. Sometime soon, many issuers and intermediaries could be forced out of business or at least out of the country.

It could be the best thing that ever happened to the industry.

There's plenty to dislike in the crypto realm. Celebrity touts and the promise of riches have lured people into buying myriad tokens with no intrinsic value; of more than 40,000 issued last year, an estimated one in four were outright pump-and-dump scams. Investor protections are lacking at even the most established intermediaries, as the demise of the FTX trading platform demonstrated. Blockchain-enabled payments have facilitated all sorts of criminal behavior, from aiding human trafficking to funding North Korea's nuclear program. If the market hadn't imploded last year, it might have become big enough to threaten the entire financial system.

Now Securities and Exchange Commission Chair Gary Gensler is poised to deliver the coup de grâce. He has said that he considers most tokens to be securities, meaning that issuers and intermediaries — unless they register with the SEC and meet all its requirements, which most can't or won't do — are engaged in illegal activity. The agency has sued one trading platform (Bittrex) and signaled its intention do the same with Coinbase, the largest in the U.S. Aggressive enforcement could all but shut the door on crypto, eliminating the primary conduits through which Americans get dollars in and out.

Good riddance? Not quite.

Markets have a way of turning irrational exuberance into social benefit. Investors in the broadband boom of the early 2000s, for example, suffered vast losses but also bequeathed valuable fiber-optic infrastructure to future generations. Crypto, for its part, may yet lead to better forms of money, more convenient cross-border payments, more efficient finance, new ways of governing mutual enterprises. With proper identification requirements, blockchain networks could even be a lot more transparent, and less conducive to crime, than the existing banking system. (Authorities are already using them, for instance, to track down North Korea's ill-gotten gains.)

Distant as that brighter future might seem, regulators should at least allow for it, as the European Union has sought to do with new rules on crypto markets. To that end, the U.S. should create legal space for the issuance and trading of instruments — such as Bitcoin and Ether — that don't fall into categories such as securities or derivatives. Requirements for (among other things) disclosure, safety, soundness, governance and protection of customer assets could come from Congress — or from an industry-funded overseer along the lines of the Financial Industry Regulatory Authority.

Such a framework would grant the SEC and the Commodity Futures Trading Commission broad powers to quickly rid the market of thousands of bad actors, without getting bogged down in definitional details — and without diminishing their authority in traditional jurisdictions. Speculators would still make bets that go wrong, as they do in any market. But the general reduction in scamminess would provide genuine innovators with the best possible shot at achieving something consequential. Crypto's true believers could hardly ask for more.