Crypto Regulation, Fear, & The Future 🔮
Hi Everyone,
It seems like every other headline I read lately is about regulation fears (again). In times like these, I can’t help but think of the quote:
“First they ignore you, then they laugh at you, then they fight you… then you win.”
I remember the ignoring phase, and I remember the mocking phase… and lately it feels like we’re square in the middle of the fighting phase. Sounds like progress to me! 😄
Jokes aside, the regulatory fights that Crypto finds itself in the middle of are:
1) A source of significant stress for everyone involved (bad regulation can be extremely damaging)
2) An absolutely incredible validation of the growth and legitimacy of crypto and Web3
3) An even more incredible opportunity if regulation is at least semi-intelligently constructed
These same fights took place in the ‘90s around the development of the internet, and were equally combative and stressful in many ways. For crypto and Web3, adoption and disruption of both the legacy financial system and the existing Web2 world were never going to be an easy process. This is what that conflict feels like!
So, let’s break down a few things related to crypto regulation, the future, and where things are heading.
The Opportunity
First, let’s acknowledge that regulation is only an important topic right now because everyone with half a brain realizes crypto and Web3 are becoming a very big deal.
Not only is the idea of crypto “going away” no longer even in the conversation, but there have been numerous hearings (including some intelligent ones!) explaining Web3 to Congress.
There are also numerous elected representatives that have seized on the popularity of Crypto to build their political brands around the topic. The infrastructure bill drama that took place last year saw tens of thousands of individuals calling into Congress to advocate against the terribly worded crypto provision. I wouldn’t be surprised if crypto becomes a significant policy point in the next US presidential election as well (it already has been in several congressional and other campaigns). In short… The general public actually cares about this, and there are political costs to not supporting crypto voters.
So, the fact that regulation is coming up is actually good. This was always going to happen, and is a sign of legitimacy, acceptance by the existing system, and it paves the way for more institutional adoption and growth into society at large. In fact, many institutions are waiting for a regulatory framework to be in place before they are able to deploy capital in crypto.
But, this isn’t all sunshine and rainbows of course… Web3 has real enemies: Those who believe the State should be the supreme power, political opportunists building their own careers, those who fear technology (and any kind of change…), and of course those who clearly have no idea how Web3, or the internet, actually works. (Example: The US Treasury sanctioning Tornado Cash… a piece of open source code. 🤦🏻♂️)
Honestly, there are so many regulatory developments happening now (both good and bad), that it was difficult for me to even choose which to write about here! So, I’ll just call out a few things that I feel everyone in Crypto should be aware of.
So, let’s start with understanding Crypto’s Public Enemy #1.
We need to talk about Gary…
Gary Gensler is the current head of the SEC. Gary is a very intelligent, capable, strategic, and clever political operative. He is one of the few regulators that actually understands what is going on in crypto. He even taught a course at MIT on Blockchain and Money that was honestly pretty great. It’s available for free HERE if anyone would like to view the lectures.
However, while the crypto community (myself included) hoped that Gary would use his knowledge and position of power to help create a constructive and more well defined regulatory landscape for crypto… He has instead gone out of his way to do the exact opposite since taking office.
Gary has pursued a “regulation by enforcement” approach, of not telling anyone what the actual rules for crypto are, and then just arbitrarily prosecuting some actions, and not others -- without giving real guidance on what they were doing wrong in the first place.
For example: Gary frequently claims that most everything in crypto that isn’t Bitcoin is a security (This would conveniently put them under his purview at the SEC). But… He won’t give any specific examples of crypto assets that are securities, or are not. Nor will he explain any kind of criteria that would make the SEC deem a crypto asset a security or not.
If you’re a crypto entrepreneur or a technologist working on Web3, this creates a situation where you have to either 1) risk prosecution with the SEC, because the SEC won’t tell you what the actual rules are, or 2) do nothing, and be passed by competitors that will take that risk. Oh, and the crypto projects and companies that DO try to proactively reach out to work with the SEC effectively get screwed over for doing so (Coinbase, Stacks, and countless other examples).
This has created (understandably) an insane degree of resentment for Gary in crypto. Gary used to be a partner at Goldman Sachs, and now runs the primary regulator for Wall Street (guess who’s side he’s actually on 🙃). Gary is also a very ambitious political climber, has used his anti-crypto stance to garner more favor with certain anti-crypto senators, and has implemented policies that have only served to further enrich his Wall Street buddies at the expense of the “public” he claims to be serving.
For example: He has repeatedly denied a Spot Bitcoin ETF (i.e. an ETF that holds real Bitcoin, Canada has multiple Spot ETFs already), which would allow the public to have a safe, regulated, and widely available way to gain exposure to BTC. However, he has approved countless Futures Based Bitcoin ETFs… Well, the Futures Based ETFs are basically just trading paper, with high fees, that enrich the whole Wall Street machine that issues and lists these Futures at the expense of the general public. Pretty infuriating for a guy who claims to constantly be working on “investor protection”. (By the way, that is often coded language for “keep the best investments away from the public” – Google the requirements for being an “Accredited Investor” if you want any more proof)
In case you think I’m biased here (I am, but that doesn’t make me wrong), SEC Commissioner Hester Pierce has called out all of this repeatedly from inside the SEC, as have others.
In short, none of us are quite sure what Gary’s endgame is here -- but it is definitely not in anyone’s best interests but his own. Until real regulation is passed, Gary will likely keep threatening crypto, going on TV to make scary statements, and otherwise trying to boost his own image and career at the expense of an entire industry… All while refusing to have the decency to give any actual guidance on the law of the land for crypto.
Best case scenario, legislation is passed that takes crypto away from the SEC and hands it to the CFTC (a more logical regulator for crypto in the first place, given the similarities to the commodities the CFTC already regulates). This would be incredibly beneficial for crypto.
Worst case scenario, Gary gets more of his talons into crypto, and most crypto assets are deemed securities. This would be pretty disastrous for most crypto assets, especially short term, but -- being a security doesn’t make something illegal. It just means you have to register with the SEC.
This would likely kill many smaller projects from being able to operate in the US, and would push much of crypto to other countries. However, the largest and most well funded crypto projects would likely benefit long term, as this would (albeit in a very distasteful way), get rid of much of their competition and networks with less capital and resources to comply with the onerous regulation requirements.
Side note: This is another reason why it is such a good idea to have your crypto portfolio skewed toward the highest quality, most well established, and most well funded crypto networks. If the worst happens, the strongest will survive, while the rest will be wiped out.
The White House’s Crypto Report
On to the next big item worth discussing. The White House’s recent framework for the “responsible development of digital assets” (it’s really more like “we’re thinking about these points” than an actual framework). While the report isn’t law, it certainly does shed some light on Uncle Sam’s priorities when it comes to Crypto. I’ll just call out a few:
#1. Stablecoins
This is a BIG priority, and rightfully so. This is somewhat of a double edged sword for the US. First, the US doesn’t want a bunch of unregulated “digital dollars” out there that it doesn’t control. The Fed and the US Govt want to control the money printer. Plus, the US doesn’t want Ponzi “stablecoin” schemes like Terra/UST out there blowing holes in the economy.
However, the flip side is that having the US Dollar be the defacto stablecoin currency in crypto (which it absolutely is), could dramatically increase demand for the US Dollar globally, and help preserve the US Dollar’s reserve currency status. This is so significant that European Governments are genuinely worried (and rightfully so) about EU citizens opting for USD stablecoins rather than holding the depreciating Euro. This is even more amplified in developing nations with less stable currencies. So, while non-US regulators may want to reduce this, and hurt USD stablecoin adoption, I would argue that US regulators actually want to increase USD stablecoin adoption globally.
In addition, certain collateralized stablecoins like USDC and GUSD are mostly backed by Treasury Bills. So, that ironically makes these crypto companies large buyers of the US Government’s debt, at a time when the US really needs that. Again, pretty ironic that such a large part of crypto -- the industry started as anti-debt and anti-fiat currency -- is now so largely impacted by both.
#2. The Environmental Impact of Crypto
It’s a bit of a bummer to see this tired fear mongering continually make the rounds. First, Bitcoin is one of the only major crypto assets that still uses Proof of Work, or the “mining” process, that is so energy intensive. Ethereum just moved to Proof of Stake (reducing its energy expenditure by 99%), and every other major 3rd Generation platform (Cardano, Polkadot, Solana, Avalanche, etc) already use Proof of Stake.
So, this is really a hit piece on Bitcoin. Now, I do agree that Proof of Stake is a superior method for running a blockchain (less energy, higher cost to attack, aligns incentives of owners, can use slashing as a penalty for an attack, etc). However, Bitcoin’s core devs are fanatical about not changing (or improving…) virtually anything. So, Bitcoin Mining probably isn’t going anywhere. But, what isn’t in the news, or covered in the report, is that more than 50% of Bitcoin’s mining power now comes from renewable energy. Plus, there is a real argument for Bitcoin mining actually helping the transition to renewable energy by providing consistent demand for high energy production.
Candidly, I get tired of talking about this one, but long story short, there is so much money behind Bitcoin Mining now, that I think this will just be pushed more towards “green” energy than any kind of “ban”. A ban would be virtually impossible to enforce, politically costly, financially costly to the US, and maybe even unconstitutional.
#3. CBDCs & FedNow
These are a bit scary, and the US keeps going back and forth on its position on a CBDC (Central Bank Digital Currency). They seem to be leaning more into it in the report. While a CBDC’s potential benefits sounds great on paper, it would also give the government supreme financial power and control. It would allow them freeze your funds whenever they want, take money away if they choose, and have full visibility into every. single. thing. that you buy.
I’ve thought for a while that the US would opt to NOT have a public CBDC system, since that would arguably get rid of the entire purpose of our banking system, and effectively destroy much of retail banking. (I.E. if you have a bank account directly with the Fed… what the heck do you need your normal bank for?) I’ve thought they would just create a “pseudo-CBDC” by bringing stablecoin issuers like USDC into the fold, and thus being able to effectively have a CBDC without really having one.
But, while I still lean toward this view, I’ve seen a few things lately that have made me reconsider… and one of those is the FedNow payment system. This is an instant, 24/7 payment service that is being launched in 2023 to let banks, businesses, and apparently individuals(?) transfer funds much more easily and cheaply. This feels like it was developed explicitly to keep up with benefits we get by default in the Web3 world.
I have mixed feelings here. This is long overdue in terms of what should be available by default in the banking system, but also provides a network that really starts to resemble what the framework for a CBDC might look like.
It will be very interesting to see how this develops, and how it impacts the competitiveness of many crypto and stablecoin payment rails for the average consumer. Again, the real value of Web3 is not in just “digital money” or payments -- but rather how to create, decentralize, and control an entirely new internet. Payments and digital money are just pit stops on the way to doing that!
Pro-Crypto Regulation
What we really need is intelligent, pro-innovation regulation. We need laws that are written by people who understand this technology, and written to help encourage responsible growth in Web3.
Fortunately, there are quite a few bright spots here! While there are several pieces of legislation in the works, the biggest one I’ve been watching is by Senator Kirsten Gilibrand and Senator Cynthia Lummis. Both are true crypto-natives, have strong track records in crypto, and have shown true commitment to the cause.
They jointly presented the first proposal of a comprehensive crypto bill and regulatory structure earlier this year. This would be monumental if passed, and would help bring regulatory clarity to the crypto industry. While not perfect, it would help regulate exchanges, take the reins away from Gary at the SEC, empower the CFTC over much of crypto, and much more! While it will probably be delayed until next year (or broken up into pieces), this kind of advocacy is exactly what the crypto industry needs to be able to responsibly grow, innovate, and deliver on the many lofty ideals of Web3.
Only time will tell, but the fact that crypto has real advocates, real funding, and a massive amount of public support (growing exponentially over time) makes me more than optimistic that there will be far more positive developments here than negative ones.
In Closing
While we wait for the future to unfold, what YOU as an individual can do is:
Stay informed and stay involved. All of you who called in to protest the Infrastructure Bill last year truly shocked Washington! Much of that effort was coordinated by Fight for the Future, an incredible advocacy organization for digital rights that I’d highly recommend subscribing to.
Vote for informed representatives that support Web3! Get away from just thinking along party lines, both sides are doing a pretty terrible job at running the country. 🙃
Think about early internet regulation: We need frameworks that set intelligent rules for the road, and then GET OUT OF THE WAY, so that innovators can create things that actually improve the lives, human rights, and the digital rights of billions around the world.Mentally prepare for the worst, build a portfolio of quality assets that will survive most anything, and then HODL (Hold On for Dear Life 😅) as we move through these choppy and uncertain times.
While the world continues to darken, the future of Web3, and the good this technology can do for the world shines brighter than ever. So, I wish you peace, resolve, and clarity in these stressful times. Difficult times create strong people, and strong people create good times. 💪
Keep learning, growing, and building for the next wave, and I’ll see you all there. 🙂
Until next time,
Graham
P.S. I recently had a cool DeFi startup called Brew Money (Aave Grants recipient) reach out wanting to mention Clarity in their newsletter, DeFi Fridays. I thought their newsletter was great for people getting started in DeFi, and I love supporting startups, so I figured I'd return the favor by posting here if anyone wants to check out their work. For those who are interested in learning more about DeFi, their newsletter has some great summaries on current and upcoming developments!