One of the biggest risks to crypto has always been that the industry would be strangled by ten thousand regulations. That risk is non-quantifiable, which is maybe why it seems like crypto has chosen to ignore it.
“If you have ten thousand regulations you destroy all respect for the law.”
—Winston Churchill
Thursday Responsible Innovation Mailbag
One of the biggest risks to crypto has always been that the industry would be strangled by ten thousand regulations. That risk is non-quantifiable, which is maybe why it seems like crypto has chosen to ignore it — if you can’t price it, how can you price it in? But whatever the risk was last week, it’s lower this week, thanks to the cross-aisle buddy act of Lummis-Gillibrand.
As a crypto enthusiast, you only had to read the title to start feeling warm and fuzzy: the Responsible Financial Innovation Act. That is a much better starting point than many alternative, just-as-likely bill titles. Would you have been surprised to see a Protect Americans from Crypto Scams Act, for example? Or maybe just a PONZI Act? (Protect Our Non-zero Investment SavingsAct).
Instead we get an affirmation that crypto is first and foremost about innovation. That’s a great start. But, as with any legislation, the devil is in the details. So, let’s see what it’s all about.
Q: Why did the market go down on the Lummis-Gillibrand bill?
I don’t know. Short of Hester Peirce being immediately appointed SEC chair for life, the bill seems like something close to a best-case scenario to me.
Crypto natives are generally not fans of being regulated (until their crypto is hacked and they want the FBI or someone to get it back for them), so I think there was an element of all-regulation-news-is-bad-news in the initial leg lower.
Or we may just be in the all-new-is-bad-news phase of the market that you get near the lows — which, of course, would be good news.
Q: It’s just a bill, though, won’t it get ruined by lobbyists and stuff?
Could be, but, big picture, I’m optimistic on the US regulatory outlook for crypto, for a few reasons:
The US political system is designed for small but enthusiastic voting blocs to get their way.
It’s a “low-salience” issue. (Most people don’t care.)
There is no political constituency that is naturally anti-crypto.
Crypto is already generating support at the local level by creating jobs.
Crypto should eventually generate support at the federal level by creating new demand for US dollars (via stablecoins).
Even if this bill is just a starting point, it’s a highly nuanced and thoughtful one, which makes me hopeful that the final outcome will be, as well.
Q: So my cryptos aren’t securities now?
Well, as said, the bill is not law as of yet. And while your BTC and ETH are almost certainly not securities, most of the rest of them probably still will be.
Currently, very few cryptos are decentralized enough for the SEC’s liking. With this bill, however, decentralization would no longer be the single litmus test: A less than fully decentralized crypto would be deemed a commodity, so long as it is not designed primarily to return a profit to token holders.
Commodities are regulated by the smaller — and friendlier — CFTC.
But most cryptos do aim to make a profit for token holders via dividends, staking rewards or just plain numba-go-up. Those would all be securities, regulated by the big, bad SEC.
Senator Lummis said as much in an interview yesterday when she agreed with Gensler’s previous statements that most cryptos are securities.
Still, the bill is good news: If it were to pass in this form, your current altcoin portfolio might still be in trouble, but crypto builders would know how to keep your future altcoins from being declared unregistered securities.
Q: But DAOs are all decentralized, right?
You’d think so, from the name, but it’s complicated. Which is why the section on DAOs is probably the densest part of the bill. It could turn out to be the most important, too, though.
As said, I’m optimistic on regulation, but the one fly in the ointment is if crypto gets a reputation for tax avoidance, which is what will happen if we continue to think DAOs are stateless entities unbound by law.
Instead, we need to demonstrate the value of Web3 to governments by showing that DAOs can act as good actors — which starts with paying taxes.
Anyone considering the legal status of a DAO should read the work that David Kerr and Miles Jennings have been doing on the subject.
Q: Anything new in there about stablecoins?
The term “payment stablecoins,” is a new one (to me, at least).
I like it: If there are payment stablecoins there will presumably be non-payment stablecoins, suggesting both will be allowed?
Algorithmic stablecoins don’t even get a mention, which is also good. There was a risk that all stables would get tarred with the Terra brush, but the government, if this bill is any indication, seems to recognize the value of stablecoins that are, in fact, stable.
I’m curious to see how this section holds up in the lobbying process. Banks won’t love the idea of issuing fully-reserved stablecoins: If people feel safe to keep their money in a stablecoin, they may do that instead of leaving it in checking and savings accounts, which would rob the banks of their cheapest form of funding.
We all like to hate on banks, but it’s the friendly neighborhood community banks that are most at risk here and nobody hates those. Enabling widespread stablecoin usage and keeping all our local banks open might prove a delicate balancing act.
Q: What’s this thing about $200?
If the prospect of a big tax bill has stopped you from taking profits on the bitcoin you mined on your laptop in 2011, this is the best news in the bill: You can realize your gains now, tax free, by spending it in $200 increments.
If, like me, you’re underwater on your bitcoin, then this is no help to you.
It is a surprisingly sensible and crypto-friendly idea, though, and emblematic of maybe the biggest and most important takeaway from the bill: The government does not have it in for crypto.
Q: Did you actually read the bill?
Um, well…I read the summary. Twice!
I did try to read the actual bill. But it’s long — 69 pages. (Which is either a sly nod to crypto-bro numerology or a rather unfortunate coincidence.) And with all of the weird punctuation and indenting and stuff it’s about as readable as "Finnegans Wake."
I saved myself that literary torture and read many of the Cliff Note versions instead (my favorite being the rundown by crv.mktcap.eth, if you want to hear from someone that really did read the bill).
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