Regulators Rumble Crypto
Representative Patrick McHenry got angry with Gary Gensler last week.
In pressing the SEC chair to answer the “very simple question” of whether ETH is a security and then expressing exasperation when he didn’t (“gimme a break, c’mon”), McHenry seemed to be channeling years of cryptopian frustration.
That frustration is understandable: It’s weird that a full seven years after its initial token sale, we still don’t know the legal status of ETH.
But it should be noted that Gensler, crypto’s bête noire, has been SEC chair for only two of those seven years and things likely wouldn’t be so different without him.
The crypto industry feels persecuted because it’s being regulated by enforcement (“we’re finding out as we go,” in McHenry’s phrasing), but that’s how the SEC worked before Gensler and that’s how it’ll work after: They’re not going to tell us the exact speed limit of the road we’re on, but they reserve the right to give us a ticket if they decide we’re going too fast.
It’s a situation that makes a lot of people angry, but the truth is that that’s simply how things work: The SEC doesn’t have the staff to focus on prevention (writing the exact rules of the road), so they rely on deterrence (handing out tickets) instead.
Could accepting that truth set us free?
Pass me a knife, please
The only reason Gary Gensler has any power over us is that we need the on- and off-ramps of the traditional finance sector that he helps regulate: We want to buy crypto with dollars so we can get more dollars when we sell it.
But fiat dollars are an invention of the US government, which means the government also invents the rules as to who gets to use them and how.
If you want to use dollars you have to play by those rules, however arbitrary they may seem.
By making crypto so dependent on fiat — via stablecoins, VC funding, and centralized exchanges — we’ve ceded significant power to regulators.
What’s the alternative?
There are ways to get into crypto without using TradFi’s on-ramps: You can turn electricity into bitcoin; you can trade that bitcoin for ETH and then earn more ETH by validating the Ethereum network; or you can work for a DAO in return for a newly invented currency.
The downside is that developers would need to keep their day jobs in order to meet their fiat-denominated expenses, so it would make crypto more of a nights and weekends kind of thing.
But if we’re not willing to accept TradFi’s terms and conditions (unwritten ones included), that’s the alternative.
When we complain about regulation, what we're really complaining about is the unattractiveness of that alternative: We don’t want to wait around for our electricity to turn into bitcoin. We want to use fiat and the banking system to quickly get in and out.
But the whole purpose of crypto is to not use fiat and the banking system.
For many, the purpose is even to eliminate fiat and the banking system.
Which makes insisting that we have unfettered access to TradFi’s on- and off-ramps seem maybe a bit unreasonable?
It’s like informing someone of your intention to stab them — and then requesting that they hand you a knife.
You can't really complain if they don’t.
Crypto hobbyists
So, how would we fare without the on- and off-ramps that TradFi provides?
In the first instance, badly: Crypto prices would go a lot, lot lower.
But maybe not so badly in the second?
It might be akin to eliminating the mortgage tax deduction: The immediate effect would be pain for current homeowners as house prices fall. But the mortgage tax deduction is regressive and counterproductive, so the short-term pain would be worth the long-term benefits.
Could the long-term benefits of developing crypto in isolation similarly outweigh the short-term pain of having our bags get destroyed?
I think they might: Currently, a lot of crypto’s resources seem to be devoted to building things like decentralized options protocols on the presumption that DeFi will soon be flooded with new fiat money looking for traditional finance things to do.
But maybe we need less focus on attracting fiat from TradFi and more focus on creating crypto-native value.
It would certainly slow things down, though, and perhaps fatally.
The thousands of developers currently working on highly technical things like scaling solutions and zk proofs would have to go back to earning fiat by day and developing crypto by night, which may not move things along as fast as they need to.
But to make that argument is to concede that crypto is dependent on access to the traditional banking system.
And if you want access to the banks, you have to play by their rules.
Even if the rules are exasperatingly stupid.
