Yeah, they’re going to jail
Being a Web3 founder means I’m having a lot of chats with crypto people. Inevitably, someone says the line, “Yeah, they’re going to jail”.
Because a lot of people are going to find themselves in jail as securities regulators take a closer look under the hood of a lot of NFT, Defi, Gamefi and DAO projects. But should they? My heart sinks whenever I hear a founder citing the Howey Test, in defence of their venture’s legality. Nine out of ten times, they don’t know what they’re talking about and their analysis is no better than wishful thinking.
But maybe they shouldn’t be going to jail. Maybe it’s the regulations that are wrong. In fact, not just wrong but economy-damagingly wrong.
Securities regulation exists for a reason. The boiler rooms of the Wolf of Wall Street set out to swindle desperate and vulnerable people of their money. And trading these secondary market penny stocks didn’t add to anything. None of these companies received the money and invested it in growth or employed people with it. That’s just the nature of the secondary trade in equities.
And yes, there are crypto scammers equally prepared to rug-pull and take people’s money. People do deserve the help of regulators and law enforcement to combat this.
But blockchain is a massive economic growth opportunity. According to CoinMarketCap, the aggregate market cap of all cryptocurrencies is near $1 trillion. This is important capital that deserves to be put to work. This is capital that could be creating new industries and employing people in good jobs. This is capital that could be targeting climate change or innovations to combat health inequalities. This is capital that could be mitigating the cost of living crisis.
But regulators aren’t allowing it. They’re not allowing normal people to use blockchain opportunities to defend their savings against 10%+ inflation. They’re not allowing the development of an open, thriving market in these opportunities. Regulators have a sword of Damocles hanging over the entirety of the blockchain, stifling innovation and growth and forcing people to choose legally-grey opportunities where it’s easier to fall into the clutches of bad actors.
This regulatory approach is entirely unnecessary and highlights the ignorance of policy makers to the economic opportunity and the dominance of regulators in their thinking.
If I wanted to make my project — www.filmicnft.com — a security (which would be great!), I would have to get licensed to market my security in something like 40 jurisdictions. The costs of doing so are simply prohibitive. Insanely prohibitive. My guess is that I’d need maybe $5 million a year just on compliance costs. As we’re only looking to raise about $1 million, it simply means that offering a security isn’t an option.
And this regulatory approach is absolutely, entirely unnecessary to achieve the regulators’ goals, principally, to protect consumers.
A crypto fundraiser could well lose all of their investors’ funds, through either a lack of competence or through malign intent. But if protecting consumers is the goal, then regulators can lean on the insurance industry.
Imagine you were thinking of investing in a startup with an NFT fundraiser. But the startup could say to you, “Hey, we’ve taken out insurance that covers our investors. You can only lose a maximum of 50% of your principal as the rest is underwritten”. Why on earth would a regulator want to go through the whole shebang of securities regulation for something where the consumer has protection from the private sector? At that point, it’s a matter for the insurance market to determine the risks and set the premiums accordingly. Startups could even lower the premiums by placing collateral in escrow.
There are other protections available. A cap on primary investment size could be implemented. Insider trading can be monitored. Wallets can be publicly claimed.
Regulators could simply state this. Your security does not need to be licensed if the following conditions are met.
- Your primary investors are protected by insurance, covering 50% or more of their investment.
- No wallet has provided more than $5,000 of primary investment.
- All wallets associated with the project and its personnel are self-doxxed.
- The project is signed up to a third-party suspicious trading monitoring service.
Insurance would be expensive, but less expensive if the team were credible and if they put up collateral. Wallet caps would be in code, transparent on the blockchain. Everything in this short list above is achievable with much less cost than getting 40+ securities licences.
An approach like this would provide far more protection to consumers than the current regulatory mindset, and release billions of dollars of liquidity for new, innovative ventures worldwide. It would also generate an exponential growth in the accessibility of micro-investments with the possibility of outstripping inflation.
Times are tough. The world economy is tanking. The increasing cost of living is rinsing people dry. Releasing the liquidity available in cryptocurrency could generate enough new growth to get us out of this mess, while simultaneously allowing everyone to benefit from that growth — not just those who are already wealthy.