Operation Chokepoint
Notes on an important conversation discussing crypto regulation, proof of reserves, and web3 social
This was a fantastic podcast by Delphi Digital, Tommy Shaughnessy, and Nic Carter covering 1) Operation chokepoint & crypto regulation 2) how proof of reserves can create a standard of trust and transparency FAR GREATER than legacy financial ecosystem and 3) web3 social.
- Operation Chokepoint: the multi-agency effort to cut crypto off of traditional banking system.
Regulation via Executive and Legislative branches (and FDIC)
- Most of government views crypto as a vector for scammers rather than a groundswell of innovation
- Government largely views finance as a means to promote policy objectives (ex. SEC top objective is climate, financial flows to make political change w Ukraine/ Russia)
- Fiat backed stablecoins are not securities under Howey and Reves test (Terra Luna may be exception here).
- Circle wants to share income with tokenholders but cannot legally at this point. Cannot have implicit expectation of interest bearing qualities w stablecoins.
- Gov officials helping the industry include Tom Emmer, Patrick McHenry, Hester Peirce.
- There is an implicit message from the FDIC to banks saying “you can touch crypto but if you do we will bury you in paperwork”
- Likely not going to proactively pass any legislation in the next two years.
SEC
- SEC is using piecemeal strategy to go after small players and set court precedent (cheetah and gazelle analogy).
- The House has subpoena power. Could ask Gensler why was he so close to FTX and why didn’t he spot anything?
- House could launch an investigation of the SEC to look into this coordinated effort
- If House sees that bank regulators are attacking a perfectly legal industry — an American industry — which is thriving, they might ask those questions
- Emmer could *potentially* help launch an investigation of the SEC
2. Proof of Reserves: The potential to create more financial transparency than ever before.
- Involves Proof of assets on chain
- Liabilities are more difficult, involve anonymizing — Binance using ZK tech for proofs of liability.
- With onchain data anyone can audit (this is how people uncovered FTX — via individual/community driven analysis of cold wallets)
- Can actually see dollars in reserves, liquidity ratio, capital buffer. None of this can be seen with banks — have to rely on disclosures on regulator
- This would not require infrastructure of auditors, consulting firms, and regulators — better for the entire system
- Proof of reserves would create standard of trust and transparency FAR GREATER than legacy financial ecosystem, not just matching but EXCEEDING it.
3. Web3 social: The long-term bet to distribute value via open protocols, social graphs, and permissionless building.
- People will understand web3 social because they have been abused in web2 with their data being used and deplatforming at the whims of technocrats
- Web3 social will give actual digital property rights for the first time as well as a better experience for users given that devs will permissionlessly build related apps and experienced based on the underlying protocol and social graph
- We are all surfs and a handful of people in Silicon Valley hold all the power. This would distribute the power more equally to contributors
- Network effects and related switching costs are so high that it will happen over time very slowly and then very fast all at once.
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