The crypto regulatory debate is red hot at the moment, with everyone from President Trump to Treasury Secretary Steve Mnuchin, to Congressional leaders stepping in to offer their views on the future of crypto.
There’s a lot to unpack, so let’s get started with some primary materials.
Here’s President Trump, Tweeting on July 11, 2019:
Here’s U.S. Treasury Secretary Steve Mnuchin, in a July 15, 2019 interview.
Here’s Maxine Watters, the chair of the House of Representatives Financial Services Committee, giving an interview on June 20, 2019.
Here’s a discussion draft of a Keep Big Tech Out Of Finance Act, which was leaked several days before the Senate Banking Committee hearing on Facebook’s Libra.
Here’s the Senate Banking Committee “grilling” of David Marcus:
Next, we have Federal Reserve Chairman Jerome Powell’s comments.
Powell has said that Libra should not be allowed to move forward unless and until the company addresses anti-money laundering (“AML”) and know-your-customer (“KYC”) concerns, among other issues. (h/t Nikhilesh De)
For more context, you should read Caitlin Long excellent analysis:
What Do Regulators Want?
A brief look at these trends seems to support the longstanding crypto anarchist position that the state apparatus has been captured by powerful industry interests, and now serves to protect incumbent monopolies (Wall Street banks), rather than enforce the rules of a free and fair market.
But there’s more to the story. The U.S. government is just doing precisely what it’s designed to do. It’s a regulatory apparatus that is reacting to a new socio-technical phenomenon with its main toolkit: regulation.
The lawmaker’s main job is to outline and weigh the costs and benefits of any new technology (not only crypto, but also AI, the current net stack, net neutrality, privacy, tech sovereignty, etc.).
That’s exactly what lawmakers are doing vis-a-vis crypto now.
The fact that the goal posts have been set so aggressively and adversarially is a reaction to the way that crypto framed its relationship with law, not the other way around.
Let’s not forget, crypto was here first, and has had more than a decade to shape its “crypto law” narrative.
Predictably, “crypto v. law” postures have only produced “law v. crypto” effects.
How to (1) see the Crypto Legal Matrix, (2) overcome regulatory anxiety & (3) make peace with law.
Analysts know that the goalposts will eventually shift towards more pro-crypto directions. Except now they will be scripted in even more legalese — full of ambivalence, indeterminacy, and exceptions to the exception.
Anti-Crypto or Anti-Facebook?
Instead of just seeing DC postures as a frontal assault on crypto sovereignty, we need to keep at least four separate (but closely related) trend lines:
- Washington’s continuing ambivalence towards BigTech as a whole (the uneasy status of being one of BigTech’s biggest targets, but also benefactors, beneficiaries and clients);
- continuation of targeted scrutiny of Facebook, specifically;
- domestic U.S. “federalism” considerations, especially relating to state innovations in crypto exchange, trust, custodianship licensure;
- broader geo-political implications.
Regulators want a working relationship with crypto, like the one Margaret Thatcher and Ronald Reagan had with Mikhail Gorbachev. Regulators want a crypto they can do “business with.”
But many crypto folks want nothing to do with Leviathan. Cf BSV; see also:
So, what is to be done?
Can Washington Ban Crypto?
As weird as it is to see U.S. political leaders tell private U.S. citizens and firms to stop development of crypto projects like Libra, these moves are not unprecedented.
American and global regulators routinely tell firms to stop development of this or that technology (think the FDA’s broad prerogative concerning human clinical trials and drug approval pipelines).
We entrust regulators with the utilitarian responsibility of looking out for society as a whole; we want regulators to protect populations, even if it means slightly curtailing our own individual rights in the process.
The scope of appropriate regulation has always been the subject of vigorous public policy debate — and that’s a good thing. The social consensus-building system is working as it was designed to, and the fact that everyone is constantly trying to game the system is a feature of the system (or, here), not a bug.
Whether regulators are using consumer protection as a fig leaf to cover protectionist policies is secondary to the realization that regulators have vast legitimate powers to regulate on behalf of the “public interest” — as often defined by the regulators themselves.
As much as diehard maximalists may wish otherwise, crypto is no exception.
Crypto Prescriptive Jurisdiction
Crypto for Regulators (CfR), Part 4 — the power of states to regulate crypto legal relations.
How to Regulate Crypto?
Short of outright bans, regulators also frequently intervene to block especially hazardous underlying processes.
The devs are still free to develop their product or service, but they must ameliorate the harm that they cause.
Crypto for Regulators
Regulators have a hard job when it comes to crypto; let’s make it easier.
A prime example is California’s provably successful requirement of catalytic converters in cars.
When the new emission rules came into force in the early 1980s, car makers were still free to sell their cars without catalytic converters in other states, but to enter the juicy California market, they had to incorporate technology that would minimize the emission of dangerous particulates.
If crypto wants to enter (and thrive in) lucrative retail markets, crypto operators must offer retail protections — such as the settled protections afforded by consumer-oriented legal forms like … refund.
The form of these measures is ultimately up to devs, users, and markets, but it’s reasonable to insist on basic mechanisms for the protection of end-user expectations (especially those developed over centuries of market-based trial and error, like … refund, the right to cure, right to breach, etc.).
You can call this whatever you want — “interventionism,” “statism,” “anti-free-market-ism,” “socialism” — but the point is that California’s strict tailpipe emissions law was needed (large California cities were literally suffocating in smog).
The law worked.
Within years, air levels were significantly cleaner than before.
The California Smog Check program was not a Republican or Democrat victory. It was a victory for reason and pragmatism.
Folks like Ronald Reagan — who were famously against red-tape and government overreach — championed California’s right to regulate seemingly un-regulatable global markets. Because they needed to be regulated. Otherwise, LA air would only get dirtier.
Today’s carbon trade schemes offer another example of regulatory strategies that seem to stifle innovation, but that, on closer inspection, actually operate as pragmatic and rather modest risk allocation schemes.
It only makes sense that when survival is at stake, ideology takes a back seat.
The same is true with crypto. Except it’s not crypto’s survival at stake, but the survival of the modern regulatory state.
From now on, when we talk about “crypto regulation,” we shouldn’t think of “financial regulations” being applied to crypto. Instead, it’s increasingly clear that “crypto regulation” is just a proxy battlefront, tangential to the longstanding real war between competing teams of global money-market makers.
Crypto maximalists might genuinely believe that Bitcoin is the money to end all money. But the folks who started WWI also thought it’d be a war to end all wars.
Tragically, the war continues, and it will get worse before it gets better.
Balance of Power: Good v. Bad
Good News: In power chambers run on Hollywood’s golden rule (“there’s no such thing as bad publicity”), DC’s recent crypto turn is arguably crypto’s single largest legitimation signal to date.
Bad News: But we should also see that Washington’s recent focus on crypto is a rehearsal dinner for much more consequential geo-political battles in the months and years to come. We can expect more high-profile proposals for outright crypto bans, even if these bans do not materialize into law.
Sux News: Instead of a comprehensive approach to crypto law, we are likely to see piecemeal regulatory approaches (divide & conquer), with skyrocketing costs of compliance. Lawyers are the chief architects and chief beneficiaries of this regime.
World News: The world’s balance of power is getting reconfigured faster and faster, and a strong-handed reaction to crypto is a simple way for entrenched power blocs to signal their might. If certain coins and project operators get caught in the crosshairs, they are just collateral damage.
No hard feelings, just the cost of business. The business of global governance.
If anything, DC is likely thrilled at the chance to show the American people that it can still get work done. And in bipartisan fashion!
Substantively, expect to see much more nuanced discussion of different “balancing” precedents, doctrines, tests, elements, and factors. As always, “reasonableness” will be a central doctrinal battlefield.
It will be incumbent on groups oriented on consumer protection — especially consumer financial protection voices — to state their governance expectations loudly and clearly. Thankfully, there is no shortage of entry points in crypto for articulating those demands.
Blockchain Governance Bibliography
What follows is a non-exhaustive shell/draft/kernel/etc. bibliography on blockchain governance.
In the months and year ahead, it is reasonable to expect bipartisan convergence around several putatively anti-Libra and anti-[insert here]-crypto tropes (affirming regulatory prerogative and jurisdictional reach, KYC, AML; disfavoring Medusa-like decentralization tactics, like anonymous DEXs, identity-shielding, pooling and shuffling; adopting stronger “pro-consumer” measures, etc.).
It is easy to view legislative convergence like this as a net-negative for crypto.
But if we take a broader view of the global regulatory landscape, we see that American bipartisanship against crypto today may actually help crypto tomorrow.
The invocation of different cost-benefit-analysis (CBA) lawgics serves a net positive effect of forcing everyone — not only the regulators — to come up with more compelling arguments for and against particular socio-technical forms and processes.
Regulatory scrutiny is good because it forces everyone to get smarter.
It allows us to better identify what it is we are trying to achieve, who benefits and loses, and at what costs. Where?
Regulatory scrutiny also motivates more complex valuation models for understanding the net economic impact of crypto operations, beyond just cumulative token price values.
This yields stronger arguments, with much higher likelihood of success.
Mo Money, Mo Problems
So far this may sound too conformist, and almost naive in the assumption that most regulators are just trying to do the right thing most of the time (in their own understanding of “right,” of course).
But we also know that regulators serve their own narrow interests, and that entire industries operate in a state of permanent negotiated rulemaking that is so pervasive that it constitutes regulatory capture (in the sense of industry capturing the regulatory agency).
Unfortunately, America’s lax attitude to the revolving door shows no serious sign of trend reversal any time soon. Wall Street is on home turf here.
Under this skeptical realist microscope, we can see Congressional actions like Keep Big Tech Out Of Finance Act as nothing more than age-old protectionism of incumbents, by incumbents.
In terms of pure dollars and cents, Washington’s response to crypto is thus predictable and simple: full-throated defense of “dollars” and “cents.”
In what may be one of crypto’s greatest ironies, crypto has made Washington want to reclaim its own financial sovereignty!
Cryptos v. Dollars?
American regulators are targeting crypto precisely because the crypto-financial propaganda machine is really effective at framing crypto discourse as fundamentally about money and finance, and derivative forms and institutions.
And money and finance are jealously guarded state capitalist monopolies. Here’s an excerpt from Article 1, Section 8 of the U.S. Constitution:
In this order of things, giving yourself private money-making power is like a declaration of war against today’s state capitalist order.
By now, it’s clear that crypto is not ready for the war it brought upon itself.
Defense or Offense?
Crypto had more than a decade to articulate how it would interface with the state, and how it would fight this war. But at the end of the first decade of supposedly self-sovereign money, the state-as-enforcement-apparatus is in a much stronger position than before.
On top of all of its other image problems, crypto can now also add Facebook’s optics to the mix. All of this is the result of voluntary offensive steps taken by crypto actors.
An earlier generation of ideologically-driven crypto anarchists shot for the king, and they missed. And now the king is shooting back.
Capitol Hill, executive, judiciary investigations into crypto are directly attributable to crypto’s offensive posture. They are reactions by a system that is experiencing serious global exogenous shocks. Yet these shocks are not coming from crypto. The shocks are coming from other global governance networks who want to operationalize and weaponize crypto.
And the folks who run these systems understand security and network effects better than anyone else out there. Proof? They’re incumbents.
In this light, the Keep Big Tech Out Of Finance Act is a defensive measure that operates on several distinct, though interrelated, planes:
- credible anti-monopolistic measure (applies to BigTech firms valued at $25B+);
- a meta sector-wide divide & conquer governance tactic (Wall Street v. BigTech cartelization);
- rent-seeking (regulation and taxation of crypto earnings [with sporadic redistribution in the form of class action settlements and centralized consumer protection restitution schemes]) as tactic of retaining not only relevance, but indispensability);
- global governance & geo-politics (control of BigTech as control over other vectors and domains of economic sovereignty).
State Money v. Money State
Viewed in this deeper symbiotic and adversarial context, it becomes clear that crypto is not a threat to the state. If anything, it’s a demand that states prove their own indispensability, instead of just demanding that everyone take it on faith.
Today, every state is redefining its raison d’être in light of crypto.
That’s good for everyone, as any new thinking is better than staid thinking. That’s why crypto should continue to engage with the work of bodies like the G20 Financial Action Task Force (FATF) and other global, regional, national, and sub-national governance efforts. Being at the table is better than eating the scraps.
Fundamentally, however, we should not lose sight of crypto’s crypto — the crypto development teams that are repulsed by business-as-usual and still believe in the cypherpunk dream of fully anonymous and maximally-sovereign global networking. Crypto’s crypto is alive and well, and the hardcore cypherpunk ethos still pulses deep within global crypto communities, from bitcoins, to Ethereum, and others.
And we should not lose sight of existing statist legal orders whose core constitutional mandate is the protection of … state-issued money. This includes known legal orders and legislative-judiciary-executive institutional forms (AML; USDOJ Kleptocracy Initiative; et al.). But it also includes many clandestine legal orders by which the USD maintains its primacy.
Folks who believe in “state money” (aka “fiat currency” aka “state-issued currency”) have every reason to be cautious about math and computer wizards who can program “money state.”
But it’s a category mistake to view state currency regulators and crypto developers as two competing clans of money issuers, fighting for control over global financial flows.
On the surface, the hearings look like a continuation of “Eth = Money” v. “Eth ≠ Money” debate, with the key question being who gets to define something as “money.” But the bigger question isn’t who can define money; it’s who can transcend money altogether.
Crypto financiers (e.g., Bitcoiners, “Eth = Money,” DeFinanciers, etc.) represent a loud constituency in the blockchain space, but crypto finance is just one constituency, of many. It’s a powerful force, with a lot of time, energy, and money on the line. But it’s one interest set, of many.
Other crews are working just as hard to unlock blockchain’s full potential without monetizing the blockchain. This includes advances in blockchain governance research, e-voting, record management, gaming, public infrastructure monitoring, non-financial bounties, and many other use cases.
The smart money understands that base protocol layers like Ethereum are valuable precisely because they are programmable in infinite ways — including ways that allow us to radically optimize economic exchange beyond money.
Too Late to Change?
Is it too late to send this signal through all the crypto noise? Not at all.
It’s not too late to realize that the “crypto v. law” & “law v. crypto” memes aren’t working, and are doing more harm than good. There are easier ways to reach global scales — legally, legitimately, and securely.
For here’s the ultimate bit of crypto irony:
The only way crypto becomes global money is if it can resist internal and external attempts to define crypto as money.
Satoshi didn’t need to define Bitcoin as money. Ethereum doesn’t need to define itself as money or currency. A “peer-to-peer electronic service system” may not have the same ring to it, but it sure beats illegality and uncertain compliance frameworks that give you just enough sovereignty to leave you begging for more.
There are many alternative frameworks for understanding crypto and blockchain that elide confrontations with Leviathan.
If you want to beat BigTechBrother at his own game, it’s not about moving fast and breaking things. It’s about building hyperutility that is so incontrovertible, the regulator comes to your table, instead of the other way around.