“Why can’t we all just get along?”
The Catch-22 of Blockchain Regulation
Why the US government and industry need to work together on the blockchain
— Martin Garthwaite, General Counsel at New Alchemy
This month, Venezuela became the world’s first sovereign government to launch its own coin (even if observers are calling the Petro a “crypto con”). If rumors are to be believed, Iran is next. Meanwhile, Dubai has big plans for a blockchain-powered government, as does Estonia. And Switzerland is actively engaging with ICO regulation and incubating the ‘crypto valley’ at Zug.
The United States’ relationship with cryptocurrencies, ICOs, and the blockchain is, unfortunately, much more fraught. Federal and state governmental bodies have yet to develop clear or integrated regulations for blockchain technologies — choosing to make negative cautionary statements rather than positive directive ones.
The signals are mixed, at best. On the one hand, Jay Clayton, the Chairman of the Securities and Exchange Commission (SEC) says that he has yet to see a token that is not a security. But the crypto-community is still waiting for the SEC to say whether or not BTC and ETH are securities. Many prospective issuers of tokenized securities reportedly made filings with the SEC under Regulation A+ more than 6 months back, but are still waiting to receive approval. The Internal Revenue Service (IRS) treats tokens and cryptocurrencies as property, resulting in complex tax treatment and cumbersome technical implementations, while state regulators apply money transmitter laws to companies handling cryptocurrencies — potentially treating them like Western Union. This classification especially has kept developers from creating services that would allow safer and more stable exchange between tokens and fiat currency. The tone of the discourse, unfortunately — from both sides — has been us versus them.
As a (perhaps, unintended) consequence, developers of innovative blockchain technologies are leaving the United States. Afraid of regulatory ambiguities, risks and restrictions on transfer of Regulation D and other US securities offerings, companies are choosing to launch token sales — in compliance with local securities regulations — in countries such as the United Kingdom, Switzerland, and Singapore. In the short list of countries excluded from these token offerings and sales, United States keeps company with China and North and South Korea.
The United States and its agencies can engage with the blockchain at three levels:
1—Regulatory clarity for continued innovation
Government Involvement: Enabler
The blockchain is often compared to the internet — to convey the speed and scale of the disruption it promises to bring to our lives. But the blockchain is also inherently global, just like the internet or perhaps even more so. The United States managed to become the epicenter of the world-wide-web revolution at the turn of the century but is now in danger of losing that position within the blockchain ecosystem, thanks in large part to regulatory ambiguity.
To reclaim that position, federal and state governments in United States must begin a constructive, public dialog about the blockchain, its regulation and its use cases. Following the examples of Switzerland, Japan, and Singapore, the SEC, IRS, and FinCEN could begin public hearings on the topic. Clear regulations will protect consumers, entrepreneurs, and investors, and prevent monetary systems from being used for illegal purposes or by embargoed countries, while still allowing room for market participants to engage and innovate.
2—The blockchain as a two-way street
Government Involvement: User
Just as the US government can do much for the blockchain by allowing innovation, the blockchain can do as much for the government to gain trust and efficiency. Some agencies have already begun — The state of Illinois recently launched a trial of their blockchain-powered birth registry and identification system and the Pentagon and DARPA are believed to be exploring blockchain-based protocols to enhance security.
Blockchains have the potential to revolutionize the workings of a government and its use extends to healthcare, tax and internal revenue monitoring, and even the holding of fair elections. The US federal government and the states have constitutional systems that could be implemented using blockchain technologies. Take the case of the elected legislative and executive branches, at both the state and federal level, and the appointed judiciary — These bodies create and interpret law. It is interesting to think about how their electoral and appointment cycles could be implemented in a blockchain system to record and interpret laws. Blockchain usage is the first step to understanding the technology and its possibilities, giving the US government a better viewpoint on how to shape the tech’s future.
3—Investing in the future of blockchain
Government Involvement: Champion
The blockchain today is as nascent as it is promising, and there are many problems still to be solved. With government interest and funding, the blockchain can reach its next stage of evolution faster and sidestep the looming threat of quantum computing.
Take, for example, the question of what “scarcity model” could be built into a governmental blockchain, so, let’s say, the Federal Reserve could control the supply of dollars in a transparent manner. The quest for an answer might take you to Quantum mechanics’ double-slit experiment and its implementations for advanced “mining” algorithms based on quantum mechanics to underlie a trust-less scarcity model. Such explorations are far more difficult and expensive without active participation at the governmental level.
Whatever the level of government involvement, it is clear (and imperative) that US Government agencies and the industry must begin a deeper conversation — whether that leads to clearer regulation, better government operations or the advancement of blockchain technologies. There is much to be gained from such a dialogue and almost nothing to lose.
New Alchemy is a strategy and technology advisory group specializing in tokenization. One of the only companies to offer a full spectrum of guidance from tactical technical execution to high-level theoretical modeling, New Alchemy provides technology, token game theory, smart contracts, security audits, and ICO advisory to the most innovative startups worldwide. Get in touch with us at Hello@NewAlchemy.io
