Does Regulation Hurt Crypto?
*NB None of the views expressed here are representative of New Finance Ventures or Mike Kelly. No mention of any app or protocol is an endorsement.
This is something I have been thinking about, rather naively, since I started becoming interested in the space in 2015/16. My light-touch thinking back then was… ‘it will just get integrated into the current system if it goes mainstream I guess’. I missed some of the fundamental and philosophical issues back then.
Our podcast with Ajit Tripathi of AAVE this week has made me start thinking about this again. He is a great thinker with a ton of knowledge in the space and a lot of regulatory alpha even just in listening to the way he thinks.
Many people now argue that crypto is completely antithetical to regulation and/or regulation would hurt it. They are right & wrong and it is an oversimplification.
Are there areas of crypto where regulation is antithetical? Yes. There are also many that aren’t. I don’t see disintermediation and regulation as incompatible- but perhaps we need to rethink how regulation is implemented.
The reality is if we want to onboard billions of retail users to crypto most of them are going to need assurances, checks & balances, and safety nets and with this comes some form of regulation. Similarly, for institutions to keep participating they need assurances, KYC, and AML steps or other protections to meet their fiduciary responsibilities.
Maybe this is similar to how newspapers looked the same as their physical counterparts when they first moved online. People coming from web2 will need some sense of familiarity and comfort to move over i.e consumer protection.
Most people (outside of crypto) do not want to be their own bank, it is a ton of pressure. As I mentioned in my last article this is demonstrated by offerings like Trustology or Fireblocks, easy multi-sig options like Casa Hodl for your BTC, and by the popularity of custodial options and exchange wallets like Coinbase, Etoro, Kraken etc. There is an appetite to not, in the purest sense, ‘be your own bank’.
On the institutional side, you look at AAVE Arc or MakerDAO and SocGen and the beginning of onboarding institutional users and also real-world assets. Do you think that their corporate governance structures will allow them to participate without the confidence they aren’t breaking laws or that if something goes wrong they can demonstrate they had adequate steps for ass-covering (this is the technical term)…
Ajit made a great point on the podcast also:
crypto is not unregulated. I think there is a lot, a lot of lack of regulatory clarity around crypto, but you know, crypto is definitely not unregulated.
People think the space is unregulated, but regulation is already here. Clarity is not. There is a strong argument to be made that it is not necessarily regulation that will hurt crypto but a lack of clarity around regulation that will hurt crypto. These issues are part of what can stop innovation. Builders don’t want to go to jail…
They may be unsure on their tax liabilities, their KYC and AML responsibilities, do their advertisements meet trading standards, does their token qualify as a security, can they get access to reliable banking, what is their NFT collection classified as, etc etc.
The opportunity here works both ways. I think the crypto industry should be proactive in self-regulation and in proposals, engage with governments and regulators to understand what their concerns are and how we might be able to mitigate them. Secondly, jurisdictions should see this as a great opportunity to be forward-thinking and to entice these businesses to operate and base themselves in their areas. They will benefit from higher tax revenues, an influx of talented individuals with discretionary income.
Where regulation does perhaps hurt crypto is the current monopoly the banks and other financial businesses have on the sector. If we apply the current laws then yet again the banks will largely remain unchallenged and uncompetitive. As Mike Kelly has pointed out, one of the great benefits of the ‘unregulated’ markets has been the emergence of competitive pressure on the banks, payment providers and the financial sector in general that we have never seen before. This should force change. If we are to hamstring innovation and experimentation with onerous regulation then there is a danger that this pressure goes away and we are left with the status quo.
What would be naive would be to imagine that regulators are going to sit around and leave this space unchallenged. Whether they can keep up with the innovations or not is almost a moot point, they will try. Their reason for existing is to try to control risk in the financial markets People can question their motives, but the reality remains there are still many good people on both sides of the table trying to make things fairer and safer for everyone. I feel proactively engaging while not laying all your cards on the table is a perfectly acceptable way to approach things. You may not be here to make friends but you don’t have to make enemies needlessly.
The right kinds of regulation and perceived protection may in fact help crypto as it would give builders the confidence to build, experiment, innovate and create in jurisdictions while also giving retail participants at scale the confidence and comfort that they have some levels of protection in what can appear a technically intimidating space.
This is a space with a million different caveats and a lot of nuance. What do you think strikes the right balance on regulation? Are there any jurisdictions getting it right already?
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