Over the weekend, we had a chance to read parts of American Kingpin,based on the true story of the hunt for the founder of the Silk Road, the man who went by the moniker ‘Dread Pirate Roberts’ and believed to be Ross Ulbricht, currently in US custody. Silk Road was intended to be a libertarian, free-for-all exchange, helping people transact in anything they pleased, including drugs and arms. It says much about humanity’s desire for anarchy/freedom that it grew rapidly into a multi-billion dollar enterprise, and the exchange was of course shut down by the FBI after a two-year manhunt for the perpetrator, believed to be Ross Ulbricht.
One view of innovation is that it is a constant struggle between the incumbency and the emerging insurgency. Given that regulators by their very construct tend to prefer not to rock the boat, the innovators either remain incognito ( Satoshi Nakamoto with bitcoin), or stay away from the long arm of the SEC (Arthur Hayes@Bitmex, CZ@Binance), or just create a ton of value really fast and build up momentum with users and big-name investors pulling for them (Travis Kalanick@Uber). As Travis famously said, “It is far easier to ask for forgiveness than for permission”. This approach of moving fast and breaking things is the credo that innovative companies live ( and sometimes die) by. A contempo case in point for the latter – Robinhood announcing a 3% “checking & saving” account only to roll it back, after figuring out that they did not have the necessary licenses to operate as a ‘bank!
With something as fundamentally disruptive as cryptocurrencies, where the establishment is made up of the Governments and the financial institutions, the battle becomes very interesting, to put it mildly.
As we have said before, the key issues that most governments are loath to lose control on are security and taxation, even if that comes at the cost of the potential loss of some innovation.
Taxation is the simplest, and just requires better coordination between the Governments and the financial institutions providing fiat on-ramps. This is definitely possible with current technology. This also needs a clear strategy on the nature of the taxation regime for bitcoin. Singapore, for example, treats bitcoin as a commodity.
While most concerns around security are valid, they are not fundamentally dissimilar from early concerns that existed around cryptography, and the debate around whether it would do more harm than good. For a while, even publishing cryptographic code was censored in the United States, in what could only be termed as a blatant violation of freedom of speech. However, the security aspect gets trickier. The avowed aim of many of these currencies is to provide ‘sovereign-grade censorship resistance’. Although bitcoin itself is only pseudonymous and not anonymous, privacy coins are a powerful sub-class that will increasingly grow in prominence. In the hands of the motivated ‘bad guys’ (and a higher proportion of the bad guys always seem to be better motivated!), a good privacy coin is worth its weight in gold. For all we know, the successor to the Silk Road is probably already being built on Monero or Grin or some as-yet-non mainstream technology. The only way that security can be fully addressed is through community self-policing. Like Google or Facebook, crypto networks will need to track suspicious or illegitimate activity, if they are to have gain the confidence of sovereigns and regulators.
0In terms of regulatory approaches by various Governments, the bellwether regulators, the US, Singapore, the G-20 nations, they seem to be taking a fairly progressive, nuanced approach, notwithstanding the recent Etherdelta ruling by the SEC. Companies are also complying, with the widely watched stablecoin project Basis recently shutting down after it became clear that they would be treated as a security token and nothing else ( as opposed to Ethereum which was originally clearly a security token, but later became a utility, for ‘gas’ payments on the Ethereum network). Of course, this will lead to regulatory ‘flag-swapping’ by some of the more enterprising companies, aided by ‘friendly regulations’ from places such as Malta, Gibraltar etc.
Also, just in case you are curious about the rookie mistakes that brought down Ross Ulbricht and the Silk Road, you can check them out here.
We hope you enjoy the regulatory pieces we have selected from the past 12 months.
An insightful episodic series on various aspects of crypto regulations and how regulators should ideally approach toward regulating this space.
A summary of key learnings from what is arguably biggest SEC enforcement action against cryptocurrencies. A harbinger of what to expect in terms of cryptocurrency exchange regulations from the SEC.
A complete end-to-end guide to the latest state of crypto regulations in the US published by CoinCenter, which works closely with the regulators and congressmen in the US towards providing more transparency around cryptocurrency regulations.
A deeply technical statistical study on what impact various crypto regulations have had on the prices and to what extent. Some regulatory announcements have had a greater effect on prices than others.
“Report Suggests Heavy Wash Trading in Top Exchanges” A report published by the Blockchain Transparency Institute claims over 87% of the transactions of the world’s top 25 crypto exchanges could be false. According to the report, of the 25 exchanges listed on coinmarketcap.com, only two are not involved in some kind of ‘wash trading’. The rest, it alleges, are likely embellishing their trading volumes by 70%.
“Romero on Listing Altcoins” In response to a suggestion that Coinbase may be loosening its approach to add coins that are more experimental or less proven than big names like Bitcoin, Coinbase Vice President Dan Romero stated that Coinbase is, in fact, revising its approach based on customer feedback and current developments in the regulatory space. According to him, the recent shift in strategy is particularly driven by customers who have overwhelmingly requested the addition of new cryptocurrencies to the platform.
“Russian Lawyer to Set Up Crypto Commission” In Russia, a new advisory body of legal experts will look into cases where the current legislation does not reflect the specifics of the growing digital economy and propose solutions. During a roundtable discussion on these issues, the Russian Lawyers Association and an educational organization called Blockchain Lawyers agreed to establish a specialized commission that will address the legal challenges in the crypto industry.
“FB Developing Blockchain Tech?”According to a report from the tech news portal Cheddar, Facebook has been quietly but resolutely focusing on research and development related to Blockchain technologies and perhaps exploring the creation of a proprietary cryptocurrency. Facebook had earlier created a Blockchain Development Department, with David Marcus at the head, to explore the various possibilities without talking about any particular type of interest.
Bitcoin and the Promise of Independent Property Rights by Su Zhu and Hasu