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Today’s note is 2,600 words (10-minute read)
Tortoise v. hare, and more and more
Those familiar with my writing will know that my notes often take one of two shapes. One, a long-form essay on a single topic. Or two, a series of shorter comments on a variety of often unrelated topics. Most MTC notes have been type 1, but this note is a type 2. Here we go.
Regulation is boring but also important
I have generally steered clear of crypto regulation as a topic because it’s mostly boring and I’m not a lawyer. That said, there is a ton of stuff going on that you should know about so let me summarize what I think matters.
Let me set the stage first. Crypto regulation has evolved at a paleothically slow rate as prosecutors are just getting to cases from 2017, legislators mostly ignored or failed to understand the opportunities and threats posed by crypto, and innovators and Big Crypto kept pushing forward without regulatory guidance. About the only thing that has been established is that bitcoin is not a security. The rest of the policy debate is up for grabs in the United States.
Part of crypto’s competitive advantage and growth potential comes from regulatory arbitrage. It’s cheap to send money cross-border using crypto because the blockchain bypasses national security and anti-money laundering rules. There are plenty of perfectly frictionless payment systems in the United States (like Venmo) but if someone in Mexico wants to send me $10k, it’s an expensive pain in the butt. Bitcoin solves this as it bypasses the main surveillance channels used by federal authorities.
Another regulatory arbitrage exists as many projects issue tokens that are very much like securities but bypass expensive SEC requirements by pretending they are not. Regulation that clearly defines what is, and is not a security, is needed. There are many viewpoints on which parts of the crypto ecosystem qualify as securities. For example:
SEC charges Ripple and two executives with conducting $1.3 billion unregistered Securities offering.
SEC chair Gensler has stated that most cryptocurrencies are securities.
The much ballyhooed bill from pro-crypto senators Lummis and Gillibrand (summary here) says almost all cryptocurrencies are NOT securities. If you want to know just how in-group the writers of this bill are… The bill is 69 pages long. I mean… C’mon.
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Cynthia and Kirsten, embracing the nonsense
There was a ton written about this bill in the crypto press, but I would scale back the excitement level as the path from release of a bill to passage is long, winding, and messy. No shot this thing is passed in 2022 and by the time it’s voted on in 2023 (if at all) it could be unrecognizable.
Defining what is and is not a security is important. Crypto exchanges are not stock exchanges. They cannot list securities (yet). Crypto that is deemed to be a security will probably be delisted from US exchanges. There is a low, but not zero chance that ETH is considered a security at some point, but this is all happening in slow motion.
Question: Is this a tortoise and hare story? Where the regulators finally catch up? Or is it more like the Uber vs. City Hall story where the hare offers such a powerful and attractive product that legislators rewrite the rules to allow the disruption?
On the tortoise side of the argument…
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bd