Four years ago, around the end of the initial coin offering (ICO) era, I said in a YouTube interview that “Rebellious Teenager Crypto Is Maturing.” For three years it did indeed appear so as financial institutions, mainstream venture funds and Big Tech companies streamed into the space. Unfortunately, over the last 12 months the failure of centralized finance platforms such as Three Arrows Capital, Celsius Network, BlockFi, FTX and Genesis [a CoinDesk sister company] has seriously hurt the industry’s reputation.
While the financial impact is likely transitory, the shift in public perception of the industry has changed the ground rules for crypto advocacy. Whereas advocacy in 2020-2022 focused on legal arguments and political bargaining, advocacy in this new court of public opinion requires a far more thoughtful and measured approach.
Ajit Tripathi is a CoinDesk columnist, an angel investor in multiple crypto startups and a contributor to key Web3 ecosystems, notably Polygon. He has previously worked at Aave, Binance, ConsenSys and Goldman Sachs.
Advocate for internet-style regulation of ‘tech crypto’
One key lesson of 2022 is that “money crypto” and “tech crypto” need to be treated differently. Money crypto in this context includes crypto-financial services such as custody, exchanges, market making, investing and lending. And tech crypto includes open-source, public permissionless innovation such as blockchains, decentralized finance (DeFi), non-fungible tokens (NFT), Web3 gaming, wallets, tools and infrastructure. Financial stability and consumer protection failures in crypto did not arise from the failure of technology, but the failure of oversight and controls. DeFi blue chips continued to operate without a glitch last year, while large opaque, centralized crypto financial institutions collapsed like dominoes.
Unfortunately, financial regulation, essentially a patchwork of crippling rules accumulated over a century, is not conducive to any form of technological innovation. If the United States and other major economies want to be competitive in the metaverse era, they need to create new legislation for tech crypto that is inspired by internet rules and not by financial regulation. This future is what the crypto industry advocates must work towards.
Tech crypto is a continued evolution of the internet, and needs to be regulated in a similar way as regulators approach the Web.We can find a parallel for this type of legislation in Section 230 of the Communications Decency Act, which provides immunity from liability for providers and users of an "interactive computer service" who publish information provided by third-party users. Without Section 230, the internet would not have become the overall benevolent, democratizing, liberating influence it has become for 8 billion people.
See also: Crypto Gets the Regulation It Deserves | Opinion
As an extension of internet technologies, tech crypto needs its own Section 230-like rules, a “do no harm” regime that protects participants from liability. This would protect open-source developers and innovators from oppression by the state or oppressive litigation by private interests. However, just as the protections of Section 230 are not unlimited, regulators should also be given space to pursue bad actors from rug pulls, scams, malicious exploits, pumps and dumps, grift and fraud.
Advocate for innovation while distancing ourselves from opportunism
Before LUNA imploded, Web3 policy advocates had shown little intent to challenge the off-chain opportunistic, unsustainable growth-hacking Ponzi scheme that the 20% yield in the Terra system's Anchor protocol represented. In fact, the LUNA mechanism had loud, unmitigated support from some of the most passionate industry advocates on social media. And while some on Crypto Twitter had called out Alameda Research’s “pump and dump” schemes, predatory tokenomics, “front end glitches,” mysterious liquidations and other dubious practices well before FTX imploded, many more were [FTX CEO] Sam Bankman-Fried boosters.
If we crypto advocates do not make the distinction between well-intended innovators and dubious or disreputable actors, we can not expect the general public to do so. We need to be very clear on who we represent and who we don’t. If we don’t make this delineation ourselves, the rest of the society – voters, courts and legislatures – will find it rather hard to do so on our behalf.
Back claims with research and data
Crypto are a matter of prejudice rather than fact. Critics like John Reed Stark tend to cherry-pick examples that validate their preset notions about the industry. Supporters, too, often take refuge in unfalsifiable slogans such as “bitcoin is a battery” or claims like “bitcoin is used by the poor in Nigeria and Lebanon,” neither of which provide actionable insight to design and implement public policy.
What the industry needs to do instead is back up its revolutionary objectives and claims with independent and objective data-driven research published in the journals and forums that policymakers follow. For example, industry advocacy groups could sponsor methodologically robust research on the impact of open finance in regions that lack a functioning currency or banking system, the environmental footprint of bitcoin mining and crypto’s utility as an internet native micropayment system. We also need studies looking at refugee and inner city African American communities, financial literacy and the benefits of transparent and decentralized finance protocols.
This approach is necessary for two major reasons. Where our assumptions are valid, the industry will benefit from the shift in attitudes and public perception. Where they are not, the industry will be able to tweak and tailor our approach to enhance our positive impact and mitigate any negative impact. Without rigorous evidence, saying crypto minimizes oppression and destitution or that finance benefits from transparency are just theories.
Solicit community feedback and avoid backroom deals
One of the factors that triggered immense crypto community anger towards Sam Bankman-Fried was the revelation the FTX founder was looking to cut secret deals with the U.S. Securities and Exchange Commission, Commodity Futures Trading Commission and other authorities to benefit his centralized operation at the expense of decentralized finance. Similarly, well-heeled venture funds have allegedly proposed regulations that would favor their investments.
While it's natural in political bargaining for market participants to look to tilt the policy in their own favor at the expense of other participants, doing so in a clandestine, opaque manner is antithetical to the values of transparency and community participation in Web3. It is also unnecessary. During 2017-2019, the ConsenSys-sponsored Brooklyn Project routinely solicited public feedback from the global crypto community before making substantial representations to policymakers. This is also something Coin Center has consistently done well.
See also: A 5-Pronged Approach to Sensible Crypto Regulation After FTX | Opinion
While some of the policy positions of the Brooklyn Project were intended to benefit Ethereum and ConsenSys, the open and transparent approach prevented unnecessary strife, mistrust and bad behavior by industry participants.
Learn about the history of financial regulation
While financial regulation, in aggregate, harms consumers and is not conducive to innovation, we do need to understand the purpose and motivation of the rules that exist today. Builders and industry representatives need to take the time to speed read why some of the key regulations such as MIFID II, Basel III, the 1934 Securities and Exchange Act and the Dodd Frank Act were created and what the main substantive criticisms of these regulations are.
Provide substantive examples of technological innovation
As Stanford University professor of cryptography Dan Boneh recently acknowledged, investment in blockchain technology has accelerated the evolution of zero-knowledge cryptography by several years. Zero-knowledge cryptography has privacy and identity applications well beyond blockchains. Similarly, NFTs have enabled many artists and creators to distribute their art directly to their fans and followers. At a time when there’s a lot of bathwater, we must find and demonstrate evidence of the baby – and there are a few of those.
Think beyond the United States
For good reasons, the crypto industry has largely focussed on education and advocacy in the United States but the opportunity in crypto is global. This means thinking globally but acting locally. The United Kingdom., European Union and India have a very different institutional architecture than the U.S., and the concerns and dynamics are very different. For example, India merged its versions of the CFTC and the SEC after the famous Harshad Mehta stock market debacle of 1992, while the U.K. reorganized its architecture after the 2008 failure of Lehman Brothers. Understanding these differences and their origins can lead to informed, credible conversations. Ignoring them can lead to an instant loss of credibility.
In summary, let’s not delude ourselves into believing that an eventual market rally put bitcoin back in the public’s good graces. FTX, as a mainstream brand, has brought the industry significant unfavorable attention, not only from governments but from the voters that elect the governments.
See also: Why Real Regulatory Change In Crypto Has Not Happened | Opinion
All is decidedly not well, and complacency will mean adverse crypto regulation across the world that will cripple both Web3 tech and crypto markets. Tech crypto, which continues to drive exponential innovation in fields ranging from art and culture to distributed computing and cryptography, deserves a far better reputation, public perception and popular support than the unfortunate failures of money crypto have allowed us. Therefore, it’s time to invest far more energy and talent into policy, education and advocacy than we ever have as an industry.
At some point, all rebellious teenagers have to grow up. For our industry, the time has come.
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