The Case for Technological Neutrality in Web3

Protecting consumers and businesses from fraud is what matters, not vague value judgments of an emerging technology.

AccessTimeIconJun 16, 2022 at 5:06 p.m. UTC
Updated May 11, 2023 at 4:53 p.m. UTC
AccessTimeIconJun 16, 2022 at 5:06 p.m. UTCUpdated May 11, 2023 at 4:53 p.m. UTCLayer 2
AccessTimeIconJun 16, 2022 at 5:06 p.m. UTCUpdated May 11, 2023 at 4:53 p.m. UTCLayer 2

The cliche is that the only things unavoidable in life are death and taxes. We can probably add new technology to the list, too. Artificial intelligence (AI), the metaverse, autonomous vehicles, flying cars – they’re all coming.

Lawmakers, if they want to be on top of a paradigm shift, should approach tech regulation in a way that is thoughtful, perceptive and comprehensive. But reaching consensus in our statehouses is challenging and finding any sort of common ground in Washington, D.C., is virtually impossible.

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Making matters worse, a comprehensive approach to tech policy typically occurs only after some crisis forces legislators’ hands and the media is all over them, only increasing the risk that the law is hasty or ill-conceived.

While new regulatory frameworks will be needed in some areas of Web3 – the version of the internet driven by blockchain – there are other areas where innovators and investors can move the ball forward on the basis of existing laws and regulations, all the while simplifying the task for policymakers.

So let’s talk about technological neutrality.

By “technological neutrality” in the context of Web3 and tech innovation, we mean this: If new technology enables activities that are mostly the same as existing activities, let’s start with an assumption that the law treats the two activities similarly.

Said differently, wherever possible, the law should be neutral to the tech and any variations in legal treatment should come from (and be tailored to) material variations in the business or risks associated with the technology.

U.S. President Joseph Biden’s recent executive order on crypto, while leaving a whole lot unsettled, gives an implicit nod to this approach when declaring, “same business, same risks, same rules.” The crypto community will likely hate the approach the Securities and Exchange Commission (SEC) takes, but at least it’s now in a context we can all understand.

In Web3 and crypto, regulators and innovators alike have at times gotten this backward. For instance, in the midst of the initial coin offering (ICO) boom; an SEC chair once said every ICO token he had seen was a security. That suggested, although digital tokens on distributed ledgers are infinitely variable and could represent anything from book club points to stock in a corporation, legal risks in Web3 stem from the technology rather than what lawyers call a substantive activity.

Under this paradigm, tokens on distributed ledgers were/are “high risk.” However, that hardly makes sense. This type of thinking is no doubt part of the U.S.’s inability to effectively regulate crypto currently and – if we don’t learn from it – Web3 in the future.

Seeking a unified regulatory scheme to oversee “distributed ledgers” – a general purpose technology with highly variable uses – is like seeking a unified regulatory scheme for uses for spreadsheets.

Appropriate oversight

Rather than starting with the technology as the bucketing function, let’s start with how people actually use the technology (their substantive activities), and the presumption that blockchain tech is irrelevant.

What is the business? What rights are being created between parties? How are those rights communicated from seller to buyer? What risks are associated with the business?

If we start with these questions, we usually find that there is relevant precedent in the existing laws, regulations or case law. And more importantly, if innovators, investors and regulators can use this as a shared starting point, we could take a couple of significant steps.

First, tech innovators and investors should have a common framework to assess risk associated with leading edge businesses. A vague sense that Web3 businesses are “risky” can be replaced by targeted questions and answers. What existing businesses does this most resemble? How are those businesses regulated? How is this business different from those businesses? Which of those differences are legally significant, and what are you doing to address risks stemming from that? What here actually impacts regular people and how?

Second, the task for policymakers can be simplified. With a technology as broad as Web3 and crypto, asking a regulator for clarity on Web3 and crypto is understandably daunting. The internet is a broad technology, and regulation would, of course, change depending on whether you’re discussing ecommerce or social networking, consumer protection or data privacy, etc.

If our starting point of technological neutrality can get us good answers on most issues associated with a particular Web3 activity, we can then rely on policymakers for a smaller subset of truly novel issues.

There will inevitably be areas where comprehensive rulemaking and legislation are needed – and industry should not be shy about advocating for that. But there will also be vast swaths of Web3 and crypto that are simply new ways to do the same old things. Not everything is revolutionary. And where that’s the case, let’s lean in on what clarity does exist under the law.

In other words if the government’s failure to properly understand and regulate Web2 has taught us anything, it’s that we need to make this a lot easier for them. Even if we do, they still may drop the ball. Or their politics may cause them to favor entrenched interests regardless of the impact of any particular Web3 business.

Protecting consumers, protecting businesses from fraud is what matters. Not passing value judgements on the merits of one technology over another.

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Bradley Tusk

Bradley Tusk is the managing partner and co-founder of Tusk Venture Partners.

Thomas Mack

Thomas Mack is principal attorney at Mack Legal PLLC, a boutique law firm focusing on blockchain innovation.