The War For The Soul of Cryptocurrency
Under The Guise Of “Protecting The Consumer,” Crypto Regulation Might Destroy All That Is Good
Imagine if we embraced the Cryptocurrency craze — even with all the scams and greed — for what it is? What if, instead of regulating it, we let it run virtually unchecked — if instead of focusing on its shortcomings, we lauded its accomplishments? Because, today, we are in desperate need of a paradigm shift. Since the crash, we are now faced with our biggest challenge yet, and the ideology is in its most vulnerable place. The SEC and other governmental regulation are cracking down, people are turning towards easy, short term solutions, and the very ideology of decentralized technology is under attack. We need to realign our vision and resist the narrative being sold today.
First, a quick recap. The last 11 years — free of governmental intervention and regulation, undisrupted by borders, open to all and highly competitive — showed us what is truly possible. We saw an obscure internet concept turn into a global reality. We saw innovators and free thinkers flock to the digital decentralization movement. We saw financial markets open up to those who never before had access. For the first time we saw people recognize the full potential of decentralized technology in the digital world.
We also encountered the dark side — theft, scams, unchecked greed. We saw an enormous bubble emerge, spurred by the influx of individuals who had no understanding of the ideology, no appreciation for what had already been accomplished. They were in it to make money at the expense of all else. And when the potential for rags-to-riches slipped from their fingers, they ran, disheartened and no richer, angry and out for blood.
And can you blame them? We all got caught up in the greed, even those who maintained an ideological stance. And we all got burned. The result is that today, we see decentralized technology drifting towards a well-worn path. We see cryptocurrency threatening to turn from the once celebrated concepts of decentralized technology towards the status-quo of financial regulation.
Today we stand at a fork in the road. We can either realign ourselves with the original goal of decentralized technology, or we can destroy it in the pursuit of the easy way, the one that necessitates little personal responsibility from the individual.
One reason that the vision was lost is that it was never well articulated to the public. The big picture is in the continuation of a 4-century-old idea. The concept of free market, the ideal of liberty. Modernity has been defined by a movement towards decentralization, from collectivism to individualism. First, it was the disruption of the centralized structure of the Catholic Church by the equalizing forces of the Protestant Reformation — a bloody affair. Then it was the evolution of empires to nation-states and the right to national sovereignty and individual self-determination. Next came the decentralization of our political and economic systems: capitalism and democracy replaced class fueled monarchies.
The last vestiges of centralization exist today in the monetary and digital systems. Bitcoin was the breakthrough. It’s no coincidence it was introduced in 2008, months after the collapse of the U.S. housing market.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party — Bitcoin whitepaper
Don’t forget how much harm the centralization of these systems has done to humanity. Currency manipulation has caused some of the most severe economic catastrophes in history. Artificial manipulation of economics almost always results in disaster. At the same time, the federal government has maintained a death grip over markets. They have restricted investing and the acquisition of wealth from equities, real estate, or security tokens to those who have money, those who meet the “accredited investor” definition. It’s the biggest racket ever, sold under the pretense of “protecting the consumer.”
Cryptocurrencies and blockchain promise to fulfill the liberal vision — they are the great equalizers. The technology realizes the ultimate vision of economic freedom: that two people — a seller and a buyer — should be absolutely free to exchange goods at a mutually agreed upon price. Blockchain is the ideal way of providing equality of opportunity in an increasingly digital world. Crypto demolishes barriers between individuals and financial assets, provides unprecedented access to investments for innovative entrepreneurs (way better than crowdsourcing), and inherently disrupts the power of digital monopolies.
Ethereum based ICOing was only the beginning. It freed both the entrepreneur and the investor from modern constraints. With Ethereum, entrepreneurs could raise funds from anywhere in the world. The only limitation was whether their idea was valuable. Investors had access to a market and to companies in an entirely new way. They didn’t have to meet the “accredited investors definition.” It equalized the ability for anyone with an innovative idea to fundraise and develop, to interact with a global community. It gave the ability for anyone to be their own VC, for anyone to be an entrepreneur. The tokenization of real estate and the potential for crowdsourcing will provide financial opportunities to millions in a way never before possible. I would argue that cryptocurrency created more self-made millionaires than anything before; that’s no coincidence.
Blockchain was never about “hyped” ICOs or “get rich quick” schemes. It was about decentralizing financial and digital systems. It was about freeing individuals from the constraints and limits placed on their economic activity by governments. It was about opportunity and innovation. Capitalism and democracy brought equality and opportunity to billions. Decentralized technologies will bring it to billions more.
In today’s debate, the bad is overshadowing the good. The crash has shown us our weaknesses and failures and instead of fixing them and continuing — better prepared — on our course, we are turning to controllers who promise us security at the cost of freedom. We see this today in how those who once celebrated the concepts of decentralized technology are turning towards regulation, towards centralization. We see it in the promotion of centralized chains (at times concealed lightly behind terms like enterprise blockchain, permissioned chains, or tokenless chains). We see it in the call for regulation to protect us from the pains of growth. We forget that blockchain is about decentralizing technology. We forget that this kind of development is an arduous and challenging one.
The tropes are broken records at this point. The arguments presented against decentralized technology and decentralized money are the same ones that were voiced in opposition to democracy, to capitalism, to nationalism. “People aren’t capable of making their own decisions.” “The government needs to protect people — protect them against predators, against what they don’t understand, against their own irresponsible behavior.” Part 1 of the SEC’s 3-part mission statement is to “to protect investors.” No ambiguity there.
But the truth is, this is never a valid argument against freedom. That sometimes a buyer acts against their own self-interest does not mean that the liberal principals of Bitcoin and crypto are broken. That some people win and some lose does not mean that suddenly the SEC (and other regulatory agencies) must begin playing God. It merely necessitates more responsibility from all of us.
Why Not Centralization?
The danger of centralization is that it hurts individuals and stifles innovation. For decentralized technology, centralization will only halt progress and destroy the long term goal. It’s really obvious. Cryptocurrency has reached where it is today (and despite an enormous crash, its current position is still an enormous achievement) because each party in the market was left to make his/her own decision free of any coercion. Innovators were left to innovate, educators to educate, programmers to program, and yes, even scammers to scam. But we achieved our progress because each was willing to take a risk, whether motivated by greed or ideology or peer pressure and fund a never before conceived idea. And it’s easy to take for granted the progress we’ve made. But if we make the mistake of using short term solutions to curb short term problems (regulation to solve corruption and greed), then we will hinder our ability to achieve long term progress.
If we think that the downsides of today’s crypto market have too high a cost, we must ask ourselves what will be the consequences of overregulating the market and confining blockchain to only centralized/controllable applications. They are certainly much higher.
We must continue to fight regulation rather than embrace it. We must resist even when many of the previous supporters of the technology have consigned themselves to the “we need regulation” argument. They’re driven to this conclusion because they’ve decided that the market is broken (evidenced by corruption or crashes or scams) and that the only way to solve it is through governmental intervention. But what they really want are “predictable” blockchains. “Controllable” blockchains. Blockchains that fit into our current financial, economic, and social frameworks. They want “safe” innovation. But considering that blockchain is the realization of digital decentralization, controllable and predictable would be death blows. We must accept that innovation is difficult. Success and failure are two sides of the same coin and crashes don’t signify that the system is broken — but rather that the system is alive.
What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. — Milton Friedman
The downsides and risks voiced today — in legislative bodies, on Twitter, and in articles — aren’t imaginary. Crypto did attract the worst of the worst. But these very downsides are the consequences of a system that will ultimately progress crypto and blockchain technology and offer decentralized alternatives to our digital landscape. They are the consequences of a system that transfers responsibility to every individual and gives them the freedom to act as they might with no constraints — to invest in whatever they deem worthy. If we think that the downsides have too high a cost, we must ask ourselves: what will be the consequences of overregulating the market and confining blockchain to only centralized applications? They are certainly much higher.
We already see the consequences of the move towards centralization. Federal regulation has made it a nightmare for people starting decentralized companies. The task of finding a decentralized solution that works isn’t easy. It is made impossible by the constant consideration of trying to work around security laws. Innovation is impossible if we’re forced to work within a predefined box.
“More generally, the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs. I will discuss each of these issues in turn.” — Hester Peirce in a dissenting opinion to a SEC ruling on Bitcoin ETFs.
Criticizing the current limitations is easy. Offering a solution is difficult. As Dale Carnegie once said, “any fool can criticize, complain, and condemn — and most fools do.” So let me try to offer a path forward.
Forms of centralization can serve important purposes. The way we should approach this question is by asking what positive purposes regulation serves in our modern economy, and how this ideal applies to blockchain. I believe the role of governmental regulation in private business can be applied to four goals:
- Contract Law — Regulation is there to protect and enforce contract law between parties.
- Private Ownership — Regulation is there to protect the rights of private ownership.
- Competition — Regulation is there to ensure fair competition, mainly by enforcing anti-trust laws and breaking up monopolies.
- The Tragedy of the Commons — Regulation is there to protect “common goods” from exploitation (i.e. to prevent the “Tragedy of the Commons.”
Here’s why blockchain breaks the traditional role of regulation. Blockchain has regulation built-in. Decentralized technology is capable of self-regulating all of the above:
- Contract Law — This is largely unnecessary. Smart contracts enforce contract law with no intermediaries.
- Private Ownership — Digital assets are virtually tamper-proof and, if managed responsibly, require no outside intervention to protect private ownership.
- Competition — The open-sourced, decentralized nature of the technology effectively prevents monopolies. Ethereum might have largely monopolized the ICO rush, but anyone can (and some have!) fork Ethereum and entice unhappy users to a new platform. Blockchain-based social platforms would have none of the problems of Facebook, where moving to a new network means leaving all your valuable data behind. With decentralized social networks, users maintain control over their data and can seamlessly jump to a rival network. It is virtually monopoly-proof.
- The Tragedy of the Commons — Finally, the current “common good” laws don’t really apply to digital assets. Where they do apply, they will continue to hold legal power (i.e. you can’t tokenize and sell a public park without federal permission).
So the easy argument to be made is that decentralized technologies should be free of regulation because they don’t need regulation.
On a larger scale, the SEC overextends their power today far beyond the above categories. They will find it impossible to enforce this kind of regulation on decentralized assets and even on decentralized securities. People will continue to use decentralized assets to avoid taxes. People will jump to different jurisdictions to avoid state-specific regulation. It is a losing battle and one that I expect will force new, relaxed policies.
Lose The Battle, Win The War
For the last 15 years in Venezuela, it was illegal to trade foreign currencies. In the Soviet Union, it was a crime that was punishable by death. In true free-market spirit, crypto will reduce the ability of governments to maliciously and artificially control the economic lives of their citizens. The greatest achievement of crypto may very well be the extraordinary way it forces change upon regulatory bodies in today’s economy. But more than anything, we need to be ready for this economic freedom. We need to accept that it is our responsibility and our responsibility alone to manage our money wisely.
Cryptocurrencies demonstrate all that is bad about free markets, but also all that is good. While the inclination to regulate and control will be strong, if we allow crypto to evolve naturally, we might realize our dream of decentralizing monetary and digital systems. As crypto evolves, it will fail and succeed, succeed and fail, carving out its applications and purpose as a disruptor and innovator. Companies will fail and companies will succeed. People will win and people will lose. But it is clear that if we aren’t brave enough to face the dangers of the road ahead, we will never reap the rewards.
We can lose every battle but still win the war. But let’s keep fighting the right war.
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Disclaimer: This is not investment advice, merely my opinion on the topic. Do your own research.