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12 Things the Crypto Industry Needs to Get Right

It’s going to take a long time to get back on track

It’s the end of summer and return to work or school for many people. Crypto has had a boring summer, no matter how you cut it. In terms of prices, we’re pretty much where we were 90 days ago, roughly. (See chart below)

However, beyond that quantitative metric, the industry malaise will continue as long as we have a hostile US regular (the SEC). Sadly, the crypto industry has a lot of headwinds to fight through. Every bit of good news is quickly tempered by regulatory realities.

The non-US market that wants to shrug off the SEC is not so immune to what happens in the US. The US is still that locomotive engine that needs to go full speed to power the rest of the industry. So, we can’t just depend on the rest of the world to pave the way on its own.

What could lift things permanently is a lot of things:

1. SEC change of regime and / or change of rhetoric

2. US Congress passing some law(s)

3. Bridges working seamlessly between L2s & from Ethereum to non EVM chains (eventually it should be just “VM”,- the blockchain as one virtual machine)

4. Many more consumer apps with a dead-easy mainstream user experience, leading to millions of committed users that use these apps daily

5. Spot ETF products for Bitcoin & Ethereum (a few of them)

6. Lower gaps between promise and reality for any new / existing blockchain projects (ie lower the hype)

7. No extraordinary bad actors for a full year (ie no significant scams or security exploits)

8. Moving the conversations away from the technical realm that currently dominates (speeds & feeds won’t matter much, but interoperability & user experience will matter). Degrees of decentralization debates are overdone.

9. Players consolidation at the L1 level which is Ground zero (there are far too many competing & non-interoperable L1’s & that works directly against much needed network effects) [related to #3 & #9]

10. Established companies adoption of blockchain / crypto not in an opportunistic way, but more fundamentally

11. Emergence of better / newer / more (human) role models in the crypto space

12. Crypto techies that can better explain the business aspects and applications of what they are building; less tinkering, more useful tech. We also need more no-code tools to put in the hands of non-tech users.

Of course, all these points are being worked on. That’s the good news.

The bad news is that it will take a while to get there as these aren’t going to be realized overnight.

Formal Disclosures Are Coming to Token-based Projects and Protocols

Disclosures not only serve to protect consumers, but they also help institutional investors feel more comfortable with digital assets.

I’ve just written an Opinion piece published in Fortune yesterday, entitled Public companies obey strict disclosure rules—it’s time for crypto projects to do the same

In this piece, I argue the crypto industry currently lacks proper disclosure practices at the level that regulators (and serious investors) will expect in the future.

“No proper disclosures” has been a refrain used by the SEC in their attempt to paint the industry’s non-compliance. 

You can read it on the above link (no paywall) as a preamble to my additional commentary on this topic.

I’ve poured over 3 recent significant legislations pertaining to digital assets: 

Each one of these recently published regulatory actions mentions the disclosure aspect several times and offers some guidelines for meeting them. However, none of them were detailed enough, nor specific enough about the peculiarities of digital assets and emerging (or established) projects that depend on the token’s utility. 

Last month, Paradigm published an excellent essay, The Current SEC Disclosure Framework Is Unfit for Crypto. Although it is clear the current framework and practices do not squarely apply, what would proper disclosures entail? That is where we should be focused, going forward.

Of course, several cryptocurrency projects claim to be sufficiently decentralized, and beg the question: are disclosures necessary? However, being decentralized is not a cop-out for the avoidance of responsibility to disclose comprehensive information about the performance and evolution of a given project. 

My counter-argument here is that even the most decentralized tokens such as Bitcoin and Ethereum could benefit from more cohesive disclosures about their evolution via performance metrics and indicators to prove their market status. 

Saying that a given protocol is open, therefore anyone can see their on-chain data is not enough, and certainly not a good reason for stopping to disclose a comprehensive view about the ecosystem. The problem with blockchain related data is that information is disjointed, tough to read and not cohesive enough for human comprehension or interpretation. Granted, a flury of analysts publish their own spins on given projects, but the quality of many such reports can be improved, and they don’t replace the requirement for base level data and information.

Furthermore, given the realtime nature of the blockchain, disclosures could be continuously available, and not a one-time regularly scheduled event. And the silver lining behind this approach is that decentralized protocols could disclose their performance autonomously, as I’ve explained in that previous blog post.

Disclosures don’t only protect consumers against excessive and unchecked promotion, they also allow for better correlation between success realities of projects and their market valuations. In essence, disclosures help make token holders and institutional investors better informed and more comfortable with digital assets. 

The formalization of disclosures is coming to crypto projects, whether decentralized, centralized or nascent. We should better prepare for it and embrace it. 

To Change the Rules or Not, That is the Question

A trillion-dollar question is at the heart of the stalemate between the SEC and the crypto industry: should the SEC rules wiggle for crypto or not? 

Yesterday, at the US House Hearing Entitled: “The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset Market Structure”, this statement from Representative Ritchie Torres caught my attention:

It summarizes the situation well. On one side, Chairman Gensler continues asserting there is nothing new here with crypto, and the industry should line-up under the existing regulation. His latest absurdity invokes a dog-goldfish analogy to traditional-crypto financial market.

On the other hand, a conventional wisdom reasoning would tilt on acknowledging that cryptocurrencies and blockchain-based technologies usher a slew of innovative business models and capabilities that must be allowed to live and prosper, especially when conceived and deployed in the United States, the largest and most vibrant capital market and economy in the world.

We know well by now, the SEC has not been shy about updating rules: 52 proposed new rulings in the past two years, of which 46 have been already enacted. Sadly, instead of expanding the scope of these rules to give life and validation to crypto, they have been doing the opposite: tightening the noose on existing regulation in order to explicitly choke crypto innovation, and that adds insult to injury. 

A picture is worth a thousand words. So, I’ll leave you to digest this diagram that says it all.

Where we are: 
Crypto is innovating at the edges of current regulations. True, it is currently hovering outside some existing regulatory boundaries.

Where we could be:
Update / Clarify rulings to encompass crypto, while still leaving some room for innovation at the edges.

What the SEC is doing: 
Tightening rules further to increase crypto exclusion. The SEC is updating some rules in the opposite direction, making it more difficult or impossible for crypto to comply. 

Could Decentralized Protocols Disclose their Performance Autonomously?

Forget DAOs, we need autonomous, real-time reporting for decentralized blockchain networks 

Let’s humor ourselves a bit. 

In a previous blog post, an SEC conundrum was exposed about expected disclosures meant to protect the consumers: if decentralized protocols have no central teams, who would be responsible for preparing and providing disclosures to the public? 

Of course, the extreme case of centerless decentralized blockchain consensus protocol is Bitcoin, closely followed by Ethereum. 

Transparency and disclosures are important. It’s a point the SEC has been harping on, and rightfully so. It is one of the key tenets of their raison d’être, “to require public companies, fund and asset managers, investment professionals, and other market participants to regularly disclose significant financial and other information so investors have the timely, accurate, and complete information they need to make confident and informed decisions about when or where to invest.” The objective of such disclosures is to prohibit deceit, misrepresentations, and other potential fraud.

Unfortunately, for many token-based projects, even some of the popular and centrally-managed ones, there are no transparency reporting standards, let alone plain transparency, or even any formal reporting. Information opacity and dissymmetry abound. 

However, most blockchain protocols have a variety of performance & operations-related dashboards and blockchain explorers that are rich with data, analysis, historical trends, and a variety of publicly or privately assembled valuable information. 

What if there was a way to string these information sources together intelligently, pluck out the most relevant data into a meta layer of sorts, and make that available in a format that would be digestible for interested “investors” or “token holders” and would give them an informed and accurate view about the network performance in a normalized manner?

Let’s take this concept further. 

That first meta layer could be fed into an AI layer that creates the narrative around the data.

Then, one could feed that narrative in a text-to-speech conversion later, and make that available to anyone who wants to obtain a voice update on how a particular project is doing. 

And since everything is real-time, that process could run as a continuous loop, and it could even be provided on-demand, at any point in time. 

Finally, another AI-driven query layer would be able to take human prompts and generate the right responses. 

There we have it. Autonomous reporting. There is no need for end-of-quarter reporting in blockchain networks. They run non-stop, so their performance indicators should be read non-stop. 

We have been advocating DAOs for a while, with no visibly spectacular examples to point to. 

How about we start with Autonomous Reporting?

The Writing is on Wall: The SEC is Unfit to Regulate Cryptocurrency

If the SEC Isn’t Fit to Regulate Crypto, Let a new Digital Assets Commission Take Birth and Rule instead

Gary Gensler is the problem today in crypto, but there was a silver lining in his refusal to provide a straightforward answer to a seemingly simple question by Rep. Patrick McHenry: Is Ether security or commodity? 

On the surface, it sounded like he was dodging the question and continuing to be himself, i.e. perpetuating the current SEC practice of confusing the market while maintaining their enforcement agenda. 

Let’s pretend there could have been a Yes/No answer. Chair Gensler is no dummy. He knows that answering more precisely would have instantly obsoleted his crypto agenda and revealed the nonsensical, illogical path they are currently pursuing. And he would have shot himself in the foot by exposing the cracks in the conundrum his agency is facing.

Let me explain.

Damned if it is, Damned if it’s not

If Gensler had said that ETH is a security, then it would be allowed to trade on approved security exchanges such as the Nasdaq or NYSE, right?

Yes, but nonsensical. 

Granted, it would be a boon for Ethereum because mainstream investors could buy it via the large and established broker-deal networks, but this would be bad for US crypto exchanges because they aren’t allowed to trade securities. They would need to de-list ETH and 99.99% of the other currently listed tokens on their platform. In one scoop, the whole industry would crumble. Gensler might be perceived as the villain here, but he doesn’t want to go down in history as the man who killed a trillion-dollar industry with one stroke (although he’s trying hard to kill it slowly by a thousand cuts).

Nonsensical scenario, of course. 

Assuming Ethereum was a security and eligible to trade on the Nasdaq, the issue is that it doesn’t make money like a traditional company, so what kind of reporting disclosures would “investors” expect? Specifically, the Ethereum Foundation (who originally issued the ETH tokens) doesn’t generate revenue from the Ethereum Network and is not “in charge” of Ethereum’s Protocol/Network revenues. So, who is going to file for that security listing? And who is going to provide the regularly scheduled disclosures that public companies are subjected to? 

Nonsensical. 

Speaking of disclosures, what will be considered as Ethereum Network’s revenues? Are we talking about the protocol’s gas revenue? Or stakers revenue? Or staking pools? Or transaction fees? Wait, the protocol itself can’t generate quarterly reports nor conduct earnings calls with “investors”. 

Nonsensical.

Now, let’s suppose the answer was that Ethereum is not security. Then, it would be officially sanctioned for trading on crypto exchanges, right? True, but Chairman Gensler is no dummy. 

If he had declared Ethereum to be a commodity, then he would have opened two cans of worms at the same time. First, Ethereum would slip away from the SEC’s regulatory purview. His most visible bargaining toy would be taken away, and probably tilt toward the CFTC’s purview. [Now, you understand the essence of the ongoing turf war between these two commissions.] Second, every other token would start claiming they are similar in nature to Ethereum, hence deserving of the same classification.  Then, the SEC would have their hands full dealing with a flurry of such inquiries. This would put them on the defensive, instead of remaining on the offense currently, which allows them to pick and choose which enforcement actions they wish to embark on.

Nonsensical.

If the Token Doesn’t Fit, You Must Acquit (and Not Regulate)

Although his predecessor’s staff via Director Hinman already stated that Ethereum would not be classified as a security, Chairman Gensler preferred to remain on the fence citing the proverbial “facts and circumstances” as a rider to any definitive conclusion.

It is true that in 2014, the Swiss-based Ethereum Foundation was the entity that issued the ETH token, and that event itself was a security offering. But when Ethereum was launched more than a year later, it suddenly caught fire and became decentralized very quickly, resulting in an overwhelming demand for its utility by thousands then hundreds of thousands then millions of users and developers worldwide. Ethereum became a commoditized utility. Its value accrued because of its decentralized status, not as a result of the efforts of the self-effacing Ethereum Foundation.

What this points to is that a traditional regulator may not be fit to regulate cryptocurrency. Although many tokens have security characteristics, several of them equally do not. Cryptocurrency and digital tokens represent a new asset class. With a new class, new rulings are expected.  

It is now obvious the SEC has not been able to grapple with the idea that this new asset class deserves a different kind of regulatory treatment than constraining it within the confines of the existing system. 

Since there is a turf war between the SEC (security side bias) and the CFTC (commodity side bias), why not let a new, impartial agency emerge and regulate these new tokens with clarity?

If that were the case, it would become a lot easier for each token to get classified either as security or utility accordingly. But only after that ruling clarity comes into light.

If the US Congress isn’t able to force the SEC to change its course quickly either by voting on a Bill or by convincing Chair Gensler to open up his mind, then US cryptocurrency activity as we know it is dead. 

Of course, we are awaiting a proposal by Rep. Warren Davidson to limit the powers of the SEC Chair and replace that role with an Executive Director that reports to the Board.

In parallel, why not advocate for the creation of a new Commission to govern the regulation of digital assets? [It is an idea I already floated in October 2021, The US Needs a Dedicated Crypto Regulator.]

Let’s call it simply the DAC: Digital Assets Commission

The DAC would be responsible for drafting new comprehensive regulations for the issuance, usage, and trading of digital assets. The DAC would take into account the existing Securities Act and the role of each existing regulatory body. It would also prescribe the interrelationships between these bodies and clarify where issuers, users, and traders stand with cryptocurrency-based projects, companies and organizations.

Let’s be realistic, the writing is on the wall. The crypto industry has clearly reached a deadlock with the SEC. It’s time to look for strong options, now.

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