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Four years ago, towards the end of the initial coin offering (ICO) era, I said in a YouTube interview that “rogue teen cryptocurrencies are coming of age.” For three years, in fact, it seemed so as financial institutions, major hedge funds and big tech companies invaded the space. Unfortunately, in the last 12 months, the failure of centralized financial platforms like Three Arrows Capital, Celsius Network, BlockFi, FTX, and Genesis [a CoinDesk sister company] has seriously damaged the reputation of the industry.
While the financial impact is likely to be transitory, the change in public perception of the industry has changed the ground rules for defending cryptocurrencies. While advocacy in 2020-2022 focused on legal arguments and political bargaining, advocacy in this new court of public opinion requires a much 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 previously worked at Aave, Binance, ConsenSys and Goldman Sachs.
Advocate for internet-style regulation of ‘technological cryptocurrency’
A key lesson from 2022 is that “money cryptocurrency” and “tech cryptocurrency” need to be treated differently. Crypto money in this context includes crypto-financial services such as custody, exchanges, market making, investing, and lending. And tech cryptography includes open source and permissionless innovation such as blockchains, decentralized finance (DeFi), non-fungible tokens (NFTs), Web3 games, wallets, tools, and infrastructure. Failures in financial stability and consumer protection in crypto arose not from the failure of the technology, but from the failure of supervision and controls. DeFi blue chips continued to operate smoothly 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, does not lead to any form of technological innovation. If the United States and other major economies want to be competitive in the age of the metaverse, they must create new legislation for tech cryptography that is inspired by Internet rules and not financial regulation. This future is what advocates of the crypto industry must work towards.
Technological cryptography is a continuous evolution of the Internet and must be regulated in a similar way to how 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 post information provided by third-party users. Without Section 230, the Internet would not have become the benevolent, democratizing, liberating mainstream influence it has become for 8 billion people.
See also: Crypto gets the regulation it deserves | Opinion
As an extension of Internet technologies, technological cryptography needs its own rules similar to Section 230, 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 Section 230’s protections are not limitless, regulators must also have room to go after the bad actors of rug pulling, scams, malicious exploits, bombs and dumps, swindling and fraud.
Advocate for innovation while distancing ourselves from opportunism.
Prior to the LUNA implosion, Web3 policy advocates had shown little intent to challenge the opportunistic and unsustainable off-chain Ponzi scheme that represented the 20% return on the Terra System Anchor protocol. In fact, the LUNA mechanism had the resounding and unqualified support of some of the industry’s most passionate advocates on social media. And while some on Crypto Twitter had denounced Alameda Research’s “pump and dump” schemes, predatory tokenomics, “front-end failures,” mysterious liquidations, and other dubious practices long before FTX imploded, many more were [FTX CEO] Sam Bankman-Fried reinforcements.
If we cryptocurrency advocates fail to distinguish between well-intentioned innovators and dubious or disreputable players, we cannot expect the general public to do so. We have to be very clear who we represent and who we don’t. If we don’t make this delineation ourselves, the rest of society—voters, courts, and legislatures—will find it quite difficult to do it on our behalf.
Support claims with research and data
Cryptocurrencies are a matter of prejudice rather than fact. critics like it John Reed Stark they tend to choose examples that validate their pre-established notions about the industry. Supporters also often take refuge in unfalsifiable slogans like “bitcoin is a battery” or claims like “bitcoin is used by the poor in Nigeria and Lebanon,” neither of which provide useful information for designing and implementing public policy.
Instead, what the industry needs to do is back up its revolutionary goals and claims with independent, objective, data-driven research published in the journals and forums that policymakers follow. For example, industry advocacy groups could sponsor methodologically sound research on the impact of open finance in regions lacking a functioning currency or banking system, the environmental footprint of bitcoin mining, and the utility of cryptocurrencies as a native Internet micropayment system. We also need studies looking at African American refugee and inner-city communities, financial education, and the benefits of transparent and decentralized financial protocols.
This approach is necessary for two main reasons. Where our assumptions hold, the industry will benefit from changing public attitudes and perceptions. Where they are not, the industry will be able to modify and adapt our approach to enhance our positive impact and mitigate any negative impact. Without rigorous testing, saying that cryptocurrencies minimize oppression and destitution or that finance benefits from transparency are just theories.
Solicit feedback from the community and avoid backroom dealings
One of the factors that triggered the immense anger of the crypto community towards Sam Bankman-Fried was the revelation that the FTX founder was seeking to make secret deals with the US Securities and Exchange Commission, the Futures Trading Commission of Commodities and other authorities to benefit its centralized operation at the expense. of decentralized finance. Similarly, wealthy hedge funds have reportedly proposed regulations that would favor their investments.
While it is natural in political negotiation for market participants to seek to tilt politics in their favor at the expense of other participants, doing so clandestinely and opaquely is antithetical to Web3’s values of transparency and community participation. It is also unnecessary. During 2017-2019, the ConsenSys-sponsored Brooklyn Project routinely solicited public comment from the global crypto community before making substantive statements to lawmakers. This is also something that Coin Center has always done well.
See also: A 5-prong approach to sensitive cryptoregulation after FTX | Opinion
While some of the Brooklyn Project’s political positions were intended to benefit Ethereum and ConsenSys, the open and transparent approach prevented unnecessary conflict, mistrust, and misbehavior from industry participants.
Learn the history of financial regulation
While financial regulation, as a whole, hurts consumers and does not lead to innovation, we need to understand the purpose and motivation of the regulations that exist today. Builders and industry representatives should take the time to quickly read why some of the key regulations such as MIFID II, Basel III, the Securities and Exchange Act of 1934 and the Dodd Frank Act were created and what the main criticisms are. substantive to these regulations.
Provide substantive examples of technological innovation.
As Stanford University cryptography professor 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 far beyond blockchain. Similarly, NFTs have allowed many artists and creators to distribute their art directly to their fans and followers. At a time when there is a lot of bathing water, we need to find and prove evidence of the baby, and there is some of it.
Think beyond the United States
For good reasons, the crypto industry has been heavily focused on education and advocacy in the United States, but the opportunity in crypto is global. This means thinking globally but acting locally. The UK, the European Union and India have very different institutional architectures than the US, and the concerns and dynamics are very different. For example, India merged its versions of the CFTC and SEC after the famous Harshad Mehta stock market crash in 1992, while the UK reshuffled its architecture after the Lehman Brothers bankruptcy in 2008. Understanding these differences and its origins can lead to informed and credible conversations. Ignoring them can lead to an instant loss of credibility.
In short, let’s not kid ourselves into thinking that an eventual market rally will return Bitcoin to public goodwill. FTX, as a mainstream brand, has brought the industry significantly unfavorable attention, not only from governments but also from voters who elect governments.
See also: Why No Real Regulatory Change Has Happened In Crypto | Opinion
Decidedly all is not well, and complacency will mean adverse crypto regulation around the world that will cripple both Web3 technology and crypto markets. Technological cryptography, which continues to drive exponential innovation in fields ranging from art and culture to distributed computing and cryptography, deserves a much better reputation, public perception, and popular support than the unfortunate failures of monetary cryptography. they have allowed us So it is time to invest much more energy and talent in policy, education and advocacy than we have ever done as an industry.
At some point, all rebellious teens have to grow up. For our industry, the time has come.