We Need to Let Crypto Come Out of The Closet

The crypto market just had a rough week in mid-May, like a hurricane or tornado hit it. 

As the overall market cap of cryptocurrencies shed billions of dollars in value, the doomsayers came out and repeated the same absurdities: this asset class has no backing, Bitcoin is useless, cryptocurrencies are going to zero. 

Amidst this backdrop, there is cause to wonder if the cryptocurrency revolution is progressing well or facing existential challenges? 

There is no denying that challenges exist. But a significant macro challenge has been lurking since the beginning:

the crypto industry and its participants are not getting enough acceptance or respect from the mainstream.

The sad reality is that many aspiring crypto businesses and participants are living in a closet, and it is time for crypto to come out of that closet. It’s time for the industry to be recognized and widely accepted as being credible, long-lasting, strong and fundamentally sound.

We are already in a vicious circle. Bad actors or spectacular failures continue to appear and give reason for the mainstream to disallow crypto to normally co-exist with the rest of the world. For these reasons, the establishment keeps pushing crypto to the edges of business and society, and forcing it to find refuge in jurisdictions with inherent lax regulation. 

A wild west of crypto is not the modus operandi we want, nor is it the desired final state for this industry. But the mainstream needs to start by being more welcoming. The best blockchain entrepreneurs prefer to operate inside more clement jurisdictions where certainty is not questionable.

Today, many businesses operating in the crypto industry are being discriminated against in more ways than one, a situation that is not stemming from their own making. 

Here are some data points:

• Blockchain startups can’t easily open a bank account at established financial institutions

• Startups have to choose legal constructs rooted in offshore jurisdictions, a situation that makes it even more difficult to be accepted by many Western financial institutions

• Fiat transfers from exchanges to banks are scrutinized, often resulting in sudden account closures

• The SEC has yet to approve a spot Bitcoin ETF, as they keep rejecting or placing on hold one application after another

• Many exchanges are not US-based and rely on external jurisdictions that are more relaxed or offer little oversight on safety or risk controls 

• US/Canadian consumers are often shut down from participating in token offerings

The opposite of this situation is exactly what needs to happen. 

Embracing or Repelling Crypto? 

I don’t understand why the US government keeps beating down crypto when the industry is at its doorstep begging for acceptance.

Bitcoin and the underlying blockchain technology are not a purely American invention, but it might as well have been. Most of the original core developers that worked with Satoshi Nakamoto were in the US. Nick Szabo, credited to be the original proposer of smart contracts is American. Ethereum took roots in Canada. Some of the most successful blockchain businesses are US-based. The largest and most successful VC funds supporting the blockchain are also in the US.

So why doesn’t the US government embrace an industry that can easily produce the next FAANG (Facebook, Amazon, Apple, Netflix, Google) set of companies, a fate that would hugely benefit the US economy at a scope of billions of dollars?

Instead, by pushing exchanges and blockchain projects to operate in less stringent regulatory environments, bad habits are being formed and excesses committed without adverse repercussions. 

Blockchain businesses should feel safe about being in the US. I regularly talk to smart US founders that wish they wouldn’t have to select offshore locations to concoct their legal structures, token offerings, or governance jurisdictions. 

Let’s Talk About Regulators

When it comes to regulators, there is a difference between protecting investors and preventing them from benefiting from available opportunities. When regulators get fixated on the bad side of crypto, they start to mold their frame of mind around protection at all costs, and that results in an unbalanced outcome and a self-fulfilling prophecy of negativity. 

Regulatory knee jerk reactions are not going to solve anything. This is a time when regulators need to be super smart and display a deep understanding, so they don’t throw the baby with the bath water. 

Actually, regulators need to let everybody in, to get closer to them, so they can regulate them better. Strictly practicing enforcement without clarifying the rules will only continue to frustrate industry participants and push many to jurisdictions that allow them to perpetuate bad behavior. The situation is not as simple as pounding the table while insisting the “tokens” debate is strictly about security vs. commodity vs. utility.

What if crypto were accepted and not discriminated against and became part of the normal business environment? Good things would happen. 

If you want to protect consumers, don't scare off companies, people and projects. Embrace them and learn from them so you can regulate the bad parts but let innovation thrive in the good parts. 

Now that the last hurricane has passed by, the good parts that remain are what counts. 

The proverbial - what doesn’t kill you makes you stronger - applies here. 

There is no doubt the crypto industry will continue building with a stronger base than before. 

Cryptocurrency Needs to Go Mainstream

I wrote a blog post on CoinDesk a couple of days ago, Defining Cryptocurrency Is the Best Way to Kill it.

It's a plea and a case for allowing cryptocurrency to become as pervasive as today's money in all of its applications variety, plus much more. It's also about the realization that the industry has tied itself in knots with various classifications and definitions trying to please regulators. Let's stop playing that game, so we can let cryptocurrency become accepted as an alternative digital currency that is here to stay for the long term.

Cryptocurrency inherits all of money's properties (as a unit and a store of value that is transferable, fungible, verifiable, divisible and scarce), in addition to adding unique functions that money doesn’t have:

• its immutability is digital (the physical is gone)
• it can be fungible or non-fungible (non-fungible is an innovation)
• its policy governance doesn’t need to be centralized
• it has very powerful programmable capabilities with imbedded logic (if-this-then-that)
• its transferability is peer-to-peer (without central intermediaries)

If cryptocurrency is so much better than money, why are we erecting so many barriers for its adoption?

Please go and read this article, Defining Cryptocurrency Is the Best Way to Kill it.

The Benefits of Higher Crypto Market Prices

Last September 2019, I tweeted a prematurely positive position on the overall cryptocurrency sector, with an end-of-year target of $750 Billion for the overall sector.

https://twitter.com/wmougayar/status/1174311907374915584?s=20

That tweet was loved and hated by an equal number of people, judging by the 362 comments received, despite an official 1K Likes, but what stuck with me is the fact that I was hammered for being very wrong in this prediction. However, to keep the record straight, it was more of a wish than a prediction.

That wish is driven by my strong beliefs that higher market capitalization as a whole is a good thing for this sector, for several reasons:

Frees-up new investment capital

New pools of capital (from gains) become suddenly available to projects and startups, some of which had been gasping for air in the past two years, stuck in the doldrums of cryptowinter. This also makes capital a bit less discriminating at funding new projects. In early stages, the quality signals are more difficult to find, even to the most discerning and experienced early-stage professional investors. That is why these investors typically choose a portfolio approach to increase their chances that at least ⅓ of that portfolio bears enough fruit to generate sufficient returns to offset the potential write-offs and losses coming from the rest of portofolio. As a side note, individual investors are also well served to follow a similar strategy. It is not easy to precisely pick one or two investments by putting all your eggs in one basket. Unless you are very lucky, you need to spread your bets across several pockets of opportunities, even if it means lowering individual amounts on a per investment basis. 

Good for the psychology of markets

The psychology of markets is a known factor and reason for rising or falling stock prices in the public markets, as it pertains to the general mood of the majority of investors. Cryptocurrency markets are not different from that perspective. With a positive mood, more investors (or speculators) believe that prices will move higher in the future, and they enter the trading dynamics, which drives prices higher.

More public awareness

As prices start to go up in a significant manner, media coverage about this development starts to increase not just within the crypto media sector (which is a niche media segment), but it starts to spill over to the general and mainstream media which is a much larger piece of the attention pie. 

The total market cap of cryptocurrencies is now flirting with the $300 Billion mark, and that’s another important psychological threshold. Once it crosses that barrier, it will be on its way to pass the most recent high of $371 Billion that was reached at the end of June. At $300 Billion+, that sector will begin to experience more broad media coverage, as it did previously when it reached the over 500 Billion mark. More general awareness about cryptocurrency and the blockchain are a good thing.

More regulatory seriousness

If you follow the logical path of the rolling ball effects, you land squarely in the lap of regulators who tend to be reactionists to market developments. As the cryptocurrency market size swells, regulators (especially in the US) will start to re-prioritize their actions, and many of them will start to move off their sitting ducks positions.

Today, during a Congressional hearing, Federal Reserve Chairman Jerome Powell acknowledged that Libra was an important development to the growth of digital currency. I sensed a streak of progressiveness, as Chairman Powell said “we support responsible innovation...” and followed by saying he believes that “the process for addressing these concerns should be a patient, careful one, and not a sprint to implementation.” Of course, Chairman Powell was taking a jab at the US Congress who seemed hyperactive on wanting to apply quick regulatory handcuffs to Libra. Today, Libra doesn’t figure yet in the total cryptocurrency market cap figures, but they are an important proxy for the development of regulation in this market, especially that the US Congress appears to be obsessed with regulating them one way or the other.

Here is a clip of the Q&A segment that covered cryptocurrency and Libra:

Overall, I’m encouraged that many positive and promising applications of cryptocurrency are entering a second phase of their evolution by building strongly on iterative learnings from the past 2-3 years. 

One promising sector that is jolting out of the gate, is stablecoins. Whether government-backed or not, they bring the novelty of programmability to money, a feature that didn’t exist before because we never had truly native digital money. As Fred Wilson pointed out on his blog today, USDC is one such example, citing the Venmo analogy. But let’s take that concept even further. 

Imagine that you can use cryptocurrency-based stablecoins to make large transfers much easier, and at the speed and convenience of blockchain transfers. Imagine a smart contract built into a financing round that automatically transfers respective funds in stablecoins when all signatures are in place. And if you take that vision one step further, imagine that we then have widespread stablecoin-to-stablecoin transfers with exchange rates, e.g. from USDC to Libra, or USDC to QCAD (a recently launched Canadian Dollar stablecoin), or any other combination.

I’d love to see the above scenarios play out in practice because all the pieces are already in place today.

There will not be one killer app for crypto or the blockchain, but there will be several of them. While there are undiscovered ones, many are advancing today in unisson, albeit with small market shares and usage numbers, which make them less visible to the naked eye, but with the passage of time, they will become gradually more noticeable.

Follow the rolling ball --> Higher prices, leading to mainstream headlines, leading to more projects being funded, leading to more positive psychology, leading to more regulatory certainty, and culminating in the solidification of a large global market of users, believers, and a solid infrastructure of services and capabilities to make it all happen at a significant scale.

There Is a Need to Modernize SEC Securities Laws For The Blockchain

As part of the CoinDesk Year End Series, I wrote an article that puts a reality check on where we are pertaining to blockchain regulation in the United States.

While We Wait for Laws, We Need Better Interpretations of Existing Regulation

Here are the key points of the article:

• Since 1993, only 7 acts came into fruition affecting the SEC, so the chances are low for getting a new act in 2020, especially given it’s an election year.
• The SEC has not created any Rulemaking pertaining to the blockchain in 2019, whereas it published 36 Rulemaking updates to other aspects of the securities law. Why? 
• Hester Peirce has already communicated a number of ideas and recommendations. Why aren’t they being followed? 
• 4 specific actions the SEC could have undertaken if they really wanted to modernize their existing regulation pertaining to the blockchain. 

The article concludes that nothing new will happen unless a leadership change occurs within the SEC. 

You can read the full article on CoinDesk. 

Happy New Year 2020! Let it be a good one.

Superficial Regulation Is Key Cause for Cryptocurrency Scams, Thefts and Lawsuits

Continued global regulatory uncertainty and inconsistency are the biggest factors that are causing scams, thefts and lawsuits in the cryptocurrency sector.

The longer regulatory authorities drag their feet for crafting thoughtful, comprehensive and balanced regulation related to all crypto related activities, the more scams, thefts, frauds, illegal schemes, lawsuits and bad things in general will continue to happen across the world in this sector. 

In the last few months, the number of cryptocurrency related scams, thefts, bankruptcies and lawsuits have increased. Just scan the news headlines, and you will encounter stories about exchanges getting hacked, users getting scammed, ICOs that siphoned money without delivering anything, exchanges becoming insolvent, etc.

Yes, we want the regulatory authorities to be dogmatic in their enforcement approaches, but if they only do that without updating and clarifying the existing regulation, it is a recipe for disastrous consequences at several levels.

Applying existing regulatory frameworks to the novelties of the blockchain, tokens and cryptocurrency is possible, but it is subject to various grey zones of interpretations leaving blind spots and uncovered areas that are causing these undesirable outcomes:

- Scammers are able to operate because exchanges are loosely regulated

- KYC and AML practices can leave a lot to be desired because they are either not enforced or their requirements are poorly document 

- Many exchanges don’t provide proper accounting activity reports (because they don’t have to)

- Enforcement authorities are not up to speed on tracking and detection software 

- Asian exchanges are seen as a more permissible environment with loose regulatory constraints

US-based exchanges generally hold themselves to high operating standards by abiding to self-prescribed set of operational principles (eg. the Virtual Commodity Association), or just knowing that the SEC, CFTC, FinCEN and other regulators are watching this space like hawks. Switzerland’s FINMA runs a tight ship pertaining to clear regulation, as everything goes through them. Canada had very loose and fragmented regulation, which was a factor that allowed QuadrigaCX to run their scam under the radar of detection. That said, I am worried about many Asian exchanges that seem to wiggle their way out of strict operational regulation. 

The boundary-less nature of cryptocurrency-based financial transactions has pierced through the previous regulatory walls. This is good for freedom of choice and levelling the playing field for consumer access, but these porous boundaries are also letting-in the bad actors alongside the good ones. 

Of course, we need to maintain the global nature of this new financial system open, but we also need to put added operational safety requirements so that the good that emerges far exceeds the bad that comes with it. 

What we need more of:

- Acceptable and clear frameworks for the variety of crypto-token creation ideas

- Exchanges that can be trusted via certification to ensure they adhere to specific operating standards

- Crypto instruments that integrate with current systems in order to reach the masses in a legitimate way

- Bank accounts that accept crypto transfers and not treat crypto transfers with disdain, just because they don’t fully comprehend it, or haven’t adapted to it yet

Failing these progressive changes, we would be pushing more of the activity to other jurisdictions that offer lower barriers of entry. The fact that the Philippines has already granted licenses to 41 crypto exchanges and trading businesses is both interesting and scary at the same time. 

When it comes to trust and safety in the global financial markets, generally, the Western world has lead with their standards, and others follow them. In the crypto world, the reverse is happening. The “standards” are coming from non-Western (or advanced economies) jurisdictions. Asian exchanges are taking the path of least resistance, doing the minimum required in many cases. Let’s hope that this doesn’t become the new standard because some of these standards are loose, and often surrounded by double standards. 

The irony of the situation today is that western regulators are pointing to these excesses and using these bad things as a pretext for more radical regulation, instead of taking a more thoughtful approach, less sketchy, and with more detailed reforms.

Will the local Western regulators elevate their game and realize they need to work together to raise the bar for everybody concerned? Or will they continue to allow a laisser-faire for whatever happens outside of their jurisdictions, while they take tepid steps to regulatory reforms in their homes?

When regulators know little about a given subject, they won’t do the right thing. This applies to anything,- food, alcohol, roads, schools, etc. There are almost no subject matter experts or thought leaders from the regulatory side that have shown real depth of knowledge, innovative thinking and fresh strategies. Christopher Giancarlo, the recently departed CFTC Chairman and SEC Commissioner Hester Peirce are potentially the few exceptions, but they are a minority voice of reason for progressive thinking.

The current state of global regulation in cryptocurrency cannot go on. We have a Balkanization of regulations with a variety of standards, classifications, rules and practices. 

Sadly, this is the worst situation to be in.