The Economic Development Opportunity of Crypto and Blockchain Technology
As we work hard to create a conducive national business environment in the United States to try and catch back up to other countries who have (Switzerland, Malta, Gibraltar, Singapore, et al), individual states are creating their own Safe Harbours such as Colorado, Utah and most prominently Wyoming who even though they may be the least populous state in the U.S they are working hard to become the "Crypto Valley."
This is an economic development opportunity both on the development of business ecosystems around cryptocurrency and blockchain (the technology invented to enable Bitcoin and other cryptocurrencies) as well as the utility of such technology to benefit the individual state's governments and citizenry.
Crypto entrepreneurs and international corporations have been gravitating to Wyoming thanks to regulation they passed starting last March 2018. Those changes made it easier to start crypto-related limited liability corporations ("LLCs") as well as regulations around what crypto-based tokens are and how they are accounted for in the eyes of state government (e.g. release from money transmission regs).
Now, as many as three new crypto-related LLCs are launching in Wyoming every day including the first state-sanctioned crypto bank, FreeRange. But that was just the beginning. As mentioned, Wyoming recently passed a new bill that classifies crypto as money. This is important because it establishes a rule that crypto investors who come to Wyoming can count on. And it could impact the future of crypto for decades to come...
Wyoming, with less than 0.2% of the U.S. population, certainly isn't creating rules that the rest of the country is obliged to follow. But other states – and eventually the U.S. federal government – could follow its lead if its policies lead to financial success. This is exactly what we have done in South Carolina through a proposal called the "South Carolina Blockchain Industry Empowerment Act of 2019" currently in the form of House Bill 4351 & Senate Bill 738 now in there respective committees for study and discussion.
As I have been talking about for nearly two years now, the federal government, its agencies, and U.S. states still can't agree on how to handle crypto technologies. Right now, four different authorities in the U.S. government see crypto in different ways...
The U.S. Securities and Exchange Commission ("SEC"), which oversees securities markets, considers virtually all of the more than 2,000 cryptos on the market to be securities. It has made an exception for two cryptos thus far Bitcoin and Ethereum (though only the ETH/ERC-20 token and not any private crypto tokens created on the ERC-20 protocol) – which means more than half the total market is NOT covered by the SEC.
Another U.S. regulator in the game is the Commodities Futures Trading Commission ("CFTC") which controls commodity futures and derivatives transactions. It has labeled cryptos as commodities and claims the power to regulate the industry.
And yet another regulator, the Financial Crimes Enforcement Network ("FinCen") who sets Know Your Customer ("KYC") and Anti-Money Laundering (AML) rules in the U.S., considers cryptos and tokens a form of money. So it requires crypto companies to register with the government, collect KYC documentation on their customers, and report any suspicious financial transactions they encounter just like banks have to do on their account holders. And this is in limited to just U.S. based banks, but all banks that have any transactions with U.S. banks - which in reality is all banks in the world.
Lastly, the Internal Revenue Service ("IRS"), which collects taxes, has determined that cryptos are properties, not currencies. That means every time a U.S. citizen sells cryptos for a profit, he or she must pay capital gains tax on the transaction. This is not only unwieldy in regards to accounting for value by individuals and retailers, but the liability puts the pee-squash on its widespread use.
Put it all together, and you have four different U.S. government bodies that consider cryptos four different things – creating a crazy web of regulations that no ones can understand or even allow the agencies themselves true oversight. In my view, this is the true reason why we encountered the Crypto Winter of 2018 where the total market cap of crypto went from $828 Billion USD to barely $100 Billion USD at the low in January 2019.
This is why we see Wyoming's legislation has the potential to break new ground, educate the Feds on how it can be done and lead other U.S. states to regulate cryptocurrencies in their own ways. But that doesn't mean every state is being smart about it.
For example, when New York created their "Bitcoin" licensing model and other cumbersome regulation, many of their blockchain and crypto companies fled out of state, if not out of the country. New York began setting rules for the crypto industry before most other states had even heard of Bitcoin. Its controversial "Bitlicense" – which is a business license for virtual currency activities – went into effect in August 2015. The licensure process has cost some companies more than $100,000 in fees and legal work, and it can take three years or longer for a company to gain approval. The result? Fewer than 20 companies have gotten a Bitlicense, and several high-profile crypto companies simply choose not to do business in New York.
The U.S. regulatory landscape is a microcosm of what we're seeing around the world. Some countries have created crypto-friendly legislation, while others have chosen to over-regulate the industry – slowing the rise of crypto industries in those countries. In 2013, China created rules around Bitcoin and blockchain together because they didn't see nor understand the difference. Today, it has a pro-blockchain but anti-crypto stance. But as Communist Party leader and President of China, Xi Jinping, says in his new book, "you cannot have fish and bear paw at the same time."
China's seesaw stance, its Ying/Yang way of doing things has, like the U.S.'s lack of policies, created more confusion and contradictions when it comes to cryptocurrencies and specifically Bitcoin. While citizens can own Bitcoin, they can't exchange cryptocurrencies of any kind for real (fiat) money - in China's case that is the Yuan/Renminbi. That means they can conduct crypto mining operations – the powerful computers that secure the bitcoin network in exchange for a reward – and earn 12.5 Bitcoin for every block they produce but they can't swap those Bitcoin rewards for fiat money. So, why would a Chinese based Bitcoin Miner want to operate in China? All you have to do is related it back to the way China likes to manipulate any type of market including their currency to their benefit - but that is for another long discussion later.
In response, big Chinese crypto mining companies have simply moved offshore to other countries.
Meanwhile, Japan was one of the first countries to legally recognize Bitcoin as a means of payment. That has helped it become one of the world's largest crypto markets. Despite licensure requirements, Japan's annual crypto transactions are now approaching $100 billion a year. More than 3.5 million Japanese citizens trade cryptocurrencies there.
In conclusion on this episode, regulation of crypto and blockchain tech can attract new investment, enable the creation of a new tech sector and accelerate economic development for a region, or it can drive it away never to see it return. By defining cryptos as money plus other incentives, Wyoming is looking to regulate the industry in a way that fosters growth for their state and their citizens, and by circumstance the United States.
The state's "gold rush" of new economic activity has gotten the attention of lawmakers across the U.S such as here in South Carolina. With the states taking the lead, the Feds will eventually have to take note and work to catch up. This should force U.S. regulators to take a hard look at the results of their current over-regulation – and encourage them to follow the states' lead.
As with everything new and complicated, I see it's only a matter of time we bring the regulations in line with the beliefs and values that make the U.S. great and thus stabilize the industry enabling U.S. crypto investors and blockchain based companies to see fantastic profits in the years ahead. This too will result in money flowing into the coffers of local, state and federal governments to better serve the People!
Be Well, DrJ
Connect with Gordon if you haven't already: https://www.dhirubhai.net/in/drgordonjones/