To My Liberal Friends: Be Careful With Crypto Regulation

You probably didn’t hear the news that a bipartisan bill to regulate cryptocurrencies and to formally change their designation from security to currency is making its way to the House of Representatives. I couldn’t tell you it’s chances of passage, but among my liberal political friends – I’ve observed a fairly limited understanding of the value that cryptocurrencies actually bring.   

When I was in Dubai last year – I fell in love with the multi-cultural environment and people; the UAE is a wonderful country whose government agents have seriously embraced the country’s 100-year plan as announced by their Prime Minister Sheikh Mohammed bin Rashid al-Maktoum in 2017. During my visit - I spoke at a blockchain conference and had the pleasure of being introduced to an assistant to a Sheikh in one of the ruling families. During the evening where we sat under the stars listening to beautiful music and drinking cocktails (he smoked a cigar); we talked about the UAE’s interest in blockchain technology. The government official told us the rulers didn’t care about making money from Bitcoin, but were more concerned and focused on the underlying technology – blockchain – which they considered to be the 4th industrial revolution. 

As an American with a long (enough) history in Democratic politics – there was a moment that stood out to me beyond all others. He said – one of the reasons we’re so drawn to blockchain and other emerging technologies was because it’s one of the few things that the government can embrace without being mired in the bullshit that is Middle Eastern politics. And that stuck with me; one of the great things about blockchain and cryptocurrencies that they’re totally, politically agnostic. Or at least – they sure as hell should be. 

I won’t try to explain how crypto isn’t blockchain and blockchain isn’t crypto; merely that crypto is built on top of blockchain. Cryptocurrencies are an important first use case of the blockchain technology and liberals and progressive alike would do well to understand why they’re so popular and so important.

The #1 Reason CryptoCurrencies Are Popular

Control. There's a "Fuck the banks" mentality. People like crypto because it’s a peer 2 peer application that allows for people to transact commerce without the need of an intermediary. That’s a big deal. They want to level the playing field. They don’t trust the banking system. They often believe in the Gold Standard (I would argue incorrectly since 99% of them don’t know that there have only been 5 Depressions in this country’s history and all of them have been under the Gold Standard, but I digress). And like every other Great Depression that existed – Bitcoin is based on a deflationary model with only a finite number that will ever exist – ever. The math behind the asset is sound, and it is no more illogical for people to hold their value in an asset like Bitcoin than it is for Gold. Neither has intrinsic value.

It’s about power to the people. That’s an underlying current that flows through the crypto community. Whether it’s giving people control over their money in remittances, $ transfers to their mom or buying something – the vision for crypto is a world where gatekeepers and unnecessary intermediaries don’t exist. It’s the kind of mentality that transcends political party. In the words of one of my favorite liberal political people, “I don’t know much about Bitcoin, but if it fucks the banks – then good.” Well that made me laugh. 

If All You See Is Bitcoin, You Might As Well Be Blind

While the outside world looks at people who buy cryptocurrencies as suckers, there’s a whole sub-terrain of innovation happening. There are scores of companies building “stable tokens” – like what IBM has created – wherein a token is literally a digital token backed by and with a price consistent with that of the stable currency it’s paired with. One stable token paired with the US dollar is always worth about $1. It’s not an investment – it’s a digital mechanism to send money cross borders without having to pay Western Union or transaction fees or wire fees or the fuck you because I’m the bank and you gotta deal with it fee. If you have a stable token and you want to send $3k to your friend in Nepal – they can have it in 2 minutes with a transaction fee as low as less than one penny; and you can do all of that without needing any third party.

Think about that - $3k over 8k miles away in two minutes for not even a penny. If that's not innovation - then I don't know what is.

And like stable tokens that are backed by cash, there are other tokens that represent equity ownership in companies with governance features including voting built into the ownership of the token. There are other asset backed tokens that represent ownership in investments like metals, art, commercial real estate and others. Tokenizing an asset allows the owner of the asset to create liquidity in a simple, frictionless way. One of my company's advisors is a VP at Blackstone and last year he tokenized a very well known castle on Long Island. Every token represents an ownership in the castle in the same way that a person can own stock except it's frictionless, liquid and is built within a smart contract.

Bitcoin was the first, but it’s not the last nor is it the only cryptocurrency. And all of this interest in Bitcoin has led to major investments in Identity technology which will minimize fraud and give users more control over who has access to their data and when. It’s led to investment in smart contracts and an enormous amount of innovation. 

The St. Louis Fed Reserve wrote an article titled Three Ways Bitcoin Is Like Regular Currency: Neither has an intrinsic value, both have a limited supply and not one requires a middle man. Cryptocurrencies are digital cash and some have extreme volatility; it's the volatility that really scares people. 

This isn’t just about Bitcoin. There are layers and layers of applications that are being built around cryptocurrencies which simply operate as the P2P payment mechanism for commerce; whereas all of these other technologies are being built in conjunction with that payment delivery system in mind. 

Why Regulations Make Sense

There’s a huge marketplace immersed in innovation and technology trying to solve real world solve problems, but it’s being held back by uncertainty. And people in the industry are begging for the certainty that exists with legislation; right now – cryptocurrencies are being regulated by a law that was passed in 1946. Our laws have simply not caught up to our evolution as a society. To further illustrate how ridiculous the status quo is presently – the SEC considers cryptocurrencies a security, the IRS treats it as property, FinCEN treats it as money, and the CFTC considers them a commodity. There is no way that all of those things can be true. Every time you transfer crypto – it’s treated as a taxable event. It’s madness. 

But outside of the lack of clarity – there are many who view it as a pump and dump scheme or a ponzi scheme or Tulip Mania. There are things happening right now in the crypto market places that would be illegal on the stock market today; there ARE pump and dump schemes happening that undercut the trust and goodwill of (often) not-savvy retail investors who are curious or interested in buying cryptocurrencies because they view it as an investment. There are people who have raised money through Initial Coin Offerings (selling tokens they created out of thin air) for millions and then they disappear; there have been ponzi schemes like Bitconnect that defrauded people who believed they could get a guaranteed return on their investment. There have been people who invested their entire life savings into Bitcoin because …. heartbreaking stuff. There are so called influencers who have made MILLIONS just promoting tokens as part of a less crude version of a pump and dump scheme without the “influencer” disclosing their financial interests or deal with the company that paid it to promote their asset. If someone says cryptocurrencies shouldn't be regulated – they’re not a serious person.

The real problems will exist when a “stable token” or asset backed token was … surprise …. not backed by actual cash or assets. Because that’s already happening. The real problems will happen when crypto exchanges get hacked for hundreds of millions of dollars (because that’s already happened). There will be some catastrophic event in the ecosystem in the future that the industry will be rocked by.  

But for all the bad – there are thousands of entrepreneurs who have a great idea or product and wants to use the unique and awesome global power to raise money through cryptocurrency crowdfunding to build that next awesome business. And those entrepreneurs are being gouged. They have a dream, but they’re fearful that one wrong move with the US government and they’ll get sued by the SEC. So entrepreneurs are setting up their companies in Malta, Singapore, Switzerland or the Cayman Islands; it’s not uncommon for a person to spend $100k to $250k just to get through the regulatory red tape just to begin their journey if they want to engage in issuing a cryptocurrency. It shouldn’t be difficult to setup shop online, but it is – because of inaction and a narrow-minded worldview that we think we know everything we need to know even when it’s about something that we have literally no fucking clue about. That’s not the American dream, and I would argue that not only is it a moral necessity to allow people the ability to go their own way – it’s an economic necessity as well.   

The Bottom Line

The bottom line is that to approach cryptocurrencies with only the mindset that they’re akin to a scam would be unbecoming of anyone with any kind of intellectual honesty. Elected officials should always adhere themselves to the Goldilocks principle: not too hot, not too cold, just right. Retail investors need to be protected from manipulation. But entrepreneurs and innovators need some room to maneuver in a very early, emerging space that will inevitably redefine how we buy, trade and sell things. And while not completely analogous – my liberal friends would be wise to consider the approach that has served the country well with the Internet. There have been some laws passed to provide a regulatory framework – much of it with the consumer and intellectual property in mind, and an overarching commitment to allow for the power of the people.