The industry is being told how to operate. We see the warning signs as clearly as if they were posted in neon on a billboard in Times Square. What is in question is whether the industry will listen or continue to ignore what is being said?
Yesterday, in the article Regulation, Wall Street, and Cryptocurrency, I made the point how the industry basically asked for what is coming down upon it. In our quest for Lambos and mansions, we lost focus upon what this is all about. Due to greed, we made it all about the money.
Since that time, an article popped up providing more insight from CryptoMom.
Decentralize Or Else
We often talk about decentralization but it is mostly a smoke screen. Perhaps many within the industry believe what we are saying but even the regulators know otherwise. This is either a completely blind spot or a true misdirection. Either way, it will come back to bite us.
SEC Chair Gary Gensler is well aware of this point. He stated it concisely to Senator Elizabeth Warren, certainly no fan of cryptocurrency. His statements were in an effort to get more regulation authority from Congress.
SEC Chairman Gary Gensler also similarly said that many platforms claiming to be decentralized were actually centralized. He told Senator Elizabeth Warren in September that many platforms “are only decentralized in name only,” citing that “There is a user agreement.” In addition, he said many tokens listed on cryptocurrency exchanges are actually securities, telling Congress that they needed more regulation.
It is pretty clear how the SEC is viewing things. Obviously, the Chair is not going to be quiet about this either. He is intent on bringing down the hammer and getting cryptocurrency in compliance. That is his main goal, especially with DeFi (decentralized finance).
SEC Commissioner Hester Peirce, an advocate for cryptocurrency, has long warned the industry to decentralize. She is very open about the fact that the government is in troubled waters there.
“There is certainly difficulty on the part of a regulator to stay on top of developments in defi [decentralized finance] and crypto more generally,” Peirce admitted.
The commissioner added: “The decentralized world is one that is very new to us because we are used to dealing with large, usually large, centralized intermediaries. So true decentralized projects do pose a challenge.” Peirce warned:
Could it be any clearer?
Although she does not overtly come out and say it, there is really nothing the government can do with a truly decentralized project. For all the power, it was designed to target centralized entities. It is hard to see where they can have any influence over anything that is spread out at its core level.
Of course, Peirce put the onus upon the industry to "clean up its act".
Decentralized finance carries within itself inherently some ability to self regulate. And I think we need to take that into account as we design a regulatory system.
Bitcoin Showed The Way
Bitcoin is consistently targeted by governments, at least in the rhetoric. The reality is that decentralization was already achieved. In other words, they cannot touch Bitcoin.
There are miners spread all over the world who are responsible for validating the transactions. Anyone can use the network, which cannot be shut down, to send funds from one wallet to another. As China showed, ban the miners and they pop up elsewhere.
We see the situation increase as more miners are continually being added. At this point, a 51% attack is near impossible, hence government control is the same.
How many other chains can actually make this claim? What projects are out there which are resilient to the point that the major vulnerability is not there?
When we view things through this lens, we get a different story.
Many of the blockchains have inherent distribution problems. At the same time, there is usually some team behind the project. For most, we can either look at the holdings to determine where there is vulnerability. It usually coincides with some type of company or development lab.
On Steem, this was the case since the inception. The "Ninja-Mined" stake gave control over to a single entity, Steemit Inc. While this ended up being sold, it would have eventually posed a threat from regulators has that not taken place. There is no way to truly claim decentralization to the authorities when there is one entity who has enough stake to influence how things operate along with the sole ability to code the chain.
What is interesting is that most other chains fall under this same situation. Even something like Uniswap can be influenced since that is coded by Uniswap Labs.
Of course, they did take the step of distributing a governance token to the users, moving in the direction of decentralization. Without knowing how the distribution of UNI looks, it is impossible to say how vulnerable it is. However, the point should be that anything that the regulators can target is a point of vulnerability.
If It Looks Like A Security
We all know the old saying about "if it walks like a duck...". It is the same thing here. If something looks like a security, the SEC is going to treat it as such.
This means that the project developers need to continually keep this in mind. The distribution of all tokens has to exceed their control. While it is a step that is difficult for many to take, it is vital to circumvent the SEC (and other regulators).
A major part of this is self-funding. The SEC is accustomed to dealing with the Venture Capital world. They know the art of raising money like the back of their hand. Applying Securities Law to that realm is something the SEC excels at.
For this reason, no matter how the funding mechanism is established, the SEC will see through it. That is why Gensler claimed that most of cryptocurrency is a security. When something, even a token, is swapped for money during a fund raising campaign, it is a security to them.
Here is where we see the idea of DAOs entering. On Hive, there is a fund that is set up to fund development and other projects. It is coded into the blockchain and all funds are distributed based upon the votes from the community. No person or entity is in control of that. Projects that receive money are not selling any tokens. Instead, it is funded through monies held in the DAO.
There is no point of vulnerability here. Each day, the fund distributes based upon the votes tallied. Nobody can go in and stop it or alter where the funds are sent. The only way a change can take place is through the addition or removal of votes by stakeholders.
Over the long-term, it is likely that the change from this technology will come from those that adhere to the words of CryptoMom. Most of what we see now will end up regulated. That does not mean those projects (or chains) will fail. Quite the contrary.
What we are going to see is the cost of operation increasing. Regulation makes things more expensive. Hence, anything that comes under the banking laws, will require compliance. That means larger entities who have the knowledge and resources to comply will dominate.
Therefore, if you want to find the disruption, look outside those areas. Rarely does this come from the big behemoths.
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