Crypto Money Versus Tech Crypto

Our internal and external debates regarding regulation would improve if we viewed crypto as two ecosystems rather than one. There is a fundamental dichotomy that has a significant effect on policy debate, explains where we are with regulation today and will define how we move forward. But we never talk about it. That should change.

One side of crypto is mostly about investing. Call it “crypto currency”. It is basically buying, holding, lending and trading tokens as investable assets. Money crypto wants large institutions and pension funds to invest and a cash exchange-traded product that every retail investor buys. When cryptocurrency says “it’s still early,” it means most people haven’t bought yet. This side has the attention of regulators.

Bill Hughes is Senior Legal Counsel and Director of Global Regulatory Affairs at ConsenSys Software.

The other side is about building peer-to-peer computer networks where participants transact by interacting with globally accessible software. Call it “tech crypto.” Tech crypto wants these new computing ecosystems to actually work and provide utility to their users. When crypto tech says “it’s still early,” it means that much of the key technology that will define the long term has yet to be developed. The innovation required has little to do directly with the price hike (but the price hike is not unimportant, in part because it impacts the security of these protocols). Generally, this side is misunderstood by regulators but some learn quickly.

Centralized finance (CeFi) is the beating heart of cryptocurrency. Intermediaries define the investment landscape and are its driving force. In technological cryptography, on the other hand, the defining characteristic is the software serving as the counterparty or transactional intermediary. Tech crypto is much more DeFi (decentralized finance) than CeFi.

Cryptocurrency and tech crypto present different risks that public policy could address. In cryptocurrency, the risks more or less resemble those of traditional finance: third-party custody, third-party facilitated payments, retail investor protection, illicit finance, and market manipulation, among others. CeFi is a lot like traditional finance (TradFi), after all. Crypto tech risk encompasses some of these categories, but also includes some entirely different ones: dangerous self-custody, vulnerable smart contracts, good and bad actors with equal access, and public, pseudonymous, and irreversible transactions. . DeFi opens up a whole different set of issues that public policy is unfamiliar with.

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The distinction between crypto currency and crypto technology has recently become clearer. Crypto OG Erik Voorhees and FTX CEO Sam Bankman-Fried’s recent discussion of regulatory policy often touched on this underlying distinction. SBF generally provided the cryptocurrency perspective while Voorhees often advanced the tech crypto banner. Vitalik Buterin said on Twitter that he would prefer slower mainstream investment adoption if it gave the technology time to improve — a tech crypto perspective. The remarkably entertaining Bloomberg contributor Matt Levine astutely recognized a distinction between money and technology in his recent comprehensive treatment of crypto.

This distinction is in our face. It is time to recognize this during the regulatory debate. Failure to do so muddied things for a while.

So far, cryptocurrency has been the 800-pound gorilla in the regulatory debate. Money crypto is capturing far more popular attention, has a set of political issues that need more immediate resolution (e.g. letting Americans trade perpetual futures on margin), donates more to political campaigns, spends more on politicians, lobbyists, and political advertising, and generally is more sophisticated with how international, federal, and state policy is created and implemented. Money crypto therefore led the agenda and defined the issues. “Regulatory clarity” has been the top political talking point, largely because regulations are likely to open up broader investor markets, not because developers want permission to write a new smart contract. . Cryptocurrency seems much more ready, willing, and able to reach regulatory compromises that open up new markets for their camp, even compromises that would present uncapped regulatory risk for tech crypto.

Money crypto has been driving the regulatory discussion, leading many regulators to over-emphasize the investment aspect of crypto. Digital assets are just things you buy low and sell high, they think.

Tech crypto has been in the backseat. Having less capital to devote to lobbying and policy making, being less sophisticated with the ways of Washington, DC, and not having as many existential regulatory issues pending, crypto tech has a much lower profile. Most lawmakers have heard of ether and its meteoric rise in price. Few people understand that Ethereum is a computing platform. Hardly anyone understands the protocols built into it.

But the balance in advocacy is changing, which should make the discussion smarter. And this change is not accidental. Tech crypto sees regulators now scrutinizing peer-to-peer networks, unhosted wallets, smart contracts, and more. The specter of peer-to-peer (P2P) regulation is now on the horizon, and so, as a growing necessity, crypto technology commits more resources to policy making and advocacy.

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We see this trend manifest in the recent response to the Digital Asset Commodity Consumer Protection Act, which sits with committees in the US House of Representatives and Senate. As cryptocurrency — particularly a hugely active major player CeFi that will go unnamed — lobbied for adoption, tech crypto roared that vague and ambiguous provisions would allow the full authority of the CFTC to regulate protocols. P2P. These criticisms have put the bill’s sponsors and some in cryptocurrency at a disadvantage. It’s a good sign.

As crypto begins to play a bigger role in the conversation, we should embrace both sides. Neither is good or bad – rather, their relationship is symbiotic. Most people only care about tech crypto because cryptocurrency has helped the price go up, and the price is only going up because tech crypto is doing something that enough people think could actually change the world for the better. Yet acting as if they are the same frustrates competent debate on political issues.

It also confuses regulators. If there is no gap between cryptocurrency and tech crypto, regulators like the Securities and Exchange Commission (SEC) have a rhetorical basis for prescribing the same regulatory solution in both spaces.

“Because we obviously need to regulate the investment side, we should also regulate the technology side,” is the logic. Properly framing both sides would ideally result in agencies acting more like FinCEN has done to date. This agency in 2020 saw a rushed rule aimed at hampering non-hosted wallets and properly resisted (as far as it was able) its US Treasury Department bosses. They knew their mandate in Congress could be extended to cryptocurrency, which often engages in money-services activities, but extending their oversight to tech crypto was beyond their authority.

A consistent approach would mean addressing cryptocurrency regulation first, then moving into tech crypto later. Cryptocurrency is much more easily regulated. Although we are far from excellent in this area, we have experience in the regulation of intermediary financial systems. We could and should prioritize working out all the complicated but important details, including custodial requirements, know-your-customer (KYC), and balance sheet transparency, that need to be ironed out in CeFi. Focusing first on a properly regulated CeFi, we would address that part of crypto that is undeniably larger, more exposed to retail, and more connected to TradFi.

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As we do this, we can evolve our views and hopefully achieve greater consensus on the risks and mitigation strategies associated with the global permissionless P2P crypto space. This approach makes sense in large part due to how early DeFi has evolved and the near certainty that it will evolve significantly over the next few years. Some of these changes will inevitably resolve many of the risks we see today.

We should be more responsive when it comes to cryptocurrency versus tech crypto. Advocates should mobilize quickly to confront the folly of any law or regulation to extend the definition of a Virtual Asset Service Provider (VASP) or Crypto Asset Service Provider (CASP) to providers or technology platforms. When we hear “same rules for DeFi and CeFi”, we should point out the loophole and resulting policy inconsistency.

Although their differences are significant, cryptocurrency and cryptotech need each other. In the short to medium term, crypto technology is receiving a massive influx of ideas, energy, and talent due to investment interest. These are the most important ingredients to keep moving forward on the path of innovation. Money crypto needs these protocols to earn in the long run so that these tokens are actually worth something. But these two facets of crypto are not the same, and our engagement approach and policy goals should reflect that.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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