The Regulatooor
We thank our guardians for saving us from crypto...
Hello everyone from here in Australia! New York looked like a ton of fun, unfortunately we're still in lockdown but hopefully within the next 2 months our colony will open up to the rest of the world again. It'd be excellent to meet all of you during the conference circuit next year :) So the main theme of this past week in my view has been regulation - let's begin!
Coinbase Fires
A few weeks ago we had Brian Armstrong, the founder of Coinbase, launch a massive tweet storm about how the SEC went hostile on them when they simply asked about launching their new lending product to consumers. However, the story isn't as simple as you may think it is. While the SEC could argue that the counter-party of this interest-earning product are degens hoping to make a 10x on their money — that doesn't quite hold up. How come? Well Coinbase's competitors are allowed to sell the same product legally and had no trouble come towards them. You'd have to imagine how pissed off Coinbase would have to be to resort to Twitter to feel heard about the injustices against them.
I think what makes incidents so frustrating for people in the crypto industry is that those who want to do the right thing aren't actually rewarded or even heard. This tweet by Brian summarises it up perfectly:
If the SEC continues to go down this path of trying to block even the most well-intentioned and regulated actors, there won't be a very bright future for the rest of the US crypto industry.
But why, Gensler?
So why is the SEC actively trying to block innovation and a flood of money coming from this new technological revolution? I guess by this point it really comes down to incentives and the way the political game is played. This tweet storm from Adam Cochrane has some good insights into it all:
Gary Gensler actually taught about cryptocurrencies at MIT and is highly educated on how the technology works!
So why would he take such a strong anti-crypto stance? Well because taking such a stance is what lets him climb his political ladder. That's really all it comes down to. The idea of being pro-crypto when political sentiment in DC is anti-crypto is a sure-fire way to make sure you don't reach the full height of your career ladder. Gensler knows this and is going to play the game hard to get what he wants. The whole situation is pretty tragic to be honest since the regulatory hurdle that the US crypto industry is facing really comes down to one dude trying to become more powerful.
This video is pretty great - it talks about how saving $5/week at 8% interest could net you north of $100k+ in a couple of decades. Only problem is there are not 8% yield opportunities for consumers and the 4% being offered by Coinbase was cut. RIP.
What implications does this have?
Honestly, the main one is just that the US becomes one of the worst places in the world to launch a crypto startup or do anything remotely close to it. It'll cost them dearly. But there's still a great positive to all of this — the entire world isn't the United States! With the direction the US is taking, it means that the global crypto industry is going to thrive more than it has before. Furthermore, serving people at a crypto conference is pretty insane and signals to the wider crypto ecosystem that even stepping into the US could have negative ramifications:
"But won't other countries step in and follow the United States?" Great question but also not as straightforward as you may think. Each country's regulatory body optimises for different outcomes and is structured very differently politically. Sure they may take inspiration from the SEC's outlook but it probably isn't going to have any immediate ramifications in the short-term since it simultaneously gives the opportunities for a ton of countries to be "pro-crypto" and soak up that flood of money.
My main thinking around lots of regulatory issues is how does this tie back and have impacts on DeFi. Well I guess there are a couple of key points I think are worth mentioning:
Teams that are based in the United States will probably have a discount applied to them in the future since they'll have an increasing number of restrictions on what they can and can't do. MakerDAO is already an example of this with their rigid tokenomics and a discount applied on the MKR token given the traction they have.
Community becomes increasingly important. Tokens that have real communities at the helm will be able to iterate and continue much quicker than communities that are only in it because of the money with zero intrinsic motivation. The true strength of a community is displayed by how much confidence the team has in handing over more control while ensuring high-quality execution and no downturn in speed.
DeFi is going to have more regulated pathways that get build on top. It may not be all bad however I think the era of completely permissionless DeFi may not be as viable or will come with hard trade-offs. It's still to be seen.
Leading from the first point, teams outside of the US will have much more flexibility and push the boundaries of DeFi in ways that US teams probably won't be able to. Especially with fundraising methods ;)
That's about it for now! Let me know what you think of this writeup and/or if you have a perspective that I haven't covered!