The crypto landscape, as you all know, is a bit of a minefield right now. We’ve been promised this was the future of finance, a peer-to-peer decentralized dream, but instead it’s filled with rug pulls, volatility, and regulatory chaos. The current regulatory approach, fervently fixated on decentralization, is like mending a rocket ship with Scotch tape. It's time for a serious rethink.

Decentralization An Unhelpful Obsession?

At the heart of this problem is the mistaken belief that decentralization is the solution. Policymakers, including most recently the SEC, are obsessed with how decentralized a given crypto network is. They rely on this prong as a way for determining whether or not a cryptoasset should be regulated as a security. If it’s “sufficiently decentralized,” then it’s a cryptoasset; otherwise it’s a security. This idea originates from the Howey Test. It means that when a network is truly decentralized, investors are not at the mercy of other people’s hard work.

Here’s the problem: decentralization is a spectrum, not a binary switch. To attempt to pin down one definitive answer would be like trying to hammer glue to a barn. Remember the dot-com boom? We didn’t try to regulate websites according to how “decentralized” their server architecture might be. Our main focus is on what they’ve done, what services they’re providing, how they interface with consumers. Yet somehow we’re doing the exact opposite with crypto.

This obsession creates unintended consequences. Overly strict interpretations of "decentralization" stifle innovation. For many legitimate projects, they’re working in the legal grey area. In some of these instances, they further go as far as relocating their operations overseas, evading regulators and exposing investors to even more risk. That’s like trying to prevent a flood by constructing an expensive sandbag dam after the fact.

Crypto's Nature The Real Regulatory Key

Rather than pursuing the decentralization white whale, let’s consider the underlying asset. This isn't some radical new idea. It's a return to first principles. In traditional finance, we heavily regulate assets based on their underlying representation. Stocks are shares of ownership in a company, while bonds are debt.

The crucial question should be: Does the cryptoasset represent a legal or contractual claim on the assets, revenues, or profits of a business or government? This is a clearer, easier-to-understand, more consistent, and in the end, more impactful approach.

SEC disclosure rules are designed for businesses. If a cryptoasset isn’t a claim on a business, those rules are mostly a sideshow. Trying to apply them is the proverbial square peg in a round hole. It squanders energy and resources, creates unnecessary confusion, and fails to meaningfully protect investors.

  • Traditional Securities: Represent claims on a business or government (stocks, bonds).
  • Most Cryptoassets: Do not represent such claims (Bitcoin, Ethereum).

Enter the real solution—the “mixed economy.” What we want from regulation We do need a regulatory framework that recognizes the unique aspects of crypto, while delivering necessary investor protections. This means:

  • Clear definitions: Define cryptoassets based on their function and purpose, not their degree of decentralization.
  • Targeted regulations: Develop regulations that address the specific risks associated with different types of cryptoassets.
  • Flexible enforcement: Enforce regulations in a way that promotes innovation while preventing fraud and abuse.

Fear, Uncertainty, Doubt And Opportunity

To put it bluntly, today’s regulatory environment is creating a culture of fear, uncertainty, and doubt (FUD). This is bad for everyone. It deters law-abiding investors, stifles breakthrough ideas in the blockchain space, and gives the black hats room to operate under the radar. Remember the early days of the internet? Sure, it was a Wild West, but good regulations found the balance, fueling the necessary growth and innovation. We can do the same with crypto.

Here is what it looks like if we don’t pivot in a new direction. Otherwise, we’re just setting ourselves up to repeat the mistakes of the past. The more we push this kind of activity underground or offshore, the harder it will be to regulate and keep investors protected. Otherwise, we’ll freeze innovation in place and fail to unlock the great promise this technology has to offer.

The opportunity is there. A well-regulated crypto market can bring in institutional investment, create jobs, and fuel American innovation and economic growth. In order to realize this opportunity, we need to quickly develop a supportive regulatory environment. It should be practical, agile, and focused on the asset type. 12, 2023 Read this post in German It’s high time we all rejected the fixation on decentralization and charted a centrist course towards market stability. This isn't about being pro-crypto or anti-crypto. It's about being pro-innovation and pro-investor. We are intent on building a new crypto-friendly future. This growth will occur not despite regulation, but due to it.

Are you ready to rethink crypto regulation?