Putting 2018 in Context
During CES, the award-winning journalist, executive editor of GritDaily and editorial staff member at The Street, Jordan French, moderated the panel “A Crash Course on Regulation.”
Members of the panel included Perianne Boring, founder and president of Digital Commerce; John Beccia, co-founder and CEO of FS Vector; and Joe Cutler, partner at Perkins Coie, LLP.
French’s most substantial question to the panel asked them to explain the rollercoaster of hype that was 2018. There’s no doubt that there were significant ups and downs for the decentralized industry.
1) From Mt. Gox and the Silk Road to Blockchains Today
If the world has learned anything about blockchain technology and digital money over the past year, it’s that they are so much more than mechanisms by which fraudsters steal large sums of money and avenues through which users purchase narcotics and other illicit substances.
“We founded the chamber in 2014 and we’ve undoubtedly been through a couple ups and downs,” Boring said. “But when we launched the chamber, it was a totally different environment — one where blockchain wasn’t in use at the time, all while suffering from very severe public relations issues like Mt. Gox. Adding to that, we were of course dealing with the Silk Road, where illegal drugs were being purchased and sold with bitcoin.
“Yet, the only thing people knew at the time about the industry was Mt. Gox and Silk Road; most people thought it was funny money people could do illegal stuff with. So, we had to fight hard to ensure that policymakers, regulators and the general public could understand the greater benefit of the blockchain, which has taken years to build. The space has been undergoing the ICO issue, where a number of enforcement actions have come out of the [U.S. Securities and Exchange Commission] SEC, which has definitely encouraged the industry to take a big step back. There’s no question that we are in a much better place today, but there are still a number of questions that need answering.”
2) From High Markets to a Market Crash
Over the past few months, bitcoin and other crypto assets have collapsed over 80 percent in value, wreaking havoc on crypto portfolios everywhere. The market crashed due to a number of factors.
Indeed, this space still faces myriad issues, such as depressed prices, but one big strain is the nature of the regulatory environment. The industry entered 2018 with very broad high markets and with what could have been a massively supportive regulatory framework. Unfortunately, that wasn’t the case.
“In 2013, there was a lot of concern as to what direction this space was headed,” Beccia said. “If you’re new to this space, whether its blockchain or digital monies, you are missing the rest of the story.
“Back in 2013, we were talking about the birth of Bitcoin and Satoshi’s white paper. Now, we are talking about the ability for blockchain technology and digital monies to expand the nature of our industries. It’s all about use cases. From a regulatory standpoint, the question to ask is how do we allow these innovations to continue moving forward, while also protecting against its risks?
“As an entrepreneur or project creator, you need to ask yourself — what am I doing? What do I want to do from a business standpoint, and what are the risks associated with operating in that capacity?
“When I advise clients in the space, that’s the roadmap I provide. We can’t control having clear regulatory certainty, but we can control how we adapt to that. It’s really trying to understand what’s black and white, and then where the gray areas are, and learning how to live within those confines.”
3) Why ICOs Were Fundamentally Attractive, but Dangerous
Certainly, money talks. But what does the appeal of cryptocurrency and the gains it experienced in 2017 say about traditional currencies?
“The reason ICOs were so attractive is that, on the outside, they looked like they were available to non-accredited investors,” Cutler said. “You could go invest in an ICO and not go through normal hurdles. On the other hand, many of the companies that developed this tokenized technology, the fundraising element was just one piece, and getting the token into circulation and collecting compensation for it was an important part of getting the token, which has its own use into circulation.
“There’s a disconnect between excitement about raising money with a token and excitement about launching a service using token technology and getting paid for it. I don’t think those things run together.”
Where Do We Go From Here?
According to Boring, the SEC is doing its job in applying the laws and it has done so in the best way it knows how.
“The problem is that there is no holistic plan on where we are going,” she said. “It is for this reason that we are only seeing conversations concerning enforcement — watching the SEC hammer people with enforcement action after enforcement action. This is providing a very negative context to the space with nothing positive to balance it out. The other side of the conversation which we aren’t seeing is what this technology can do to help stimulate economic activity and growth. It’s great to focus on the enforcement angle, but we need to balance it out to help foster this technology’s innovation.”
What Your Project Needs
So, what does the average investor or entrepreneur immersed in this space need to do to find success?
1) Identify Your Project’s Model
“Unfortunately, many cryptocurrencies or ICO projects have launched with the fundraising in mind first, then attached to that goal was a project,” said Cutler. “I would encourage anyone to flip that model upside down and instead first focus on what your project is and is it worthy of raising money in the way others have raised money.
“The first thing people should do who have gotten a blockchain project off the ground, is know what their token is and how it’s used. From there, you have a taxonomy of where regulations are going.
“Am I using this to move value around or am I using it as access to my program or traceability? Because it’s a lot easier to know which regulatory regime applies when you ask that question. If you’re not using a token to raise money, it’s a lot harder for SEC to have jurisdiction; if you’re not using a token to pay for things, it's hard for [the Financial Crimes Enforcement Network] FinCEN to have jurisdiction. Therefore, you have to always ask what you are doing with it, and once you know what activities you’re engaged in, you can then apply industry regulations to that particular activity.”
2) Get Your Nomenclature Right
“It is for this reason, we need to get our nomenclature right,” Cutler said. “Not every token is a cryptocurrency. The tech has moved from being just taking stores of value and creating systems to move that value around, to tokenizing all kinds of things, and not just money — sometimes it’s assets, tracking property and people.”