Beyond the Blockchain Infrastructure Layer Wars: Embracing the Interoperable Future of Apps and Services

“Technical people don’t ask the right questions.”
– Henry Kissinger (1923-2023)

In blockchain technology, a heated debate persists surrounding the efficacy of various infrastructure layers. On X (formerly known as Twitter), proponents of Ethereum (ETH) and Solana (SOL) have been engaging in a ‘pissing contest’ debate, arguing over the merits of their respective platforms. [Here are two links to such discussions: Link1 and Link2]

These infrastructure layers are simply a means to an end, and this debate overlooks an important vision and fundamental aspiration: to become a global interoperable network of blockchains with Apps and services on top. This vision transcends the limitations of individual platforms, fostering a cohesive environment where applications and services can operate seamlessly across diverse protocols.

ETH, SOL, L1s/L2’s: Stepping Stones for Developers, Not Consumer On-Ramps

While leading blockchain protocols such as Ethereum or Solana play crucial roles in the blockchain landscape, they primarily serve as developer tools, enabling the creation of innovative decentralized applications (dApps) or augmenting Web2 ideas with Web3 capabilities. 

However, blockchain protocols do not directly cater to mainstream consumers. Instead, they serve as the foundation upon which consumer-facing applications will emerge. The applications, not the underlying blockchains themselves, will act as the real on-ramps for consumers, via user-friendly interfaces and intuitive experiences.

Moving Beyond Pointless Debates

The ongoing debate between vocal Ethereum and Solana enthusiasts often delves into technical minutiae and pedantic discussions over ‘degrees of decentralization’, transactions finality speeds, scalability factors, fees, validators conditions, governance methods, etc. These debates, while intellectually stimulating, tend to forget the overarching success factor for blockchain technology: to empower individuals to become regular users of blockchain-based applications.

Prioritizing User Experience and Market Reach

As blockchain technology matures, the focus of discussion, attention, and activity should shift from infrastructure layer ‘turf wars’ to cultivating a rich ecosystem of user-friendly applications that are interoperable across the patchwork layers of the underlying infrastructure. These applications will target diverse market segments, providing tangible benefits and exceptional user experiences.

Revisiting Blockchain’s Core Principles

We should not lose sight of the fundamental principles of blockchain technology amidst the noise of the current landscape. Blockchain’s inherent value lies in its ability to facilitate peer-to-peer transactions while eliminating the need for unnecessary central intermediaries. At this point of maturity, all leading blockchain protocols effectively achieve this core objective.

Beyond the above core principle, blockchain technology also encompasses mechanism design and smart programming logic as another blockchain ‘first principle’ of sorts. While each protocol approaches this aspect differently, most have demonstrated this capability. 

Consumer Indifference to Blockchain Infrastructure

The average consumer will ultimately care less about the underlying blockchain infrastructure powering their applications. Instead, they will prioritize functionality, convenience, and a seamless user experience. 

The field remains wide open for imaginative mainstream consumer applications. These applications may operate on diverse blockchain platforms or even transcend blockchain entirely, utilizing the technology’s underlying principles without explicitly exposing it to users.

Let me illustrate with two examples I’m familiar with.

To the user, Blackbird looks like a restaurant loyalty application. Tucked somewhere in a corner of its technology architecture, you will find blockchain technology in the form of unique, non-transferable certificates (NFT-based) that users earn as a status symbol reflecting their customer loyalty activity. Also, in there, you will find a private currency equivalent to airline points, except that rewards gained are redeemable for restaurant perks with very low levels of transaction friction.

In the field of decentralized finance, Prime is a cross-chain prime brokerage that allows users to deposit, borrow, repay, and withdraw cryptocurrency across 8 different chains seamlessly. This sounds like a banal feature when compared to traditional finance where interoperability is taken for granted (albeit with a lot of friction). That said, Prime represents the leading edge of where interoperability exists in blockchain technology.

Let’s Embrace Interoperability and Innovation

Blockchain ecosystem players should move beyond the infrastructure layer wars and embrace a more collaborative approach. Interoperability between blockchains is paramount to achieving the shared vision of a global, interconnected infrastructure. Applications developers should focus on building innovative applications that cater to diverse consumer needs, while infrastructure layers should continue to evolve and adapt to support this growth. 

Ultimately, the success of blockchain technology hinges on its ability to empower individuals through user-centric applications that deliver tangible benefits.

The future of blockchain is about the applications that empower users rather than the battle between different layers.

Re-Thinking DAOs as an Evolution of Coops

We should stop trying to force DAOs to exist based on their current path of evolution if they want to be a positive part of the blockchain future.

There is no doubt that most DAOs from the cohort that mushroomed during the 2020-2022 period are floundering, or being very loosely successful. 

Yet, some pundits continue to profess a type of analysis that obscures instead of enlightens. Machiavelli for DAOs: Designing Effective Decentralized Governance struck me as a very unrealistic opinion about how to design decentralized governance by espousing Machiavellian principles. 

One of the biggest problems is when we see DAOs as a lever to eliminate the need for human management. This is a naive and misguided assumption. No organization can run on autopilot, and DAOs are no exception. Even when you inject the strong community component that is always part of DAOs, communities also need to be managed with human intellect. In fact, DAOs can be even more difficult to manage than traditional organizations, due to their decentralized nature and the diversity of their shot-gun stakeholders.

We need to stop trying to force decentralized organizations as a panacea for something that doesn’t need it. And we need to be realistic about what’s viable. 

There is validity in rethinking the way we design and implement DAOs towards more simplicity, not complexity. We need to move away from the idea of DAOs as completely autonomous organizations, and instead think of using DAO constructs as a complement that espouses the novelties of blockchain and cryptocurrency. Maybe DAOs are meant to be a complement to something else but not an entirely standalone thing. 

I don’t mean that we need to throw the whole concept away. There are some very good embedded ideas, at the high levels:

  1. Decentralization is a good anti-single point of failure.
  2. Automation with embedded smart contracts does bring operational efficiency. 
  3. Community/user voices with decision-making influence have their benefits. 
  4. Giving back parts of the economic gains to participants that contributed to wealth creation is the right thing to do.

The “autonomous” part in the DAO vocabulary is perhaps the most misleading, misguided, and certainly the weakest part of the equation. 

Management by committee, delegation, or populist votes is a terrible idea. Conflating blockchain consensus mechanisms with human decision-making is blasphemy against human intelligence and decades of sound management practices. 

Voting on decisions, when you have an economic or ideological stake, is not a bad idea, even if it’s only a directional vote that could influence a future decision, but thinking that this is sufficient for running organizations or projects is a naive assumption. 

On the regulatory side, being “autonomous” doesn’t absolve an organization (or its instigators) from the rule of law as set by governments or regulatory authorities. 

Maybe DAOs could be applied when there is predictable repeatability, no issues, no surprises, and when a given system is stable. These difficult simultaneous conditions narrow DAO’s applicability field tremendously. 

The cooperative (Coop) corporate business model is the closest to the DAO concept. I think the industry should work more diligently to extend and adapt the Coop model instead of trying to push DAOs as we know them today. 


Platform cooperatism is a concept that was recently introduced. It is described as “businesses that sell goods or services primarily through a website, mobile app, or protocol.”

This article, ‘Staking’ Identities: Looking at the Practicalities of Transforming DAOs Into Co-ops looks at the similarities between DAOs and Platform Cooperatives.

There is a lot of inspiration that can be drawn from the cooperative Coop model. At their core, coops are businesses that are owned and democratically controlled by their members. That happens to be the primary goal of DAOs, which is why the match is worth exploring seriously.

By combining the best of DAOs and the best of coops, we can create a new type of organization that is democratic, equitable, and resilient.

12 Things the Crypto Industry Needs to Get Right

It’s going to take a long time to get back on track

It’s the end of summer and return to work or school for many people. Crypto has had a boring summer, no matter how you cut it. In terms of prices, we’re pretty much where we were 90 days ago, roughly. (See chart below)

However, beyond that quantitative metric, the industry malaise will continue as long as we have a hostile US regular (the SEC). Sadly, the crypto industry has a lot of headwinds to fight through. Every bit of good news is quickly tempered by regulatory realities.

The non-US market that wants to shrug off the SEC is not so immune to what happens in the US. The US is still that locomotive engine that needs to go full speed to power the rest of the industry. So, we can’t just depend on the rest of the world to pave the way on its own.

What could lift things permanently is a lot of things:

1. SEC change of regime and / or change of rhetoric

2. US Congress passing some law(s)

3. Bridges working seamlessly between L2s & from Ethereum to non EVM chains (eventually it should be just “VM”,- the blockchain as one virtual machine)

4. Many more consumer apps with a dead-easy mainstream user experience, leading to millions of committed users that use these apps daily

5. Spot ETF products for Bitcoin & Ethereum (a few of them)

6. Lower gaps between promise and reality for any new / existing blockchain projects (ie lower the hype)

7. No extraordinary bad actors for a full year (ie no significant scams or security exploits)

8. Moving the conversations away from the technical realm that currently dominates (speeds & feeds won’t matter much, but interoperability & user experience will matter). Degrees of decentralization debates are overdone.

9. Players consolidation at the L1 level which is Ground zero (there are far too many competing & non-interoperable L1’s & that works directly against much needed network effects) [related to #3 & #9]

10. Established companies adoption of blockchain / crypto not in an opportunistic way, but more fundamentally

11. Emergence of better / newer / more (human) role models in the crypto space

12. Crypto techies that can better explain the business aspects and applications of what they are building; less tinkering, more useful tech. We also need more no-code tools to put in the hands of non-tech users.

Of course, all these points are being worked on. That’s the good news.

The bad news is that it will take a while to get there as these aren’t going to be realized overnight.

A Critical Perspective on Ethereum: Too Much Tinkering

The tinkering ratio of output can be improved to yield more mainstream products

I’m writing this critique with a deep and long historical perspective on Ethereum because I want Ethereum to succeed better. I’d like its ecosystem to get stronger. I’d like its apps and services to be more useful. I’d like its end-user experiences to be on par with what the mainstream consumer expects. 

At a time when many other L1 blockchain infrastructures are struggling for growth, Ethereum has a chance to clean up and solidify its position as the preeminent blockchain infrastructure. 

Whether changes happen or not depends to a great extent on what the Ethereum community does or doesn’t do. There is a limit to what the market can do to pick up the pieces and innovate on top of what is handed to them.

This comes at a time when a large part of the Ethereum community is getting ready to re-assemble in Waterloo where the first ETH Global event took place six years ago. I participated in that event, wrote From Waterloo to Zug, Retracing Ethereum’s Journey and made a presentation chronicling the then-emerging Ethereum ecosystem.

I’d like to talk about what Ethereum can do better. So, I’m going to focus on some parts that could be improved, in order to maximize Ethereum’s potential. 

There is no need to extol Ethereum’s strengths, as you all know them. But sometimes your strengths create a weakness. So we can start there. 

One of Ethereum’s strengths is the diversity of its ecosystem and how much development activity there is around it. It is undoubtedly the most vibrant laboratory for blockchain innovation. 

However, that strength has become a weakness because there is too much TINKERING in that ecosystem. 

Tinkering is not bad because it can lead to great things as you iterate. But when I said “too much tinkering”, I meant on a relative basis. 

Tinkering as a ratio of output can be improved. This means that we don’t necessarily need less tinkering, but we need more tinkering that results in fully deployable and usable solutions. And not just at the technical level. We need more end-user applications with user-friendly, mainstream-appeal types of applications.

If your tinkering doesn’t produce an end result, do you know what happens?

Other chains take your half-baked ideas and they add the last mile to it, and they deliver something usable. Sounds familiar?

One of the drawbacks of too much tinkering is that we tend to forget about tuning the end-user experience. 

Of course, the first level of the Ethereum ecosystem is mostly comprised of developers, and that’s a great thing. Developers typically work on infrastructure or they work on services for other developers to build applications on, or they work directly on applications.

The part that needs the most improvement is the last part, the part that touches the end user.

If Ethereum wants to be in the hands of one billion users, it needs to think more about the importance of mainstream user experiences. The mainstream user wants SIMPLICITY first, and two or three clicks to get impressed and hooked. That challenge, by the way, doesn’t only apply to the Ethereum community. It does also matter for the entire blockchain industry. I recently wrote, What The Blockchain Industry Can Learn From the Popularity of Artificial Intelligence pertaining specifically to the user experience.

Here are two related parts where Ethereum can improve.

First, the Ethereum development ecosystem needs more product managers. Product managers focus on getting the product to the market in its most usable form. Sadly, sometimes, they are the ones who realize that at one point, you need to shoot the engineers in order to get the product out. Product managers obsess about the user experience, user flows and user interactions. Product managers understand how to lay out a roadmap and prioritize features rollout accordingly. 

Second, the L2 layers fragmentation is another strength-turned-weakness. L2’s have been undoubtedly beneficial to Ethereum’s scalability, but from a user perspective, the experience is not ideal, because of the switching friction. As a user, imagine if you had to switch browsers to access different parts of the web. It would be unthinkable, yet we ask Ethereum users to decide which L2 to choose from. Furthermore, we make them jump through hoops and take security risks to bridge from one network to another if they seek to move assets across L2’s. 

I don’t have a solution for this fragmentation, and some believe it’s not an issue, but I do think it is. Therefore, I’m just laying out the challenge to elevate its visibility and importance. When there is less friction, there is more adoption.

I realize that the Ethereum ecosystem is obsessed with an extreme form of decentralization at all levels of the stack. But that also creates challenges, because as you unbundle various pieces in order to decentralize the system, you then need to re-bundle everything to properly assemble a solution. Then, you need a lot of coordination and making sure that many parts work together at the same level of readiness and response, and that’s not always so easily achieved. 

This challenge was validated in Vitalik’s last essay, The Three Transitions where he advocates there are three essential capabilities that need to work together in Ethereum: L2 scaling, wallet security, and privacy. There is nothing new with these individual features as they were part of the early vision of the Ethereum blockchain. However, with increased decentralization, there are increasing degrees of complexity that compound when you start to implement these three prongs simultaneously. 

Ethereum is approaching its ten-year mark on its original inception. It’s time that we polish the ongoing tinkering in its base infrastructure and services so that apps can prosper on top of it. 

I’m looking forward to seeing more product managers and entrepreneurs drive the Ethereum ecosystem in addition to the base technology developers who are obsessed with technology tinkering. 

What The Blockchain Industry Can Learn From the Popularity of Artificial Intelligence

The A.I. industry’s approach to user adoption could prove instructive in the area of user friendliness

Image generated by DALL-E

In my third Fortune Crypto column, What Blockchain Can Learn from A.I., I contrast and compare how artificial intelligence burst onto the scene and is being adopted by end-users a lot faster than blockchain products have.

A primary reason is that A.I. has nailed the user experience, especially on a relative basis while blockchain products continue to miss their appeal to mainstream users.

A.I. refrained from overhyping itself prematurely, allowing ample time for development and refinement over the past decade, before it was ready for prime time. During that gestation period, developers dedicated themselves to fine-tuning the technology, tackling intricate challenges, and only now are we witnessing the true impact of A.I. on the average consumer.

In contrast, the blockchain industry continues to expose its tinkering to the public, resulting in a large gap between hype and reality. Several participants in that industry persist in promoting unproven products or exaggerated business models, exposing their experimental ventures to public scrutiny and inviting criticism or skepticism.

As a long-time blockchain enthusiast, this makes me incredibly jealous. I think A.I. can teach the blockchain a few lessons.

Here’s the link to the article (no paywall), A.I. exploded in popularity because it’s so easy to use. Here’s what blockchain developers can learn from that.

A.I. exploded in popularity because it’s so easy to use. Here’s what blockchain developers can learn from that

As soon as the word “blockchain” is uttered, speculation about cryptocurrency prices springs to mind. In contrast, initial thoughts about artificial intelligence revolve around what users are already doing with it.

That stark disparity alone is enough to make many blockchain enthusiasts, such as myself, incredibly jealous.

What can the blockchain learn from A.I. given that adoption of A.I. is off to such an impressive start?

To answer that question, let’s review the similarities and differences between the two sectors. 

First, a quick summary of the parallels between their evolution.

Both A.I. and the blockchain have brought transformative advancements in technology and garnered significant market attention.

With the blockchain, the fundamental innovation was the seamless peer-to-peer transfer of digital assets, independent of intermediaries. With A.I., machine learning and its languages are pivotal elements revolutionizing the application of knowledge everywhere.

With so many imaginable use cases, these two technologies have sparked the interest of millions. Both industries are fast-growing, with the potential to create millions of jobs as thousands of new businesses have already attracted billions of dollars in investments.

In the past decade, both technologies have significantly matured and evolved, offering equal potential to reach billions of people. But the similarities end there.

A.I. has done much better pertaining to market introduction and user adoption.

A.I.’s consumer experience is more elegant but also simpler. For example, OpenAI’s ChatGPT has spawned the creation of dozens of applications for every possible sector. A user doesn’t need to download anything or have specialized knowledge about machine learning or natural language processing. Often, users can try a new product without even formally signing up.

A.I. technology has done an excellent job of appealing to developers who want to inject their applications with its power. The APIs offered are generally simple to understand and functional, from start to finish. Notable ones from OpenAI, Google, Microsoft’s Azure Cognitive Services, and AWS are just a few examples. In contrast, blockchain developers are confronted by a patchwork of technical resources.

Under the hood, A.I. is fairly complex, but while its developers were sifting through technical jargon—Deep Learning (DL), Large Language Models (LLM), Natural Language Processing (NLP), Machine Learning Languages (MLL)—end users weren’t asked to do so. The blockchain sector, by contrast, remains dominated by technical discussions that leave many potential participants grasping for clarification instead of just experiencing the tech.

A.I. refrained from overhyping itself prematurely, allowing ample time for development and refinement over the past decade, before it was ready for prime time. During that gestation period, developers dedicated themselves to fine-tuning the technology, tackling intricate challenges, and only now are we witnessing the true impact of A.I. on the average consumer.

In contrast, the blockchain industry continues to expose its tinkering to the public, resulting in a large gap between hype and reality. Several participants in that industry persist in promoting unproven products or exaggerated business models, exposing their experimental ventures to public scrutiny and inviting criticism or skepticism. Some examples include the heightened expectations around DAOs or GameFi that was supposed to revolutionize gaming.

With a combination of practical, realistic, and compelling use cases, A.I. has now entered various sectors and segments one by one. Artificial intelligence is already being verticalized and specialized, whereas blockchain’s ambitions to permeate industry remain a work in progress. Although blockchain’s impact has primarily been felt within finance, most other forays in different sectors have been feeble or, at best, hopeful.

There is much that the blockchain community can glean from the success of A.I. I hope the upcoming generation of blockchain entrepreneurs will not only draw inspiration from their predecessors but also look to their counterparts in the A.I. field for valuable insights and guidance. The lessons are there for the taking.

William Mougayar has four decades of tech industry experience and is the author of The Business Blockchain. The opinions expressed in commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

Learn more about all things crypto with short, easy-to-read lesson cards. Click here for Fortune’s Crypto Crash Course.

How Will Crypto Wallets Lead Us To The Wild World of Blockchain Apps?

We’re a long way from the wallet becoming the next browser. But there’s more than one way to get there.

I wrote another article that was published on the week-end in Fortune, entitled The growth of Web3 depends on crypto wallets—and how we choose to use them.

The article discusses the question, Will the popularity of wallets lead users to a Web3 world, or will current web apps move more quickly in that direction by first incorporating built-in wallet functionality?

It’s a bit of a trick question because both paths will be valid, in my opinion.

Having more built-in wallets inside apps is inevitable, and that trend is going to increase. In these cases, the app itself is the main attraction, and the wallet takes a second-class position to it. In these cases, there is tight integration between the app and wallet experiences.

Then what happens when you own a variety of cryptocurrencies? You will need a multi-currency wallet to hold them. That’s where the standalone wallet comes in. In that standalone category, there is more than just holding currency. These wallets also function as a bridge to “decentralized apps”, ones that use the wallet as a user login or for authentication and pseudo-identity purposes, such as for Decentralized Finance.

Today, we have an abundance of choices in standalone wallets, while there is a shortage of useful apps that use the built-in wallet in a significant and essential way.

With that backdrop as a set-up, I invite you to click on the link and read (no paywall) the full article, The growth of Web3 depends on crypto wallets—and how we choose to use them.

P.S. The image above was generated by starryai with the prompt “A bridge depicted by cryptocurrency wallets.” I was pleasantly surprised that it also included the hamburger menu alluding to apps, although I didn’t give it that directive.

Formal Disclosures Are Coming to Token-based Projects and Protocols

Disclosures not only serve to protect consumers, but they also help institutional investors feel more comfortable with digital assets.

I’ve just written an Opinion piece published in Fortune yesterday, entitled Public companies obey strict disclosure rules—it’s time for crypto projects to do the same

In this piece, I argue the crypto industry currently lacks proper disclosure practices at the level that regulators (and serious investors) will expect in the future.

“No proper disclosures” has been a refrain used by the SEC in their attempt to paint the industry’s non-compliance. 

You can read it on the above link (no paywall) as a preamble to my additional commentary on this topic.

I’ve poured over 3 recent significant legislations pertaining to digital assets: 

Each one of these recently published regulatory actions mentions the disclosure aspect several times and offers some guidelines for meeting them. However, none of them were detailed enough, nor specific enough about the peculiarities of digital assets and emerging (or established) projects that depend on the token’s utility. 

Last month, Paradigm published an excellent essay, The Current SEC Disclosure Framework Is Unfit for Crypto. Although it is clear the current framework and practices do not squarely apply, what would proper disclosures entail? That is where we should be focused, going forward.

Of course, several cryptocurrency projects claim to be sufficiently decentralized, and beg the question: are disclosures necessary? However, being decentralized is not a cop-out for the avoidance of responsibility to disclose comprehensive information about the performance and evolution of a given project. 

My counter-argument here is that even the most decentralized tokens such as Bitcoin and Ethereum could benefit from more cohesive disclosures about their evolution via performance metrics and indicators to prove their market status. 

Saying that a given protocol is open, therefore anyone can see their on-chain data is not enough, and certainly not a good reason for stopping to disclose a comprehensive view about the ecosystem. The problem with blockchain related data is that information is disjointed, tough to read and not cohesive enough for human comprehension or interpretation. Granted, a flury of analysts publish their own spins on given projects, but the quality of many such reports can be improved, and they don’t replace the requirement for base level data and information.

Furthermore, given the realtime nature of the blockchain, disclosures could be continuously available, and not a one-time regularly scheduled event. And the silver lining behind this approach is that decentralized protocols could disclose their performance autonomously, as I’ve explained in that previous blog post.

Disclosures don’t only protect consumers against excessive and unchecked promotion, they also allow for better correlation between success realities of projects and their market valuations. In essence, disclosures help make token holders and institutional investors better informed and more comfortable with digital assets. 

The formalization of disclosures is coming to crypto projects, whether decentralized, centralized or nascent. We should better prepare for it and embrace it. 

The Race to Change the SEC Course and Some Breakthrough Scenarios

It is unlikely the US Congress will pass significant crypto-related legislation soon in order to foil the SEC’s path of killing that industry. 

As I wrote last week, 81 crypto-related Bills have been proposed so far, but none have yet to pass. One of the most hopeful Bills pertaining to Stablecoins had to be re-written as the previous one died on the vine. Another “comprehensive” Bill is being promised by Rep. McHenry as a joint effort from the House Financial Services Committee and the Agriculture Panel.

The SEC has momentum, and they can move much faster than Congress, sadly. The only way to make headways is to throw the SEC a curveball, distract them, think out of the box, do something different, or wait for an unexpected event to change the variables.

Some candidate ideas could have a faster gestation period than passing a Bill. 

1/ Sideline Gensler’s Power

Statutorily, the SEC’s Chair reports to the US Congress. Rep. Warren Davidson is preparing a Bill he will introduce in May that might limit the powers of the Chair, and give the Commissioners more voice.

2/ The Coinbase Legal Battle

There are two interrelated parts to Coinbase’s situation. First, the much-publicized Wells Notice and their response to it. Second, is their filing of a “narrow action” asking the SEC to answer their 2022 petition. The silver lining in this situation is something called “The Major Questions Doctrine” as it might be used to argue that digital assets are not within the SEC scope, and that Congress should give that mandate.

3/ XRP Lawsuit

It can go either way, and the type of outcome will determine how significant this might be for the industry. 

4/ State Legislation Mess

In the absence of federal agencies’ leadership, several states are enacting legislation touching pieces of the blockchain industry. Although this patchwork of local regulation may or may not be congruent with the national strategy, it’s possible that one such Law might tip the attention and create a new sense of urgency. Notable mentions are California’s DAO Bill, Texas’ Mining Bill,  

Florida’s proposal to ban CBDCs, Wyoming’s Bill on private crypto keys, etc. Regardless, this underscores the mess this is creating.

5/ Self-inflicted event 

The SEC’s arrogance was asserted when they either sued or fined the top four US actors, Ripple (XRP), Coinbase, Kraken, and Gemini. It’s possible that something starts to crumble under Gensler’s dictatorial and domineering style of leadership. 

6/ A Major US Bank Endorsement

Although major US banks have been absent from any crypto cheerleading, that can change on a dime. These banks are under pressure to become more open-minded about the inevitability of the blockchain and cryptocurrencies. If one of them makes a bold move, others will be fast followers.

7/ Unexpected Turn in the FTX Trial

The trial is set for October, but it could get delayed, or we might see a speedy outcome. There hasn’t been a shortage of unexpected twists and turns, and that will probably continue as more layers of the onion get peeled.

8/ The US Dollar Tumbles

Many are sounding the alarm bell on the continuing weakness of the US dollar versus other world currencies, some of which are competing to replace its supremacy. Then you need to compound the US Fed’s insatiable appetite to print more USD, and the theory that cryptocurrency is a good alternative hedge against the devaluation of the dollar. The chart to keep an eye on is the US Dollar Index (DXY), which has been on the decline, dropping from 110.88 in November 2022 to 101.61 in early May 2023. 

9/ Senate Flip 

Midterm elections could flip the Senate toward a Republican majority which might embolden the US House to act more aggressively pertaining to cryptocurrency.

Of course, the probabilities are low for some of these scenarios, but everything is possible. We need a breakthrough because the current path for change is very slow.

And breakthroughs often come as a result of unexpected surprises.

To Change the Rules or Not, That is the Question

A trillion-dollar question is at the heart of the stalemate between the SEC and the crypto industry: should the SEC rules wiggle for crypto or not? 

Yesterday, at the US House Hearing Entitled: “The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset Market Structure”, this statement from Representative Ritchie Torres caught my attention:

It summarizes the situation well. On one side, Chairman Gensler continues asserting there is nothing new here with crypto, and the industry should line-up under the existing regulation. His latest absurdity invokes a dog-goldfish analogy to traditional-crypto financial market.

On the other hand, a conventional wisdom reasoning would tilt on acknowledging that cryptocurrencies and blockchain-based technologies usher a slew of innovative business models and capabilities that must be allowed to live and prosper, especially when conceived and deployed in the United States, the largest and most vibrant capital market and economy in the world.

We know well by now, the SEC has not been shy about updating rules: 52 proposed new rulings in the past two years, of which 46 have been already enacted. Sadly, instead of expanding the scope of these rules to give life and validation to crypto, they have been doing the opposite: tightening the noose on existing regulation in order to explicitly choke crypto innovation, and that adds insult to injury. 

A picture is worth a thousand words. So, I’ll leave you to digest this diagram that says it all.

Where we are: 
Crypto is innovating at the edges of current regulations. True, it is currently hovering outside some existing regulatory boundaries.

Where we could be:
Update / Clarify rulings to encompass crypto, while still leaving some room for innovation at the edges.

What the SEC is doing: 
Tightening rules further to increase crypto exclusion. The SEC is updating some rules in the opposite direction, making it more difficult or impossible for crypto to comply. 

Could Decentralized Protocols Disclose their Performance Autonomously?

Forget DAOs, we need autonomous, real-time reporting for decentralized blockchain networks 

Let’s humor ourselves a bit. 

In a previous blog post, an SEC conundrum was exposed about expected disclosures meant to protect the consumers: if decentralized protocols have no central teams, who would be responsible for preparing and providing disclosures to the public? 

Of course, the extreme case of centerless decentralized blockchain consensus protocol is Bitcoin, closely followed by Ethereum. 

Transparency and disclosures are important. It’s a point the SEC has been harping on, and rightfully so. It is one of the key tenets of their raison d’être, “to require public companies, fund and asset managers, investment professionals, and other market participants to regularly disclose significant financial and other information so investors have the timely, accurate, and complete information they need to make confident and informed decisions about when or where to invest.” The objective of such disclosures is to prohibit deceit, misrepresentations, and other potential fraud.

Unfortunately, for many token-based projects, even some of the popular and centrally-managed ones, there are no transparency reporting standards, let alone plain transparency, or even any formal reporting. Information opacity and dissymmetry abound. 

However, most blockchain protocols have a variety of performance & operations-related dashboards and blockchain explorers that are rich with data, analysis, historical trends, and a variety of publicly or privately assembled valuable information. 

What if there was a way to string these information sources together intelligently, pluck out the most relevant data into a meta layer of sorts, and make that available in a format that would be digestible for interested “investors” or “token holders” and would give them an informed and accurate view about the network performance in a normalized manner?

Let’s take this concept further. 

That first meta layer could be fed into an AI layer that creates the narrative around the data.

Then, one could feed that narrative in a text-to-speech conversion later, and make that available to anyone who wants to obtain a voice update on how a particular project is doing. 

And since everything is real-time, that process could run as a continuous loop, and it could even be provided on-demand, at any point in time. 

Finally, another AI-driven query layer would be able to take human prompts and generate the right responses. 

There we have it. Autonomous reporting. There is no need for end-of-quarter reporting in blockchain networks. They run non-stop, so their performance indicators should be read non-stop. 

We have been advocating DAOs for a while, with no visibly spectacular examples to point to. 

How about we start with Autonomous Reporting?

The Writing is on Wall: The SEC is Unfit to Regulate Cryptocurrency

If the SEC Isn’t Fit to Regulate Crypto, Let a new Digital Assets Commission Take Birth and Rule instead

Gary Gensler is the problem today in crypto, but there was a silver lining in his refusal to provide a straightforward answer to a seemingly simple question by Rep. Patrick McHenry: Is Ether security or commodity? 

On the surface, it sounded like he was dodging the question and continuing to be himself, i.e. perpetuating the current SEC practice of confusing the market while maintaining their enforcement agenda. 

Let’s pretend there could have been a Yes/No answer. Chair Gensler is no dummy. He knows that answering more precisely would have instantly obsoleted his crypto agenda and revealed the nonsensical, illogical path they are currently pursuing. And he would have shot himself in the foot by exposing the cracks in the conundrum his agency is facing.

Let me explain.

Damned if it is, Damned if it’s not

If Gensler had said that ETH is a security, then it would be allowed to trade on approved security exchanges such as the Nasdaq or NYSE, right?

Yes, but nonsensical. 

Granted, it would be a boon for Ethereum because mainstream investors could buy it via the large and established broker-deal networks, but this would be bad for US crypto exchanges because they aren’t allowed to trade securities. They would need to de-list ETH and 99.99% of the other currently listed tokens on their platform. In one scoop, the whole industry would crumble. Gensler might be perceived as the villain here, but he doesn’t want to go down in history as the man who killed a trillion-dollar industry with one stroke (although he’s trying hard to kill it slowly by a thousand cuts).

Nonsensical scenario, of course. 

Assuming Ethereum was a security and eligible to trade on the Nasdaq, the issue is that it doesn’t make money like a traditional company, so what kind of reporting disclosures would “investors” expect? Specifically, the Ethereum Foundation (who originally issued the ETH tokens) doesn’t generate revenue from the Ethereum Network and is not “in charge” of Ethereum’s Protocol/Network revenues. So, who is going to file for that security listing? And who is going to provide the regularly scheduled disclosures that public companies are subjected to? 


Speaking of disclosures, what will be considered as Ethereum Network’s revenues? Are we talking about the protocol’s gas revenue? Or stakers revenue? Or staking pools? Or transaction fees? Wait, the protocol itself can’t generate quarterly reports nor conduct earnings calls with “investors”. 


Now, let’s suppose the answer was that Ethereum is not security. Then, it would be officially sanctioned for trading on crypto exchanges, right? True, but Chairman Gensler is no dummy. 

If he had declared Ethereum to be a commodity, then he would have opened two cans of worms at the same time. First, Ethereum would slip away from the SEC’s regulatory purview. His most visible bargaining toy would be taken away, and probably tilt toward the CFTC’s purview. [Now, you understand the essence of the ongoing turf war between these two commissions.] Second, every other token would start claiming they are similar in nature to Ethereum, hence deserving of the same classification.  Then, the SEC would have their hands full dealing with a flurry of such inquiries. This would put them on the defensive, instead of remaining on the offense currently, which allows them to pick and choose which enforcement actions they wish to embark on.


If the Token Doesn’t Fit, You Must Acquit (and Not Regulate)

Although his predecessor’s staff via Director Hinman already stated that Ethereum would not be classified as a security, Chairman Gensler preferred to remain on the fence citing the proverbial “facts and circumstances” as a rider to any definitive conclusion.

It is true that in 2014, the Swiss-based Ethereum Foundation was the entity that issued the ETH token, and that event itself was a security offering. But when Ethereum was launched more than a year later, it suddenly caught fire and became decentralized very quickly, resulting in an overwhelming demand for its utility by thousands then hundreds of thousands then millions of users and developers worldwide. Ethereum became a commoditized utility. Its value accrued because of its decentralized status, not as a result of the efforts of the self-effacing Ethereum Foundation.

What this points to is that a traditional regulator may not be fit to regulate cryptocurrency. Although many tokens have security characteristics, several of them equally do not. Cryptocurrency and digital tokens represent a new asset class. With a new class, new rulings are expected.  

It is now obvious the SEC has not been able to grapple with the idea that this new asset class deserves a different kind of regulatory treatment than constraining it within the confines of the existing system. 

Since there is a turf war between the SEC (security side bias) and the CFTC (commodity side bias), why not let a new, impartial agency emerge and regulate these new tokens with clarity?

If that were the case, it would become a lot easier for each token to get classified either as security or utility accordingly. But only after that ruling clarity comes into light.

If the US Congress isn’t able to force the SEC to change its course quickly either by voting on a Bill or by convincing Chair Gensler to open up his mind, then US cryptocurrency activity as we know it is dead. 

Of course, we are awaiting a proposal by Rep. Warren Davidson to limit the powers of the SEC Chair and replace that role with an Executive Director that reports to the Board.

In parallel, why not advocate for the creation of a new Commission to govern the regulation of digital assets? 

Let’s call it simply the DAC: Digital Assets Commission

The DAC would be responsible for drafting new comprehensive regulations for the issuance, usage, and trading of digital assets. The DAC would take into account the existing Securities Act and the role of each existing regulatory body. It would also prescribe the interrelationships between these bodies and clarify where issuers, users, and traders stand with cryptocurrency-based projects, companies and organizations.

Let’s be realistic, the writing is on the wall. The crypto industry has clearly reached a deadlock with the SEC. It’s time to look for strong options, now.

Terrible Tuesday, Whimper Wednesday, Terrific Thursday: A Week to Remember in Crypto Regulation

This was a week to remember for crypto industry regulation.

Terrible Tuesday

On Tuesday April 18, 2023, the US House Financial Services Committee conducted a Hearing Entitled: Oversight of the Securities and Exchange Commission with SEC Chair Gary Gensler in the hot seat. During this hearing, it became abundantly clear that the SEC was purposely not doing anything new to update their rules pertaining to crypto regulation, while they were rushing with 48-52 ruling updates, as I already pointed out in a previous post,US Policy on Cryptocurrency Is Lopsided: It is Solely Focused on Mitigating Risks while Suffocating Innovation, Leadership and Growth. The SEC continue to firmly believe that the industry must fit its square pegs into its round holes. 

As expected, the Democrats praised Gary Gensler and threw him soft ball questions.

Unsurprisingly, the notable Congressmen that skewered Chairman Gensler the most were Reps. Patrick McHenry, Tom Emmer, and Warren Davidson. To add to this wonderful trio, a newcomer, Rep. Byron Donalds delivered a final coup de grâce that summed it up.

The other takeaway is that the SEC didn’t seem to care if they were pushing the crypto industry outside of the US. Sure enough, two days later, Coinbase and Gemini announced they were setting-up offshore operations

It was a terrible day, if you were in Gary Gensler’s shoes, despite his cavalier attitude during that marathon hearing.

Whimper Wednesday

On Wednesday April 19, 2023, the US House Subcommittee on Digital Assets, Financial Technology, and Inclusion conducted another Hearing Entitled: Understanding Stablecoins’ Role in Payments and the Need for Legislation.

Contrasted with the fireworks-heavy preceding day, that hearing was a bit of a whimper. Democrats were wishy-washy on supporting stablecoins. Rep. Maxine Waters had to audacity to declare that we “are starting from scratch”, a very sad statement that typified how politics can quickly lead to a stalemate when each side digs deeper into its own positions. Sadly, that Hearing was short, and ended in a status quo situation despite the fact that many in the crypto industry had high hopes for seeing stablecoin-related legislation be the first to get passed, given the many months of preparations.

Terrific Thursday

Thankfully, the European Union saved the week, with something tangible. Almost three years in the making, the Markets in Crypto-Assets Regulation (MiCA) was passed by the European Parliament. Although not perfect, it did usher clarity and an willingness to fold crypto into the traditional financial system. Clearly, the EU doesn’t want crypto to be an outlier. This was a good step in the right direction, especially when contrasted with the US policy of trying to keep crypto outside of the financial system while tightening the noose on it.

Former SEC Chair Jay Clayton said it well this morning on CNBC. 

But why wasn’t he so hawkish and effective as the SEC Chair for four years? 

What’s next? 

Next week, another new Hearing was just announced by Rep. Patrick McHenry, entitled: “The Future of Digital Assets: Identifying the Regulatory Gaps in Digital Asset Market Structure”.  

Indeed, the gaps are getting wider, with each passing day that the SEC continues on its current path of crypto exclusion. Rumors has it that Senator Elizabeth Warren also has something planned. 

Republicans appear to have the upper hand in terms of increasing the heat on the SEC. 

Two questions remain:
Can the US Congress move fast and pass at least one piece of legislation to put the breaks on the SEC’s damaging path?

Can the US House of Representatives oust Gary Gensler as Rep. Davidson seems to be determined to do when he introduces his awaited legislation hopefully next month?

This movie will surely have multiple future seasons and episodes, but the US spectators are getting tired of being taken around in circles.

Why Eighty-One Cryptocurrency Bills? US Congress Just Needs One

The US Congress needs to take a strategic approach to Crypto by grabbing the bull by the horns.

The US Congress should stop proposing crypto-related Bills like throwing mud at a wall to see what sticks.

A search on the federal GovTrack website with the keyword “cryptocurrency” reveals eighty-one (81) cryptocurrency-related Bills have been introduced by Congress since 2014. They are spread across various topics: taxation, CBDCs, stablecoins, token classification, commodities aspects, consumer protection, ransomware, mining, foreign issues, and code of conduct for ownership by US officials. 

These are good topics because they are part of the nitty gritty aspects of blockchain, but that’s not the right approach. Tackling these matters one by one requires some good knowledge of crypto because they are nuanced topics where details matter. Except for a minority, most Congress Members do not have sufficient knowledge about blockchain and cryptocurrency to go granular on it. Therefore these are not the right starting points hoping that one of them will pass or make a significant impact on the currently stagnating regulatory environment for crypto.

Instead of getting lost in the weeds, Congress needs to be more strategic about it. They should just focus on passing a single Bill as a manifesto declaring crypto as essential to US security, its economy, prosperity, and ongoing technological leadership. 

Let’s call it “The US Cryptocurrency Leadership Act”. This Act would direct all government agencies to facilitate and prioritize innovation around blockchain-enabled technologies, cryptocurrency, and their adoption across society, government, and business.

Japan’s Liberal Democratic Party has this text in their recently published Japan’s NFT Strategy for the Web 3.0 Era: “The arrival of the Web 3.0 era is a great opportunity for Japan. But if we continue as we are now, we will surely miss the boat. We should design our national strategy to develop our digital economy in the Web 3.0 era, utilizing NFT and crypto assets, and position it as a pillar of growth for new capitalism.”

This was an excellent example of how to state the intent of a country’s leadership. 

As for the US, here’s what the text of this hypothetical Cryptocurrency Leadership Act would look like. The first paragraph is taken verbatim from the White House Framework for Responsible Development of Digital Assets which started off well but went downhill right after.

US Cryptocurrency Leadership Act

The digital assets market has grown significantly in recent years. Millions of people globally, including 16% of adult Americans, have purchased digital assets—which reached a market capitalization of $3 trillion globally last November [2021]. Digital assets present potential opportunities to reinforce U.S. leadership in the global financial system and remain at the technological frontier.

While US government agencies and regulators are already aware of the potential risks pertaining to their oversights, the US needs to prioritize the innovative and entrepreneurial aspects of this emerging market to allow it to achieve its full economic growth potential. 

Blockchain technology and cryptocurrency are essential innovations that the US must lead in. Just as the US achieved leadership with e-commerce and web-enabled businesses during the early days of the Internet, we need to seize the opportunity of this next technology phase representing the Internet of money. 

Today, the US has some catching up to do. The lack of regulatory clarity has already hindered the full entrepreneurial potential of this sector. 

More than one million tech jobs in the US are at risk of fleeing. Thousands of companies are already involved and affected. Billions of dollars in venture capital have been poured into startups and potentially promising projects. 

The US leadership will have implications for our economic security, trade, and the strength of the US dollar. Therefore, the US must develop a sound strategy focused on blockchain-based technologies and cryptocurrencies, and let innovation play the role it should.

The risks within cryptocurrency are manageable, but they should not become impediments to making progress toward the propagation of this technology. 

With that in mind, we are ordering the SEC to reverse its current course and provide additional clarity and openness toward cryptocurrency. Instead of focusing on enforcement actions that are costly and damaging, they should rather dig into their panoply of existing capabilities, and redirect their resources to start updating rules and regulations pertaining to cryptocurrency and blockchain-enabled technologies.

Within 90 days, being the lead agencies, the SEC and CFTC must come back and present together updated regulatory actions that are coordinated and aligned within their current scope and mandates in order to make crypto more friendly in the United States.

Coordination is important and should be accomplished vertically within each topic instead of horizontally by governmental agencies. Today, various departments have published what they see from their vantage point, but this siloed approach has resulted in overlapping and sometimes conflicting conclusions (e.g. the SEC disagreeing with the CFTC on the status of Ethereum). Instead, we need to tackle these various topics, one by one across agencies, which would result in a cohesive view that is coordinated and harmonized. For example, there should be a single token classifications report that transcends any particular agency treatment. This approach would yield more clarity because the market is organized that way.

Here are the parts that should be addressed by this strategic report, along with our expectations on the direction that should be taken.

  1. Exchanges: create a new license class for digital assets exchanges crypto including details on risk, KYC/AML, and reporting standards, along with specific requirements for all allowed services: listings, custody, brokerage, audits, fees, marketing, ancillary services, etc.
  2. Tokens: we should allow token-based innovative business models to be tested, iterated upon, and perfected in order to maximize their chances for widespread adoption at scale. 
  3. ICOs and token generation events: we need to allow tokens to be created, and a path for them to become tradable at a given time in their maturity cycle. 
  4. Licenses: we need a single place where all required crypto-related licenses are clearly visible in order to make navigation of the regulatory maze more approachable.
  5. Exchange Traded Funds (EFTs): EFTs proposals should be considered without prior bias or prejudice against them for being in the crypto space. 
  6. Consumers: US consumers should be allowed to trade cryptocurrency or participate in emerging token projects at some maturity levels, and based on risk factors related to their income and net worth brackets.
  7. Disclosures: disclosure standards for token-based projects should be published and followed by tokens that are listed on US exchanges.
  8. AML/KYC/CFT: existing processes around these practices should be rolled in
  9. Taxes: clarity around tax treatment for crypto assets, including staking, and other DeFi-related income.
  10. NFTs: we need confirmation that NFTs are not securities, rather they are collectibles. They are potentially the future of loyalty programs, community rewards, and membership perks, therefore the NFT market shouldn’t be burdened by regulatory uncertainty. 
  11. DeFi: DeFi is not perfect, but it’s innovative. It should be allowed to continue growing with the right guardrails, not roadblocks.
  12. DAOs: DAOs should be allowed to register as corporations.  
  13. Banks: banks should be allowed to offer on/off ramps to crypto, hold a % of their assets in cryptocurrency, become certified custodians, and own or back USD-based stablecoins. 
  14. Mining: Responsible cryptocurrency mining practices should be allowed according to published energy consumption standards. No state should ban mining.

In the meantime, the SEC and the CFTC should place a moratorium on all crypto-related lawsuits, except for clear fraud cases.

With this Act, it is useful to compare the advent of blockchain technologies and cryptocurrency to the arrival of the automobile at a time when the transportation infrastructure consisted of dirt roads. Gradually, the shift was made to paving roads and later creating highways, along with updating the rules of conduct. These updates allowed cars to reach their full potential as they became faster and safer. 

Today, if we don’t allow for the paving of new infrastructure rails and if we don’t modernize parts of our regulations, we will see a disastrous mismatch similar to what might have happened if fast/modern cars would have continued to drive only on dirt roads: chaos, traffic jams, and dust in the air would have been part of that outcome. 

This Cryptocurrency Leadership Act also calls for the creation of a joint government-private sector salvation committee consisting of a bipartisan group of 10 government members and 10 private sector leaders working hand in hand to oversee the direction and implementation of this new chapter in US cryptocurrency policy.

Let’s take the high road on crypto. Let’s be strategic about it. 

Let’s hope the US Congress can start thinking about passing this one Act to unlock this industry’s potential, unchoke the choking, and pave the way for US leadership.

Cryptocurrency Is Not Napster

Napster was killed to save copyrights. What does killing crypto save? Nothing.

There are interesting analogies between Napster’s rise and fall during the 1999-2001 period and today’s situation with the cryptocurrency sector in the US.

Napster was a popular peer-to-peer file-sharing network written and launched in 1999 by then-18-year-old Shawn Fanning. It was originally conceived as a workaround to his increased frustration with dead MP3 dead links emanating from central music websites he was visiting. Napster proposed to solve this vexing situation by bypassing these websites and stringing together users’ personal computers where MP3 files were stored. (MP3 is a compression standard that preserves CD-quality sound files)

Suddenly, Napster became famous for sharing digital music between users. At its height, it boasted 80 million users after passing 25 million in its first year. Its popularity rivaled top applications, email, and instant messaging. 

Sadly, Napster’s success could not last because it couldn’t control copyrights over its network. So, in essence, it became illegal.

During its short life, Napster sparked the peer-to-peer technologies movement and captured the imagination of its application outside of music. Fawning’s invention was “file sharing via a peer-to-peer method.” Soon after, more than 200 startups with various file-sharing solutions entered the P2P file-sharing market. P2P became the essential tech of the day, just as AI is today.

Proponents of Napster opined that users were just sampling the music and that it was contributing to more CD sales. Others argued it was a wake-up call against distribution companies’ excessive monopolies and their being adverse to accepting new technologies.

During its ups and down, Napster was described as revolutionary and world-changing. It even placed temporary doubts in the music industry’s business model, forcing it to defend its intellectual property. Napster was unstoppable, except by court order. 

Soon enough, the Recording Industry Association of America (RIAA) filed a lawsuit against it. The National Association of Recording Merchandisers joined them with a panoply of artists such as rock band Metallica and rapper Dr. Dre. Ultimately, these groups won, forcing Napster’s shutdown in 2001. 

Technically, none of the information resided in a central server in Napster’s possession. Everything was spread across millions of user computers, but Napster was guilty of “tributary” copyright infringement. In essence, Napster facilitated other people’s infringement, not violating copyright itself.

There are uncanny parallels between crypto and the blockchain today about how a new revolutionary technology becomes so popular that it generates enough fear to warrant an assault against it. 

The difference this time is that crypto is not an illegal technology. Furthermore, it’s not the private sector that wants to shut it down. Instead, it’s the US Government, its agencies, and regulators.

They are doing so by dramatizing crypto’s pitfalls while ignoring its virtues. Sadly, every tool at their disposal is being deployed to erect barriers, manufacture choke points, instill fear, launch lawsuits, impose arbitrary fines, and do almost anything short of declaring crypto illegal. 

The most recent Economic Report of the President featured 30 pages bashing the technology behind crypto in a very biased way. Operation Choke Point 2.0 has been well documented as an overt series of actions the Biden Administration took to discredit the crypto industry. And the cherry on the cake became the SEC’s increased pace of litigations against several crypto actors.

But crypto is not Napster. So yes, they do share a native element: peer-to-peer technology. But the analogy stops there. 

Sending money at the speed of the Internet isn’t breaking any laws. It only challenges existing financial rails and infrastructure. It’s a competitive factor anyone can adopt.

Napster was killed to save copyrights. So, what does killing crypto save? Nothing, except that it might kill about 1 million crypto-related jobs that are at risk of leaving the US to more welcoming parts of the world such as the European Union, UK, Switzerland, UAE, Hong Kong, Singapore, Australia, and Japan, who are going out of their way to welcome crypto businesses.

While US regulators and government agencies have been attacking the crypto industry, the USD as a reserve currency for global commerce is being challenged by the Chinese Yuan. Countries like Brazil, France, Russia, Iran, and Saudi Arabia are gradually replacing the USD in favor of the Yuan for their trade, including with Latin America, Asia, and Africa.

If not for the assault on crypto, the US would already be in a leading position with a crypto-enabled digital dollar that could quickly be adopted worldwide as a de facto standard. In another world, the same agencies currently attacking crypto would focus their efforts on backing it. Even US banks would immediately throw their weight behind cryptocurrency more decisively if it weren’t for the government pouring hot water on it so frequently.

There is also a political dimension. The crypto agenda is so polarized today, as some believe it might be a crucial swing voter issue during the next US elections. 

Crypto is not Napster. Don’t kill it. The collateral and consequential damage will be irreversible and too grave to ignore.

How the SEC Could Easily Regulate Crypto

There is no need to change the Securities Act of 1933

Almost every other Western regulator has updated their rulings for crypto, and although none is perfect, at least they have made changes and given cryptocurrency businesses and users some clarity and a chance to comply. 

The leadership of Hong Kong, Singapore, the UAE, and Japan has been well documented. Recently, Japan’s ruling party has published a commendable white paper, Japan’s NFT Strategy for the Web 3.0 Era, as a calling for Japan’s leadership in Web3 and NFTs as the next frontier. 

In a previous article, The SEC is Not Being Straight with the Industry, I exposed the many tools the SEC already has at its disposal, only if it wanted to enact updates.

The cryptocurrency industry isn’t asking the SEC to amend the Securities Act of 1933. That’s a tall order. 

But the SEC could make some simple amendments to become more friendly to crypto and that could go a long way as a helpful move for an industry that is begging for it.

In line with the many tools already at their disposal, here’s what the SEC could do. The following is a 7-part regulatory update the SEC could easily implement if they had the will to.

First, publish a pre-approved list of tokens that would be allowed to trade in the US without being named securities. These could be curated from the top 100 tokens currently on CoinMarketCap representing the most credible projects with visible traction. The SEC could evaluate them based on their decentralization maturity aspects. Approximately fifty to one hundred such tokens would be expected to emerge from this list. 

Second, grant a special license to at least five US Exchanges, and allow them to list the above-published set of approved tokens without naming them as securities. In one scoop, this would simultaneously neutralize those nebulous lawsuits against tokens or exchanges that were allegedly accusing them to violate Securities laws just because the SEC chose to conflate tokens with securities loosely. This license would also allow these exchanges to offer ancillary services such as loans, derivatives, staking, NFT listings, and other popular DeFi services. Along with this new license, the SEC could tuck in rules about broker-dealer status, custody requirements, KYC/AML reporting, and overall allowable risk-related aspects.

Third, label other tokens (up to the top five hundred potentially) as “small cap tokens”, and allow them to trade in a subcategory of services, similar to the Nasdaq’s small cap. Allow the above five exchanges to provide such services, and grant five additional crypto exchanges special licenses where these “crypto small cap” projects could trade within strict rules. All other lesser-known tokens would be relegated to overseas or offshore exchanges, therefore de-risking that segment for US consumers.

Fourth, require all token projects allowed to trade in the US to publish regular disclosures and adopt reporting practices comparable to those in place today for public companies, except for a handful of extremely decentralized tokens where a central team no longer influences, controls or manages the evolution of that project. Obviously, notable exemptions would be Bitcoin and Ethereum. Concurrently, work with the industry to develop such transparency standards and reporting requirements that would mix traditional data with the novelty of blockchain/crypto-related data (e.g. gas revenues, number of wallets, number of holders, on-chain transactions, etc.). This would squarely align with the SEC’s mandate of mitigating information dissymmetry by “enforcing practices that prohibit deceit, misrepresentations, and other fraud in the sale of securities”, except that the word “securities” is replaced by “digital assets.”

Fifth, allow Initial Coin Offerings (ICOs) but with restrictions for consumers. For example, the SEC could play it safe and only allow ICOs that have been first backed by VCs (VCs have higher selection thresholds than consumers). US citizens could be allowed to participate via capped amounts, based on their income levels, at the same terms as VCs. Tokens could be locked for a minimum of one year, and up to three years. All new token projects will have three years to qualify for listing in the small-cap or standard crypto Exchanges, depending on their maturity evolution. Otherwise, they would be relegated to offshore trading. 

Sixth, allow banks to provide on-ramps and off-ramps to crypto exchanges in the US easily and openly. Start to unchoke the choking trend that is underway. By the same stroke, allow banks to hold up to 5% of their assets in cryptocurrency, as well as become certified custodians, and own or back USD-based stablecoins.

Seventh, continue to promote the use of KYC, AML, CFT (counter-terrorism financing) methods, and tax reporting obligations by all participants in the crypto ecosystems. Specifically, allow DeFi to prosper without impractical restrictions on self-custody wallets. Allow DAOs and not-for-profit crypto foundations to incorporate and provide clarity on their legal status. Declare NFTs as non-securities, because they are more like collectibles, and allow the mining industry to continue unharmed.

Of course, these seven actions are wishful thinking. The SEC and other US government agencies are already knee-deep in a search-and-destroy expedition. It is unlikely they will unwind their actions unless a strong US Congress edict comes their way. 

What Congress can do will be the subject of the third and final installment in this series.

The SEC is Not Being Straight with the Crypto Industry

They could make changes if they wanted to.

The SEC is right and wrong at the same time in their crypto-regulation approach. It’s quite simple. By continuing to apply current procedures as is, they are right, and almost every token would undoubtedly be labeled as a security. However, with an open mind, they could easily make some regulatory updates, and demonstrate how easy it could be to find a place for cryptocurrency in the spectrum of regulations under their control.

Sadly, the missing (but necessary) conditions were to have the conviction that the blockchain, cryptocurrency, and token business models are novel enough to warrant such changes.

Instead, the SEC has been hiding behind the pretext there is nothing to change in the current rules while taking cover in Congress’ inability to direct them otherwise.

This is a very disingenuous positional play by the SEC, as it points to a clear discriminatory bias against crypto. Here’s the proof.

A review of SEC’s news announcements over the past year reveals they have proposed numerous changes across the board. This includes introducing new registration forms, updating rules (e.g. best execution rules), opening comment periods on issues, publishing enhancements to their frameworks, modernizing reporting requirements, updating electronic filing requirements, and specifically proposing amendments as they see fit, just to name a few of these actions. 

To be precise, here is a chronological sample of such headlines pulled from their website: 

  • SEC Proposes to Modernize the Submission of Certain Forms, Filings, and Materials Under the Securities Exchange Act of 1934 (March 2023)
  • SEC Office of Municipal Advisors Frequently Asked Questions (March 2023)
  • SEC Proposes Changes to Reg S-P to Enhance Protection of Customer Information (March 2023)
    SEC Proposes to Expand and Update Regulation Systems Compliance and Integrity (SCI), the set of rules adopted in 2014 (March 2023)
  • SEC Finalizes Rules to Reduce Risks in Clearance and Settlement (February 2023)
  • SEC Proposes Rule to Prohibit Conflicts of Interest in Certain Securitizations (January 2023)
  • SEC Proposes Regulation Best Execution, first established in 1968 (December 2022)
  • SEC Proposes Enhancements to Open-End Fund Liquidity Framework (November 2022)
  • SEC Adopts Amendments to Modernize Fund Shareholder Reports and Promote Transparent Fee- and Expense-Related Information in Fund Advertisements (October 2022)
  • SEC Adopts Rule Amendments to Modernize How Broker-Dealers Preserve Electronic Records and Enhance the Electronic Recordkeeping Requirements for Security-Based Swap Entities (October 2022)
  • SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting (February 2022)
  • SEC Proposes Cybersecurity Risk Management Rules and Amendments for Registered Investment Advisers and Funds (February 2022)

The evidence points to the fact that they “can” implement change…only if they wanted to. All of the above initiatives are a display of the tools and span of changes already at their disposal.

Conspicuously absent from these seemingly progressive updates are specifically positive ones relating to the crypto industry. Instead, all news updates about crypto relate to negative actions such as SEC charges against firms or people, lawsuits, or Wells Notices.

This approach contradicts one of Chairman Gensler’s three goals in the SEC’s FY 2022-2026 Strategic Plan, “…keep pace with evolving markets, business models, and technologies.” 

“Keeping pace with evolving markets, business models, and technologies” in the blockchain market has been the last thing on the SEC’s mind, which is why crypto is absent from regulatory innovation. Their modus operandi has been: “Nothing new here.” So, if you’re in crypto, “keep trying to fit your square pegs into our round holes.” The SEC has continued to use the only hammer they wanted to use: enforcement actions. 

Token models are very interesting and innovative. They deserve a chance to be accepted. 

The industry is not asking the SEC to amend the Securities Act of 1933. It is only asking for some change. 

Chairman Gensler, tear down your artificial crypto regulatory wall! Stop hiding behind the mask of rigidity, and adopt the mindset of innovation and flexibility. 

In Part II, I’ll discuss how the SEC could take an easy road to regulating crypto without making it too complicated.

The Crypto Industry Needs to Fix Itself Before It Can Progress

Choose the culprits: The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and their panoply of lawsuits, the U.S. Congress’ inability to pass any significant blockchain law, a lackluster Biden administration “Economic Report of the President” with 30 pages bashing the industry, the closure of two of the most crypto-friendly U.S. banks (Signature and Silicon Valley Bank), the Terra implosion and its ripple effects, the FTX failure and its ripple effects, the ongoing flurry of decentralized finance (DeFi) exploits in vulnerabilities, blockchain bridges failures, token prices tanking, increased negative public opinion, decreased institutional holdings – just to name major ailments facing the blockchain industry today.