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The US Securities Act and the Singing TelegramWhat do these two things have in common? They both started in 1933, nearly a century ago. US securities law, as well as the Exchange Act of 1940, both continue to determine how financial products are offered and traded, hampering innovation in fintech.
Outside of finance, the same story rings true. The US economy has boomed in large part because of the technology companies that now form the backbone of Web 2.0such as Facebook, Google, Amazon and Apple but unless the United States steps up its regulatory game in a major way, it is very likely that other countries will usurp its position and reap the economic and cultural benefits that come with welcoming the world’s most innovative technologies.
Web 3.0 depends on an environment conducive to innovation not massive infrastructure systems
Over the past two years we have seen Total Value Locked (TVL) in DeFi exceed $200 billion. In 2021, the NFT volume exceed $25 billionand venture capital invested over $27 billion in cryptocurrency and blockchain businesses. The best part is that we haven’t even scratched the surface of massive use cases such as implementing NFT in legal documentation or transitioning traditional financial markets to permissionless global exchanges.
Interestingly, the projects driving this extraordinary growth are often driven by small teams of 20 or less. There are few “head offices” in the crypto world. Many of the most influential figures in space have no home and instead live itinerant lifestyles, traveling from place to place. Indeed, Web 3.0 operations are often very light, with a single objective on the release of products and the creation of user communities.
Contrast this with the Web 2.0 model, where VC valuations and growth goals often lead to focus on growth for growth’s sake. This leads to the building of new offices, competition for staff, and absurd spending just to demonstrate “success”.
In other words, governments and companies are getting as much profit as they can rather than working to develop technologies that inherently benefit users and contributors. Back then, the giant VC-powered model was the best way to make the most progressbut now those very advances have made the model less important, and the infrastructure can now drive future changes much more efficiently.
With the Web 3.0 model, the big headquarters, massive teams, and capital investments of established leaders are gone.
The United States is lagging behind because it is afraid that the incumbents will lose control
The inherent nature of Web 3.0 means there are fewer points of influence for governments to control. Regulations largely operate by imposing rules and responsibilities on financial intermediaries, which in turn create barriers to entry for potential new participants. The new Web 3.0 system that cuts out the middleman presents a problem for governments that no longer have the means to control decision-making (and decision-making) through a centralized authority.
To take the example of a US agency, SEC Chairman Gensler was quick to report the “fraud, scams, and abuse” seemingly permeating the cryptocurrency space. With this in mind, US regulators have chosen to take a tougher stance on cryptocurrency-related efforts. This comes in the form of proposed new regulations, such as expanding the SEC’s definition of a to exchange and expanding the requirements for who should register as a broker.
In a race to maintain control, we could see absurd implications like teenage gamers playing to win or validating node operators suddenly having to pass securities licensing exams like stockbrokers and issuing 1099s. The end game is to either stop innovating or go where you can build.
However, those who examine the data know that the criminal activity argument does not hold. A recent on-chain analysis report found that only 0.05% of crypto transaction volume is potentially linked to money laundering, while 5% of global GDP is laundered in fiat each year. Add to that the small exchange size, intraday liquidity, and 24/7 risk management capabilities offered by crypto and it has the potential to be a much safer space than traditional markets.
Countries with clear and open systems foster innovation and attract global talent
Unlike most industries, where people endure years of paperwork and millions in lobbying costs, many DeFi builders are voting with their feet, moving to more innovation-friendly jurisdictions. Singapore’s EntrePass, Portugal Non-Habitual Resident, Bahamas Incentives to Attract Crypto Entrepreneurs and Saudi Arabia government investment all make it relatively easy for entrepreneurs to lay out their intentions and build with a supportive ecosystem behind them.
For non-US citizens, moving to these places is a no-brainer when the choice is between dealing with a combative regulatory regime and a supportive one. Building a crypto project in a place with favorable regulations can make or break the success of the project. It should come as no surprise that entrepreneurs, engineers, and people in other highly skilled professions leave the United States.
So how is the United States getting back on track?
We need to rely on a group of good players who are innovating in the Web 3.0 space while building on the noble first principles of existing regulationsmarkets free from fraud and manipulation without the inefficiency and self-interest that come with it. Most crypto founders (and users) support regulations that balance security and fairness with ease of implementation and a move toward greater inclusiveness.
We can start by not making rash judgments or making hasty policy decisions. After that, define what the end goals of investor protection and consumer protection are. Sometimes existing disclosures or processes don’t make sense in the Web 3.0 world. Then present an implementation timeline that allows for a discussion or review loop rather than a wholesale threat of closure based on ambiguous feedback.
No matter what large, stable country can provide a cooperative and conducive framework, it will not only prevent its own engineers and entrepreneurs from leaving.but they will also attract global talent and sit at the center of a global financial and technology system that is not held back by geographic restrictions or socio-economic censorship.
James Whitley, one of the main contributors to Zero, is a TradFi veteran who has had a distinguished career in private markets, corporate finance and strategy. He began his career in structuring advisory and principal investments at M3 Capital Partners before taking up an international finance management position at Novartis, one of the world’s largest pharmaceutical companies. As an associate director at Baxter, he led business model innovation in home dialysis. Now at Cypher, he leads the company’s marketplaces initiative to bridge the gap between TradFi and DeFi.
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