Many blockchain companies now believe that regulation is inevitable, but there’s a growing debate over where to draw the line between protecting users
Many blockchain companies now believe that regulation is inevitable, but there’s a growing debate over where to draw the line between protecting users and strangling the lifeblood out of the industry — or forcing it outside the United States.
“Whether we like it or not, regulation is coming,” Sheila Warren of the Crypto Council for Innovation tells me during an interview in the lead up to the recent Collision conference in Toronto, Canada.
The CEO of the industry lobby group for blockchain technology explains that rather than trying to stop the inevitable, many companies are now focused on lobbying for rules that work for them instead.
Why the change? With every week seeming to bring new stories of loopholes, hacks and algo stablecoin failures — from the popular Netflix QuadrigaCX documentary to the dizzying world of crypto transaction mixers and the steps law enforcement used to track two Americans accused of selling fraudulent NFTs — increased regulation is starting to look like a better idea. And not just for businesses but also for legislators worried about being reelected. People seem to love hearing about crypto scams and lost money… as long as it’s not their own.
Even if regulation is inevitable, the question of how and what to regulate is still controversial. Specifically, what type of regulations and enforcement will actually help keep the industry fair and safe for participants without killing the unique and revolutionary aspects of blockchain, or turning it into another version of traditional finance?
Does regulation mean clarifying the 38 different considerations for the four factors that define a U.S. security? How about defining who owns what rights in NFTs? Or maybe it simply means following Wyoming’s example and regulating DAOs?
Walking the line
A week later at Collision itself — a 35,000-person tech who’s-who in Ontario — I plop myself down on a chair in the dark area in front of the “crypto stage” for a discussion with Ripple CEO Brad Garlinghouse about how to regulate cryptocurrencies.
Ironically, staring me in the face are a hundred or so branded seat covers sporting an eye-popping white-on-black Crypto.com logo, despite the fact that Crypto.com isn’t registered to operate as a crypto asset trading platform in Ontario.
According to the Investment Industry Regulatory Organization of Canada (IIROC) Staff Notice on crypto ads, Crypto.com’s seat branding is legal. It avoids statements that could be seen as unfair, misleading or inadequately informative of consumer risk. Most conference attendees — a global audience of tech entrepreneurs and CEOs — already knew what “Crypto.com” meant. Matt Damon could have the week off.
The advertising is an example of how regulators have their work cut out for them in finding the delicate balance between deterring bad actors while promoting innovation. For example, the Ontario Securities Commission (OSC) is mandated to protect consumers while encouraging novel businesses and competitive capital markets.
As part of the OSC’s mandate, it previously published a report on the suspicious death of QuadrigaCX CEO Gerald Cotten and how what used to be Canada’s largest crypto exchange lost its clients’ millions. It also kicked the world’s biggest crypto exchange by volume, Binance, out of the province for operating without permission.
This year’s plans include continuing to enforce securities law and engaging with crypto firms to get them to register to do business in the province, says OSC senior affairs specialist JP Vecsi. “Another priority will be identifying and addressing misleading information in crypto asset trading platform advertising, marketing and social media,” he adds.
The freedom to make terrible investment decisions
At the other end of the scale, there are plenty of crypto libertarians who aren’t convinced much regulation is necessary at all. The Satoshi Island group is attempting to establish a libertarian “blockchain-based democracy” on an island in the South Pacific (with the cooperation of nearby Vanuatu). It’s minting NFTs for citizenship, though the process has slowed thanks to the crypto downturn.
Lizaveta Akhvledziani, CEO of Chexy — a rewards card program for renters — leans liberatarian with a few ground rules. She believes people should be able to invest in whatever they want, no matter the risk.
All that investors need, she says, are Anti-Money Laundering rules and education. When she bought TerraUSD (UST), the algorithmic stablecoin linked to LUNA that would crash in May 2022, she understood it was risky.
“If you really go in there thinking it’s risk-free, but you’re going to be making 20% a year, you’re an idiot,” she says.