I recently read a great article in Politico by Brandon Possin, a US foreign service officer (and friend of my colleague Fred Rocafort) currently stationed at the US Embassy in Tokyo. Possin also has significant blockchain-related credentials. In US Diplomat to Washington: You’re Becoming Obsolete in One Big Area of Tech Policy, he describes how a number of countries, including China, continue to provide fertile ground for their homegrown web3 entrepreneurs, while Washington vibrates and allows entrenched financial players to suffocate Innovation.
Do I really have the tech chops to talk about this?
Actually I do. As a pragmatic lawyer and businessman involved in many blockchain clients and projects, I can confidently say that Possin is not wrong. I am part of the earliest generation in the United States that was born into a completely analog world, but was quickly forced to become digital natives. (One of my earliest regrets was not being smart enough to claim [email protected] as my first email address).
I remember my dad teaching me how to load Caverns of Gink and Bouncing Babies from “real” 5 ¼” floppies in 1985. From there I progressed to all kinds of Apogee games, then to MUDding, where I was routinely chastised by my parents for to have connected our only phone line with our new “screamingly fast” 28.8 kbps modem that I bought with my own money and installed myself.
And I remember fondly when my friend (who had two phone lines at his house) triumphantly showed me the two DVDs on which he had burned a booted copy of The Matrix after spending 24 hours downloading it through a torrent site. And who can forget the joy of using broadband Internet for the first time in a computer lab to download a song in the world of Napster?
In my early 20s, my Linux-loving brother-in-law convinced me to ditch Windows for Ubuntu, which I then installed. These technologies were often far outside the mainstream and I enjoyed using these tools to see what I could learn and achieve with minimal external guides. Being involved in blockchain projects has allowed me to relive the excitement and sometimes confusion of the most important moments of discovery in my life.
Not everything Blockchain belongs under the crypto heading
Possin rightly identifies the first problem that appears to be prevalent in the US: the ability or willingness to analyze the various types of blockchain-related technologies. Not all of these are created equal, which cuts both ways. Peer-to-peer (P2P) software such as BitTorrent and Napster appeared decades ago and spawned many derivatives. Generally, they have been the tools of those operating outside the law, or at least in gray areas where licensing terms are not robust or applicable.
From my perspective, which was largely informed by my time at FINRA (Financial Industry Regulatory Authority), most of the recent SEC enforcement actions have centered around fraud schemes and “worst practices” common to private and public businesses and capital. markets. These include unregistered offers and sales of crypto-asset securities, market manipulation through wash trading, undisclosed relationships with celebrity promoters and racketeering, among others.
The SEC’s high-profile “regulation by enforcement” actions have not helped to provide any significant clarity or certainty to those inside or outside the web3 industry. I have my own opinion on whether staking should be classified as a security and it starts and ends with “it depends” based on the facts and circumstances. But even well-reasoned legal opinions are just opinions that only provide some comfort to founders and their potential financiers and business partners.
The SEC’s actions (and the CFTC’s sometimes conflicting opinions) regarding some of these key blockchain technologies and innovations continue to push founders and projects offshore to friendlier jurisdictions. For US founders this means looking to Switzerland, Liechtenstein, Dubai, Portugal, Bahamas, Caymans or Panama, and for China and Japan founders this means looking to Singapore, Bali or Dubai.
Blockchain’s Bloom is not doomed to fade and fall into obscurity
Many of my web3 clients are nominally in the “crypto” industry, but in reality they are software developers working on innovative solutions that use some aspect of blockchain technology. They are crypto-adjacent, but not the kind of bad players making headlines today (see FTX founder Sam Bankman-Fried accused of bribing Chinese officials).
These entrepreneurs provide tools to help the industry and frantically try to get their software into compliance with existing regulations, often requiring users to be geofenced or to create two versions of their software, depending on where it will be distributed. This applies to founders and teams in the US, Canada, China, Indonesia and elsewhere.
These developers and entrepreneurs have retreated during the crypto winter, keeping their heads down and their fingers on the keyboard. They also painstakingly document the political winds in the United States. Many of them are brilliant and looking for a safe haven. They are agnostic as to their final country of nationality and quarter of residence. They are part of the group who see their original nationality and citizenship as secondary to their identity as technologists.
Too many in the US government cling to the past
This applies to national and subnational authorities. I will only give two examples. Many land registries are administered at the county level in each US state. These systems are woefully outdated, inadequate and inconsistent. And they’re not built for the kind of forward-thinking projects like real estate tokenization that could help property owners monetize some or all of their otherwise unproductive real estate assets.
A significant obstacle to real estate tokenization is complying with securities laws. But many US states have securities exemptions for securities backed by real estate. Harmonizing and updating these various exemptions for government securities could unlock significant potential for property owners, while allowing non-accredited investors to participate in this newly unlocked asset class. This will allow oversight by government regulators, many of whom appear to have a more robust appetite for blockchain innovations. See The DAO gains legal recognition in the United States when the Utah Dao Act is passed.
Tech-friendly Japan’s experimentation with DAOs (decentralized autonomous organizations) for rural regions is another use case for streamlining widespread group participation via ubiquitous cell phones. DAOs can bring technology-enabled voting and asset distribution to long-standing but non-technologically native agricultural collectives and similar rural groups, even those outside the for-profit realm.
China’s government crushed crypto
No, the CCP crushed (mostly). proof of work crypto mining (targeting Bitcoin mining’s energy-intensive process) in late 2021. Nevertheless, many of China’s promising web3 project CEOs of all kinds moved to Singapore and Bali as a result, and they remain friendly with the Chinese government as Chinese gaming companies do. They run their business, pay taxes and generally hire people accordingly (via “calculated variance” – my term), rolling the dice in the same way that many Chinese and foreign companies do in China.
The CCP’s Big Brother role waxes and wanes, at various times dictating how, when, and for how long Chinese citizens can, should, or shouldn’t spend their time and express their opinions online. But the CCP doesn’t care if non-Chinese youth are hypnotized (addicted) and spill their secrets on TikTok, Honor of Kings or Clash of Clans, as long as these projects keep people in stable jobs in China. Blockchain ventures are no different.
The Chinese government is supporting Blockchain Innovation and shaping Web3 in its image
China has made significant progress in trying to revive its domestic economy. This includes designating Hong Kong as a web3 paradise. However, Hong Kong is not Singapore, and it is not far enough away from the influence of the CCP. Many blockchain founders, especially those with China ties who obviously operate outside of Chinese law, need this separation. This is especially true for those deeply involved in cryptocurrency exchanges that can track capital flight out of China. But mainland Chinese founders may be willing to set up in Hong Kong, bolstering Hong Kong’s image as a resurgent financial capital.
I am concerned that China may require its exporting companies of all kinds to use self-built dApps (distributed apps) in closed loops or permissioned blockchains that effectively put a web3 sheen on the software while promoting CCP surveillance through backdoor channels.
AI News pours out positive Blockchain development news
The release of ChatGPT in November 2022 was one of the best and worst things to happen to the blockchain industry. AI forced its way into the high-tech spotlight previously occupied primarily by web3 news, including Baidu’s answer to ChatGPT being years behind it in development.
In the wake of ChatGPT’s release, some interesting questions were raised by Chinese scholars about the corpus of information on which AI programs in China would be trained, and whether these strictly redacted datasets would limit their effectiveness. Robust AI programs require unfettered access to information to explain the present or predict the future. These and other AI-related issues and developments, along with negative blockchain news, have generally topped reporting on positive web3 developments.
We need a sandbox, and we need it now
What are we going to do with all this? Regulatory sandboxes are used by many governments, especially when it comes to the rapid interaction between technology and other more traditional areas, such as finance, real estate and everything else under the sun. That’s the genius of regulatory sandboxes. They provide much-needed regulatory oversight without stifling innovation in areas where technologists want to operate.
Instead of continuing to regulate by enforcement, the SEC should work with the CFTC and Congress to provide a creative workspace for blockchain projects as a natural precursor to laws and regulations that will be informed by developments in a regulatory sandbox.
