Crypto’s Nightmare Scenario Is Here – POLITICO

With help from Derek Robertson

While Coinbase’s problems with the SEC have flared up in just the past weekthey represent the exact scenario that has been keeping crypto leaders up at night for far longer.

In fact, Coinbase spokeswoman Lisa Johnson told me the company had been working for months on long petition it filed with the agency last Thursday to formulate new rules related to digital assets — an effort, in part, to fend off accusations of listing unregistered securities.

It was then an unfortunate coincidence that the SEC unveiled a complaint the same day implicitly accused the company of doing right. Johnson said Coinbase had not been aware of the SEC’s impending complaint.

And in the months before the petition, executives had clamored for more explicit SEC guidance, with the threat that the federal government would conclude that much of the industry amounted to trading in unregistered securities.

“It’s the sword of Damocles over this trillion-dollar industry,” said Jay Verret, a law professor at George Mason University and a critic of the SEC’s approach to crypto, who said the problem has hung over the industry for the past five years.

But the industry wasn’t looking for the kind of guidance that came in last week’s insider-trading complaint against a former Coinbase employee, which declared that several crypto tokens offered by the exchange qualify as securities — or the kind that might come from the logical consequence of that finding: The investigation of Coinbase for possible listing of unregistered securities, if existence Bloomberg reported on Monday.

Even before this week’s news, industry representatives had complained about “regulation by enforcement,” where the agency clarifies its interpretation rules by penalizing crypto firms that run afoul of them. That was the approach it took in February, when it fined trading platform BlockFi $50 million for offering an unregistered security.

Despite these complaints, crypto critic Rohan Gray said the ambiguity has actually helped the industry break the law.

“It’s largely been non-regulation by enforcement,” said Grey, director of research for the Digital Fiat Currency Institute, a group that supports the issuance of digital currencies by central banks, “because the SEC is concerned that they can’t necessarily win a case.”

And the wider legal uncertainty surrounding digital assets also presents other challenges for regulators. IN a talk at the Brookings Institution on Monday, Commodity Futures Trading Commission Chairman Rostin Behnam spoke of a “regulatory vacuum” that has prompted the commission to start “thinking creatively” about how to use its authority.

In short, entrepreneurs quickly moved into a legal gray area based on their interpretation of the law, agencies are now moving to enforce their own interpretations, and Congress may at some point pass legislation codifying new rules.

The SEC, for its part, has argued that many digital assets count as securities, and its chairman, Gary Gensler, said that most crypto exchanges offer at least some securities, whether the companies acknowledge it or not. It is a problem both for exchanges and for many issuers of cryptoassets, few of which have registered them as securities.

How big a problem has become clear in the past week: Coinbase stock is down about 20 percent, representing billions of dollars in market capitalization.

At least the company’s investors were warned. Because Coinbase is definitely making is a registered security, the company had already declared the risk that the SEC would disagree with its view that it does not list securities – exposing the company to potential investigations and penalties – in a revelation registered with the SEC.

Author Neal Stephenson — yes, he who coined the term “metaverse” — have an ability to explain technologies before they actually exist.

As such, he is in demand from actual technology companies, having advised Jeff Bezos’ Blue Origin and virtual reality company Magic Leap. His latest venture is a collaboration with Bitcoin veteran Peter Vessenes to launches LAMINA1a blockchain they call “the foundation of the Open Metaverse.”

I interviewed the two about their goals for the project, which is intended to provide the technical foundation for a creative, artist-friendly metaverse space. A condensed and edited version of the conversation follows:

Neal, people like to point out that your novel “Snow Crash” is a dystopian story, but its metaverse is basically a neutral technology. Do you see this project as an attempt to steer it in a more useful or noble direction?

NS: Trying to manage something like this at a high level probably won’t work. It’s an open source, bottom-up phenomenon, so trying to build it from the top down probably won’t end well.

“Snow Crash” is both a dystopian novel and a parody of dystopian novels. There is nothing inherent in the metaverse that makes it dystopian or utopian… I don’t believe the argument that you sometimes see on the internet that there is anything inherently dystopian about the metaverse. That’s what we make it.

Neal, the blockchain community is more explicitly ideological than others you have recommended. How did that affect your approach to this project?

NS: I’ve known people interested in forms of cryptocurrency since the mid-1990s, and many of them got into it specifically because they were thinking about metaverse-style applications. They realized that it’s not possible for you to have a distributed community without other people’s code running on your machine, which raises obvious security and privacy issues, and these friends have been working for a long time on cryptographic approaches to make that possible.

There has always been a strong motivation among crypto people towards fundamentally idealistic goals, and while not everyone may agree on how to go about it – libertarianism is not a universally beloved way of thinking – it is strongly motivating for many of those who have been has been working in this area for several decades, and it is motivated by a belief that it can lead to a better society.

Peter, what is your case to people who see blockchain as just a vehicle for financialization?

PS: I think Bitcoin is underrated – like, really underrated – in terms of its social impact. Bitcoin was a whole new way for people to cooperate. Blockchains are not companies in the traditional sense. I don’t think there is any other human structure that has succeeded in pulling people in unison toward something that ended up being worth a trillion dollars at its peak.

I look at the lessons learned from it and see that finally there is a way to monetize open source software through the combination of the community, payment rails and whatever you want to call it, Web3 or crypto incentivization – there has to be a way to use it for more than just Bitcoin, and build a new way for people to work and collaborate. — Derek Robertson

A big change is coming to one of the most vibrant and long-running VR spaces.

VRChat – a metaverse-like space known for its avatars with copyright infringement, bizarre role playing gameand problematic memes — announced this week that the next update would crack down on the user-driven modifications to the game’s code that made such things possible. It means no more, for example full-scale recreations of Nintendo games.

The type of modifications that will now be banned form a large part of the game’s lifeblood. Until now, VRChat has mostly turned a blind eye to the code solutions users have implemented, not just for cultural mayhem, but for everything from improve accessibility to speed up the game’s somewhat archaic graphics engine.

VRChat’s tweet announcing the update inspired a… robust response from fans, with upwards of 3,000 replies and just as many quote retweets. VRChat’s justification for the change is that it will make the game a safer and smoother experience, and they have tried to answer some of the most pointed criticisms in a follow-up blog, but the incident is yet another reminder that the incentives for growth in virtual worlds are sometimes directly at odds with what their most dedicated users want. — Derek Robertson

Stay in touch with the entire team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is a cryptocurrency investor.

If you have had this newsletter forwarded to you, you can sign up here. And read our mission statement here.