Ethereum co-founder Vitalik Buterin weighed in on the regulatory debate around crypto on Sunday, and gave his thoughts on what industry rules should – and should not – include.
Regulation can make crypto more palatable to mainstream financial institutions and legitimize cryptocurrencies as an asset class. But new rules and guidelines can also change the industry’s DNA, especially when it comes to principles such as censorship resistance and decentralization.
Buterin said he believes preserving the latter should be a priority.
“I don’t think we should enthusiastically pursue large institutional capital at full speed,” he said. “Regulation that leaves the crypto space free to trade internally, but makes it harder for crypto projects to reach the mainstream, is much less bad than regulation that intrudes on how crypto works internally.”
Buterin’s Twitter thread comes ten days after a controversial blog post by Sam Bankman-Fried, the founder and CEO of cryptocurrency exchange FTX, in which he outlined its regulatory vision for industry.
Bankman-Fried then capitulated to Crypto Twitter after receive pushback on potential rules related to DeFi, such as requiring autonomous programs to comply with US sanctions and making crypto websites register as broker-dealers. He revised the post and said he will continue with it.
Regulatory uncertainty is seen as a barrier to institutional crypto investing, according to a new Fidelity Investments survey. The study of institutional investors’ digital assets found that of more than 1,000 institutional investors, 16% said a lack of regulatory clarity was a barrier to investing in digital assets.
On the other hand, more than 8 in 10 (81%) of the surveyed institutional investors see digital assets as a role in investment portfolios. Additionally, 43% of institutional investors said they would be interested in a Bitcoin ETF.
Segments of the crypto industry have pursued institutional capital for nearly a decade, ever since the Winklevoss twins’ first application for a Bitcoin ETF-like trust in 2013. While futures-based products trade on the Chicago Mercantile Exchange, the Securities and Exchange Commission has dragged his feet on approving a spot-based Bitcoin ETF.
That’s not a bad thing, according to Buterin.
“I’m actually quite happy that a lot of the ETFs are being delayed,” he said. “The ecosystem needs time to mature before we get even more attention.”
Buterin divided the policy goals he envisions for the crypto industry into two categories: providing better protections to consumers navigating the nascent industry, and stemming the illicit flow of cryptocurrency — which he said is not exclusive to the DeFi space.
Addressing the latter, Buterin is skeptical of requiring DeFi protocol interfaces to comply with Know Your Customer (KYC) standards. While such standards are used by financial institutions to prevent money laundering, fraud and corruption, hackers “write custom code to interact with contracts,” bypassing the usual KYC barriers.
“It would annoy users but do nothing against hackers,” he said.
There are DeFi regulations that Buterin believes could be more helpful, such as limits on how much leverage a user can trade with, transparency in code audits, and requirements for “knowledge-based tests” as opposed to “plutocratic minimum net worth rules.”
Buterin said that he is also in favor of creating regulation in a way that allows for further use of zero knowledge certificatea cryptographic principle that safeguards privacy.
The response to the response
The SBF responded to Buterin’s points, stating that he thinks they “are quite reasonable” and expressing an openness to bringing the ethereum co-founder to Washington DC to provide nuanced input on regulation.
“I think policy makers/regulators would find that quite interesting to hear from @VitalikButerin,” SBF stated. “he is very different from the average person in DC, but in a slightly refreshing way – calmly and thoughtfully speaking his mind.”
Buterin’s comments also appeared to receive an endorsement from Changpeng Zhao, founder and CEO of Binance, another leading cryptocurrency exchange. The CEO responded to the thread with a thumbs up emoji.
Crypto investor Ryan Sean Adams gave a nod to Buterin’s entry into the debate as well, saying Buterin is welcome to share his thoughts on Bankless, a DAO and crypto media project.
Adams had delivered sharp criticism to SBF’s first blog post, and tweeted: “This is absolutely sick.”
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