Renowned intellectual property lawyer talks about crypto crash

Since the Bitcoin White Paper was published in 2008 and Bitcoin was launched in 2009, over 10,000 different cryptocurrencies have been created and are available for trading. It would be an understatement to say that Bitcoin, the first successful and working implementation of blockchain technology, has given people an innovative way to buy things, earn and do business.

Bitcoin became a pioneering digital currency, paving the way for the development of a number of digital asset products such as NFTs and the creation of a trillion-dollar global market. But the road to where cryptocurrency is now has been long and difficult – and the journey has only just begun.

On top of highly volatile prices, the cryptocurrency market has constantly had to contend with the fact that it has been and continues to be used for fraud and other fraudulent activities. And after nearly a decade of inaction, the US Securities and Exchange Commission (SEC) has finally decided that these criminal acts cannot be ignored. It formed a unit focused on crypto oversight in 2017.

Since then, it has also been established that exchanges are under the regulatory umbrella of the Bank Secrecy Act (BSA), and cryptocurrencies are overseen by the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS) and the Commodity Futures Trading Commission (CFTC ). In 2021 alone, 35 bills aimed at regulating cryptocurrency and digital assets have been introduced in the 117th Congress.

“I don’t blame the government, like the SEC, for acting so late. Because the truth is that when blockchain came out, there was so much hype or a mysterious feeling. It really humbled almost everyone,” noted intellectual property attorney Zeming M. Gao said during a discussion with Bitcoin developer Joshua Henslee.

“I think even the top government people are looking at it and saying, ‘Wait a minute, let’s not get involved too quickly because there might be something we didn’t understand.’ The truth is they were just being honest. They didn’t understand, [so] they did not take action, Gao added.

Gao is a business and technology consultant, Chief Strategy Officer at online marketplace Toolots Inc., and Chief Advisor at professional services firm Caapable.com. He also coined the term Company-as-a-Product (CaaP) and is the author of the book “Bitcoin & Beyond.”

Crypto crashes

The past few months have been marked by US government enforcement crackdowns on crypto, each faster and bigger than the last. In July, crypto exchange Kraken, which is valued at $11 billion, was revealed to be under investigation by the Treasury Department after it allegedly ignored US sanctions against Iran.

On August 1, the SEC labeled the smart contract crypto-earnings program Forsage as a Ponzi scheme, charging 11 people in the process. Ethereum-based coin mixing service Tornado Cash was also sanctioned by the US Treasury Department last month over money laundering.

The sanction is a ban on all Americans interacting with the Tornado Cash platform. However, many question whether or not this sanction would be devastating because the anonymous nature of transactions – no one can verify where or who sends them – is what made Tornado Cash popular. No matter how effective the sanctions are, these crackdowns serve as a clear warning to crypto platforms to get their act together or they could be the next to be targeted.

But what’s next after these attacks? Although stricter cryptocurrency and blockchain legislation will surely follow, it would be better if policy makers and regulators make it part of their duties to learn more about these technologies.

“I hope the government would actually study from this point, instead of just focusing on [crackdowns]. I personally don’t think cracking down is the primary solution. Sometimes it is necessary, [but] I don’t think that is the primary solution. The primary solution is really [making] making sure the right narrative is being put forward, then people have the right access to the right kind of information,” Gao pointed out.

“I think in order to have a solid footing to make decisions like these, you have to have a thorough understanding that you have a better option. When you don’t have a better option, it’s very difficult—almost reckless—to make a decision like this,” Gao added.

The better option

Gao actually talks about the ability of a public blockchain to scale as the better option. Compared to cryptocurrency that acts as a speculative investment primarily used for trading, it is better to focus on blockchain as a technology that can not only make crypto more stable in price and value, but also provide a variety of uses for businesses across all industries – just like how the Internet did it.

Scaling is key because it enables constant increases in block sizes and transaction capacity, reducing fees in the process. Combined with a public blockchain that provides immutability, security and transparency, scalability brings power, efficiency and practicality to the technology.

The opposite of this is what happened with the cryptocurrency lending platform Celsius Network. On July 13, Celsius filed for Chapter 11 bankruptcy after freezing withdrawals in an effort to keep the company afloat. Now around 1.7 million people have lost their hard-earned savings with Celsius falling because it couldn’t handle extreme market conditions.

“The problem is actually this, it’s not that they can’t do it now, it’s that they actually have a theoretical hard ceiling…. It’s not a purely technological problem, it’s an architectural problem,” Gao commented.

“You mentioned that it’s not just a technological problem [but] architectural. I also think there is economics there. You need the fees to be – humans cannot understand how low the fee has to be for that to be possible… Even today Bitcoin SV is superior on that front to all other payment systems already. And I think the fees are still too high. So I think that part is a big factor as well,” Henslee added.

Because platforms like Celsius cannot scale, instead of revenue relying on transaction volume, they rely heavily on the price of cryptocurrencies, which are highly volatile. Therefore, when there are extreme market changes, like prices falling over 50% this year, they end up not handling it and declare bankruptcy.