Leading Into 2022: Crypto Usage, Regulations and Considerations For The Future
What's tabled for discussion in US congress, and what the future might look like for crypto worldwide
So I watched the hearing on digital assets by the US House Financial Services Committee. No, not the summary - the 5 hour-long one, so a long post and correspondingly long thought dump should follow, leading up to 2022 and how to navigate it.
Overview of Congress Hearing
Worries by US Congress
US Dollar use cases and staying in the #1 Spot
Fraud and Laundering
How Crypto can be used to help marginalized societies; Immigrants being forced to pay predatory remittance fees, and not have transparency in the process.
Risk of 2008-esque financial crises triggered in the crypto markets, and spilling into “real life”.
Sharing and Suggestions by Crypto CEOS
The crypto economy, specifically Stablecoins, could help the USD to continue being the top currency of choice worldwide, but this has to come from a utility - i.e. the use cases of a digital currency, which is where the competition is strong, and the US needs to be as well.
Existing US laws state crypto as a form of digital property, or as a record of ownership. Clarity is needed on the definitions and thus regulation/reporting requirements.
Risk-monitoring can be done 24/7, and in real-time. The infrastructure has already been built. Every transaction is transparent, and this is unlikely to be a repeat of what happened in 2008’s risks.
Two suggested ways to protect consumers
A) Only let the rich access it, as they can tolerate the risk, and B)
Open-up access, such as with equity funds, mutual funds. Currently, this is not allowed.
At the moment, this is allowed by other countries; Germany, Switzerland, Singapore.
And remittances are almost-instant, and there is no intermediary involved. All it requires is a wallet, and a device (phones).
No minimum balances and transfer fees are minimal
The electricity usage of Bitcoin is not as high as feared (e.g. there are quotes that mining takes up the yearly electrical usage of Argentina). This differs greatly by each crypto’s consensus protocol’s aka algorithm used.
The Stellar protocol has even lower fees than Visa’s network.
Not everyone has to use Bitcoin.
What The Future Might Look Like
A lot can happen in just 6 months.
In 6 years, Web 3.0 may have evolved into a whole different beast by then. In 2021 alone, there was a sheer amount of evolutions.
And to understand the context on why innovations are headed a certain way, they are built off some successes in the past (DeFi 1.0, just in 2020 alone), and making variants/experimentations, and the cycle continues.
If none of these are making sense to you, they are crypto specific innovations built atop each other. Click on a link to start going down a rabbit hole..
It’s as if the start-up community had jetpacks and steroids for their feedback loop.
Innovations spawn on a weekly basis, and these compound the cycle in any crypto ecosystem. Should regulations cover all innovations like a blanket, or will each be inspected, audited and verified?
Should accredited investors be the only ones who can ‘play’ in this new market, due to the perceived ability to take on these greater risks? What happens to the existing players if this type of regulation comes into effect?
It looks bright where Congress is sitting with industry leads to understand the space. Firstly, this means conversations are actually happening, as compared to people talking past each other.
Having Crypto Exchanges and Payment On/Off Ramps As De-facto Points of Regulation for Regulatory Bodies
This is on assumption that Regtech does not integrate with the crypto world just yet. Risk, fraud monitoring, and compliance operations do need a fair amount of automation, else regulating anything crypto is going to be extremely cumbersome.
Players such as FTX.com / FTX.US are making great headway here, yet there’s a need for regulatory bodies to collaborate and understand how crypto works before a proper operating model can be established.
Until then, I’m expecting slow yet steady progress. The fact of having this hearing is already a good signal for US governance to get involved.
There are also several on/off-ramp serves such as Moonpay, Kado, Zipmex, Simplex, Kash and more that grows weekly.
These are all points where fiat and crypto intersect - can a framework cover all these points of where fiat and crypto meet such that Regulators’ concerns are eased? Can it be done in a way that doesn’t harm the growth of these markets?
There is tremendous growth in projects across ecosystems. In the Terra ecosystem, there’s 1 new Whale (wallets holding $3.5M USD) onboarding into Anchor (the ‘savings’ product of Terra), every other day, and it’s been months since their initial launch. Think about the net effect across ecosystems, and for each new project launch (founders, investors, and whales becoming even bigger…).
If these are off ramped into the real world, will there be unprecedented inflation from the lack of sensitivity to any prices? How will inflation be addressed if these two markets meet?
Top-of-mind Grey Areas
Token issuance, platform registration, stablecoins, and how each are handled by geographic jurisdictions are going to be top-of-mind. All these differ on Governments’ favorability of crypto, and the underlying protocols’ functioning.
What may be imperative for the US, may not be so for Germany or Japan, and vice-versa. Crypto players, especially exchanges need to be highly adaptive to changes, as I do think they are the interface between fiat and crypto (for now), as are payment gateways for on / off-ramping into crypto.
Costs of Functioning
The cost of functioning of blockchains can be addressed, depending on the BFT (Byzantine fault-tolerant) algorithm/protocol used. Proof-of-stake seems to be the common go-to, of which there are plenty of projects and protocols using them already.
The argument that Bitcoin uses the same electrical output of Argentina yearly was valid a few years ago, but there are many ways today to circumvent it.
Its also incorrect to say that crypto = = Bitcoin. Not all crypto users are on Bitcoin, and there are several ecosystems you and I may not have heard of before, but can offer the same utility, and perhaps catered to certain geographic regions more so than a ‘universally known token’ such as Bitcoin or Eth.
Here’s a summary of them (Courtesy of Messari) that might be new:
Each ecosystem differs. Some are built atop an L1. Some offer a stablecoin, and use cases requiring that stablecoins. Some have ecosystems within an ecosystem (Terra within Cosmos). Some are aggregators, and some are just there for fun/memes. There’s whole backstories on each of them, if you’re interested.
Interestingly, usage goes to where incentives and growth are. Surprise-surprise.
Consumer Protection and Security
How should a regulatory body address this? Will “buyer beware” be good enough, such that there’s trust in citizens to protect themselves enough without government supervision? How inclusive can governments worldwide be to ecosystems? Are there favourites, and would this be fair on other ecosystems if some are ‘locked-out’ regionally?
Some countries are more lenient, in that crypto actually brings much-needed growth and a market for job and wealth creation. Some are not too keen, citing laundering, fraud and others.
Security risks are also a concern. DeFi has heavy usage of smart contracts, and with it, comes the risk of the implementation. There are standards, and yet the smartest hacker can find vulnerabilities. Cascading consequences may occur, where other projects dependant on other smart contracts can result in liquidations, theft and more. How do Governments protect against attacks and the corresponding impacts in the ‘real world’ (very loosely defined). How will citizens be protected?
By being collaborative, crypto players’ stance will shape Governments’ response depending on their appetite. It is still best to form collaborative models, as compared to completely bypassing regulatory frameworks.
Identification and Linking CDBD / National Blockchains to the Crypto World
Several countries are ahead in this technology. China and Singapore come to mind, while the US, Europe, Japan are considering/building their own.
It would be interesting to see how the national blockchains are plugged into crypto - or not at all.
A simple version would be having national blockchains track where the money goes in fiat - simply a ledger of record, and the currency stays - identifying who were the senders and receivers becomes a more interesting discussion whereby governments now have a simple way to trace fraud/laundering, provided citizen identification can be tagged to on and off-ramps.
Will this ultimately connect to the crypto world? It’s possible, and I think it might come from each countries’ appetite, as stated above. It also poses the question - how anonymous should transactions be on Web3.0?
What benefits do users lose if they lose their anonymity? Can crypto markets still function (with their growth, innovation and adoption), by making users identifiable?
Having National blockchains also gives governments new tools for creating ecosystems within fiat - think of the way China distributed ‘money’ in the form of e-vouchers, which were done used on e-commerce platforms, successfully distributing ‘printed money’ in the ecosystem, to the communities that needed it most.
New incentives for holding money, or using it, could also be created. Innovations from the crypto world (think governance voting, LBP models, quadratic funding, built-in inflation etc), could be brought over into fiat. The possibilities are endless from having an experimental testbed to build from.
This also holds true for the virtual worlds in the metaverse, and we haven’t even touched on when crypto meets metaverse!
The future is exciting, and I feel we’re close to the tipping point of a new market.
For those new to crypto, I encourage you to get started on understanding some fundamentals - Finematics has great explanatory videos.