Regulatory Capture of Blockchain Innovation

If you’re here, reading this, I’ll assume you’ve been following the back and forth between The SEC and the Cryptocurrency/Blockchain community. If you haven’t been following, I recommend you start here. I’d also encourage you to watch this Hearing entitled “Examining the Cryptocurrencies and ICO Markets.

If you are lazy, I will sum it up for you by saying that the SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission) are worried about Crypto investors getting scammed out of their money. They have made it clear that protecting “Mainstreet” investors is a priority but, what will that look like? More importantly, will is destroy the ability for small time investors to take part in ICO’s of potential world changing technology?

Now, it’s certainly easy to think and say things like “anyone who gets scammed didn’t do enough research”, but the fact is that these large scale scams are hurting the Crypto investment landscape.

Recent Crypto Scams

Let’s take a look at a couple recent examples. (I’m going to have fun with these. If you lost money in one of these scams, my heart goes out to you).

1. Prodeum – Oh my Prodeum! What a fantastic entrance and exit strategy. Put up a website, use some fake executive photos, and exit with enough money to buy a few burritos. Oh yea, and don’t forget to write “penis” on your website before you go. The thing is though, if someone hadn’t noticed those photos, people could have given a lot more. This whole scandal also made all the headlines. Imagine if you were thinking of investing in Crypto and you end up reading this fucking penis article with your morning coffee? Yea…maybe I’ll wait a little longer to get involved.
2. Bitconnect – Not sure how far I have to dive into this one. I know what you’re thinking, “those ridiculous promises of high returns! Everyone should have known”. Well, they didn’t, and it turns out that promises of high returns, and the fear of missing out on them, still works quite well in getting people to invest money. Bitconnect lost $1.5 Billion in value after closing down. A few days later, the token made a freaking recovery of over 400 freaking %.

There are many more and there will be more to come. Clearly, we need some form of regulation in the space in order to be taken more seriously and become more inviting for those who want to get involved.

Regulatory Capture

This is what many Crypto investors, and Blockchain developers, are truly afraid of. Investopedia defines regulatory capture as,

“a theory associated with George Stigler, a Nobel laureate economist. It is the process by which regulatory agencies eventually come to be dominated by the very industries they were charged with regulating. Regulatory capture happens when a regulatory agency, formed to act in the public's interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public" (Regulatory Capture, 2017).

In the Crypto space, regulatory capture would look something like today’s laws pertaining to IPO’s. The SEC could label all ICO’s, IPO’s and label all tokens securities. It wouldn't really be labeling by the way, it'd be more like clarifying since everything is very muddy right now. They could then move to only allowing “Accredited Investors” to invest in ICO’s.

This would be genuinely terrible for innovation and investors. An accredited investor must have made $200,000 in income in the previous year and have a reasonable expectation to make the same in the current year or have a net worth of $1 Million. Screw that. Joey Bag of Doughnuts should be able to invest $500 in the ICO of his choice without first selling 2 Million 50 cent doughnuts. He just needs a little guidance to make sure his ETH is going where he thinks it’s going!

So What’s the Solution?

Honestly, I don’t have all the answers, or even most of them, but here’s the crux of some of the issues:

I’d love to see white papers get reviewed by third party authorities. This is already happening in some respects on sites like the one you’re on now and by other authorities in the space. The problem so far is that people who’s last name sounds like an agile, on stage dancer will shill anything to make a quick buck. It is just genuinely crazy, and scary, that someone can sit down and plagiarize an episode of Star Trek and then raise millions of dollars.

I’d love to see decentralized smart contract auditing. Things can go wrong on accident sometimes. If investors are taking on all the risk, we really need to start asking for assurances that our ETH won’t disappear to some random wallet and be lost forever.

I’d also personally love to have all executive teams be public but I know some of you might disagree on this last one.

Regulatory Capture has a history of destroying innovation by creating false barriers to entry in established markets. No matter what happens, The SEC needs to tread lightly to assure this is avoided in the regulation of the crypto markets.

Seriously though, I don’t know anything. Definitely do not listen to me. You can get at me on twitter though, @fatherofbags.