Improve, Don’t Kill: Six Principles for Governing Crypto Technologies

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The collapse of cryptocurrency exchange FTX ticked all the boxes for the tech-cynics. A founder and CEO adored by Silicon Valley wags and Sand Hill Road portfolios. A service based on technology most people don’t understand, riding the waves of a thriving ecosystem. And, at the center of it all, an opaque black box with virtually no external control.

As congressional investigations heat up, this chorus of critics will demand tough new regulations that protect consumers. And clearly, after a meltdown that wiped out over $152 billion in market value for the biggest cryptocurrencies, we need greater regulatory oversight of the field, especially for the less savvy and less wealthy of the society.

Yet establishing tough controls without fully understanding the nature of the broader crypto ecosystem and its potential benefits will stifle innovation that could produce a more fair, efficient, integrated, and transparent global economy. As lawmakers consider new regulations, six key principles should guide their efforts.

First, they need to understand that FTX was not a real crypto entity. At its core, FTX had a traditional corporate structure that, like Enron and Lehman Brothers before it, escaped crucial regulatory scrutiny. In this case, the alleged fraud occurred through money transfers to a hedge fund and withdrawals for personal gain, but the business model itself was essentially the same as traditional trading platforms. currency or stock trading.

A knee-jerk crackdown on new technologies, such as the blockchains at the heart of many new crypto services, will not prevent this type of illicit activity. In fact, because blockchain ledger data is public, it could provide regulators with easier ways to audit financial flows, even if recipients and senders remain anonymous.

Second, we need to stop bundling the wide array of promising cryptocurrency technologies. Building safeguards around Bitcoin and other cryptocurrencies — such as custodial monitors, liquidity monitors, and “know your customer” standards for certain types of exchanges — can help protect users without stifling compliance. innovation in other applications, such as borrowing and lending.

Third, and similarly, we must bear in mind that “crypto” is shorthand for a larger Web3 ecosystem, which contains much more than coins and digital financial exchanges. New blockchain-based microfinance apps can extend credit to the unbanked, peer-to-peer music sharing can provide new outlets for artists, and a blockchain-based web could help break free from censorship. This broader potential of crypto technologies is what we need to keep in mind when we start drafting regulatory checks. It is important that we protect the public from harm, but also that we take advantage of the unique opportunities that these technologies offer.

Fourth, given this wide variety of potential use cases, we need a regulatory approach that we can tailor to the many different categories of crypto services. Consider decentralized autonomous organizations (DAOs), which make governance decisions through the vote of often anonymous members. He has no single point of contact or responsibility. And while this may facilitate more democratic, accessible, and fluid economic activity, the mindset underlying current financial market regulation does not even begin to contemplate this type of organizational structure. A new style of regulation will need to delineate the different types of control, ownership and governance in centralized and decentralized environments and leverage their benefits.

Fifth, as we regulate, we must ensure that we do not overlook the critical role of usability and user experience in new systems. This may sound like a product design issue, but previous regulatory experience should underscore the importance of a smooth user experience and interface. European Union data protection regulations have spawned a swarm of pop-ups and legalese that users rarely bother to read or use to their advantage. If we want the positive aspects of blockchains and the crypto ecosystem to progress beyond early adopters, our evolving regulations should aim to encourage improvements in user experience in ways that minimize complexity of use. .

Finally, the sixth principle requires us to recognize that the decentralized nature of the crypto ecosystem means that these organizations and services inherently cross jurisdictional boundaries. While some cross-border institutions, such as the Financial Action Task Force (FATF) or the Basel Accords, can serve as a useful guide or even bear some of the burden of cryptocurrency regulation, no existing organization is well suitable for other types of crypto applications unlimited. We need to rethink and form new institutions that are better equipped to handle the new dimensions of the crypto world.

These six principles only provide a rough roadmap for the more detailed multi-stakeholder process we need, but now is the time for this kind of smart regulation. According to the Atlantic Council’s Crypto Regulation Tracker, 88% of the countries surveyed were in the process of making substantial changes to their regulatory framework.

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We cannot adopt a one-size-fits-all approach to crypto regulation – the nature, scope and potential of this ecosystem is too vast and too promising to be stifled by clumsy rules. However, if done thoughtfully, the tilt towards more regulation could lead us to a higher level of economic inclusion and vitality.

Olaf J. Groth Ph.D. is CEO of Cambrian Futures, Professional Professor at the University of California Berkeley Haas Business School, Professor of Practice at Hult International Business School, and author of “Solomon’s Code” and the upcoming “Great Remobilization: Strategies & Designs for A Smarter World” (MIT Press).

Tobias Straube is Vice President of Analytics at Cambrian, Board Member of Digital Waves, Founder of Scio Network, and Assistant Instructor at UC Berkeley Executive Education.

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