Is it possible to have regulated, permissionless crypto instruments?

IRINA LITCHFIELD: "If we want to have access to regulated capital, we must comply with current laws and figure out a way to build a system that allows a central record of ownership and transfer"

Before the 1980s, permissionless wealth ownership and transfer instruments were everywhere in the form of bearer bonds. Just think about ‘coupon clipping’, and you’ll get the idea.

Originally, bonds were issued with coupons, which you clipped and presented to the issuer or the issuer’s agent – typically a bank or brokerage firm – to receive interest payments.

It sounds absurd and obviously could be easily abused by fraudsters. That is precisely the reason why regulators prohibited bearer certificates and created new requirements. Which are: a central record of ownership, and recorded mechanisms of ownership transfer.

Expiring bonds

People could discover a box full of old bonds or stock certificates 20 years after their grandparent had passed away and be super excited about them until they found out the redemption period was worthless. The company had no idea who owned the bonds, and so nobody was “at fault”, the things just expired and became worthless.

That was the status quo, and, for one reason or another, was found wanting. Over the last 30 years, governments of the world have been getting rid of these bearer instruments. And this has been pretty well accepted. There’s enough new convenience, and “nobody *honest* would actually NEED to keep millions of untraceable dollars hidden away, right?”.

Crypto is a digital version of old-school bearer instruments.

A new world of permissionless wealth ownership and transfer excites and drives many in the crypto community. Some dreamers believe that complete privacy will become a reality. For many, revolutionary hope is to break away from permissioned wealth transfer, to the new world. A new, old world even.

Crucial clarification

To understand better what the future holds, we must draw the line between permissioned versus permissionless crypto assets. Clarification of where the line lies between those instruments is crucial. Rest assured that regulators will draw it. As they promised during the latest G20 meeting in Buenos Aires, they will regulate the crypto industry.

I’ll repeat myself there in case you didn’t catch that… the world’s governments agreed at the G20 summit to regulate the crypto industry.  The biggest question they will hold in their mind while drawing the line is going to be: Is this a bearer instrument?

How we use this information is entirely up to us. Surely there is space for the crypto industry to continue chugging along outside of compliance. After all, there is much capital in the world.  Even if we look at the height of BTC price, there still should be room for growth. However, if we want to have access to regulated capital, we must comply with current laws and figure out a way to build a system that allows a central record of ownership and transfer.

Why is that? Simple! Governments make money by taxing permissioned trades.

Illegal operation

A perfect demonstration that indicates that regulators are intelligently protecting their territory is the EtherDelta decision by SEC that all DEX’s that transact what they deem to be securities are in fact marketplaces that fall under their jurisdiction. If you do not have a license under the 34 act (named after when it was passed, 1934), you are an illegal operation, even if you’re using exotic technology.

All this sounds gloomy and unexciting. However, it is not. Pay off for cooperating is access to compliant capital which is enormous.  We, as an industry, need to figure out paths to compliance that are not so heavy and cumbersome.  The billion-dollar question now becomes: How do we make the path to compliance something easily absorbed by a start-up?

What does a ‘lightweight’, and ‘start-up grade’ (as opposed to ‘enterprise grade’) compliance regime look like? We’ll see. A lot of jurisdictions are now racing to establish themselves as small business friendly, and I’ve written about Malta’s efforts along these lines in the past. I’ll continue to do so, and track this space. You should too, by following my column here or on twitter – @IrinaLitchfield – where I’ll keep talking about this until I’m blue in the face.


Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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