The Crypto Hare and the Regulatory Tortoise

Imagine entering a cryptocurrency time machine to take you back to October 31, 2008 when the bitcoin white paper was published.  It’s just you and Satoshi Nakamoto, no Ethereum, no XRP, not even Dogecoin for entertainment value.  Fast forward five years to May 2013 when you get to participate in Coinbase’s Series A round with its $22M valuation but not yet comprehend the coming of ICOs or airdrops.  Fast forward another five years to the brutal “crypto winter” of 2018, watching bitcoin’s value drop by 84% but not yet knowing the words “DeFi” or “non-fungible token.”  And then rejoin today, where crypto market caps are coming off of their $2 trillion highs and seeing every major financial institution involved in the crypto space, Christie’s auctioning off NFT artwork for $69M, and Elon Musk rage-tweeting about bitcoin as he hurtles rockets into space. 

Wow, the crypto world has changed. 

But do you know what hasn’t really changed in all that time?  Regulatory clarity.

If you took that time machine to every possible bitcoin, blockchain or digital asset conference over the past ten+ years, you would always hear some speaker focusing on the fact that policymakers are not yet up to speed, and a lot of future innovation will depend on what will happen when governments get involved.

We are quickly approaching the point – actually, perhaps we are past it – when technology innovation and market development in the cryptospace needs no traditional financial regulation at all.  The open-sourced, transparent, and flexible nature of decentralized systems suggest that the efficient functioning of markets is being coded into the protocols themselves.  Certainly, the world of circuit breakers and trading curbs, Wall Street CEOs giving congressional testimony, and government-led financial bailouts – all of this starts to seem quaint and irrelevant in a maturing, decentralized, autonomous market infrastructure.

Nowhere was this clearer than on May 18-19, 2021 when the value of bitcoin plunged by 50% and all other cryptocurrencies came crashing down with it.  During prior massive crypto corrections over the past decade, it would take some time for the market and importantly, confidence to recover.  And in comparison, should any traditional asset class fall suddenly by 50%, there would undoubtedly be regulatory (dare we say, paternalistic) intervention temporarily keeping traders from being able to execute what they want when they want.

But this time, following May 19, the crypto markets stabilized without major drops in the confidence of crypto itself.  The stabilization and continuation of orderly trading was even more remarkable given that this was the first real test for the effective functioning of decentralized exchanges which performed seamlessly.  There was no need for government intervention and keep in mind, as a friend pointed out – in this recent market correction, Dogecoin lost about the same market cap as Lehman Brothers did in 2007. One was the biggest financial crisis of all time and the other was "a bit of a laugh."

So now, we have a maturing market that has increasing ability to function without regulatory supervision.  And what will policymakers do?  Still continue to study?  Still take a wait-and-see approach?  Still not acknowledge that crypto is an industry they need to work with rather than against? 

Thankfully, leaders like Perianne Boring, Founder of the Chamber of Digital Commerce and our podcast guest on OpenOutCry.pto, are in the trenches making sure that our government leaders are informed about advancements in this space and cryptocurrency’s future massive impact on economic competitiveness and financial equity.  And as Perianne rightly points out, despite the glacial appearance from the outside, there has been a lot of growth of awareness inside Washington, D.C. about cryptocurrency, its nuances and geopolitical importance. 

That said, the clock is ticking for traditional regulation to be relevant in a digital economic reality.  If we jump back in the time machine and now go forward five years, we don’t think anyone will be surprised to see the crypto hare way ahead of the regulatory tortoise.  And we will have to keep flying far forward into an uncertain future to understand the ramifications of such a critical gap.