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Kevin Werbach is a professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania and author of "The Blockchain and the New Architecture of Trust", from which this article has been adapted.
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In 2015, New York became one of the first jurisdictions in the world to adopt a regulatory regime for cryptocurrencies. The Department of Financial Services has begun requiring virtual currency companies to obtain a "BitLicense" in order to operate or serve customers in the state.
"We want to promote and support companies that use new and emerging technologies to create better financial companies," said New York-based former superintendent of financial services, Ben Lawsky, on the occasion of the announcement of the rules. He continued:
"Regulators will not always find the right balance … But we have to start somewhere."
Maybe. Yet Lawsky caught the mistake somewhere. And he moved to fasting to formalize the rules that govern what was still, in 2015, a small-scale and fluid cryptocurrency community.
Bitcoin entrepreneurs and technologists have argued that the threat of over-regulation and compliance costs would have slowed down startup activity. More than 4,000 comments were filed on the draft of the rule, most of them critical.
And when the regulations came into force, a sizable number of Bitcoin-related startups left New York, including the Kraken, Shapeshift, Bitfinex, and Poloniex exchanges. "The" Great Bitcoin Exodus "has totally changed the Bitcoin ecosystem of New York," said the New York Business Journal.
Three years after the Great Bitcoin Exodus, crypto-native exchanges did not rejoin the New York startup scene. But other companies have.
R3, the consortium headquartered in the financial sector with over $ 100 million in funding, is headquartered in New York. As might be expected, so are a number of blockchain startups focused on finance such as Digital Asset Holdings, Symbiont and Axoni. The pillars of Wall Street like Goldman Sachs, JPMorgan and the parent company of the New York Stock Exchange are entering into action.
And the business is not limited to financial services. Consensys, a venture capital development firm based on Ethereum technology, has grown from 100 to over 400 employees in its Brooklyn office in 2017 alone and is working on dozens of innovative projects around the world (although it has recently announced layoffs significant). Blockstack, a high-profile startup that hopes to build "a new decentralized app Internet" on blockchain bases, is also in New York. The New York bitcoin and ethereum Meetup Groups each have over five thousand members.
The BitLicense, despite all its faults, did not eliminate the cryptocurrency activity in New York. Nor did it create the model for regulatory innovation that its creators intended. Subsequent jurisdictions that have developed regulatory cryptocurrency frameworks have explicitly distinguished their policies from the excessively restrictive elements of BitLicense.
The dilemma of the regulator
Stepping back into fast-moving areas, regulators inevitably find themselves faced with a dilemma.
If they move too early and subject new technologies to old rules without a good cause, they risk killing innovation or pushing it to other jurisdictions. If they wait too long, the public will be damaged and the cost of imposing requirements on industries now considerable will become even bigger.
Where regulators see clear evidence of the damage that has been created to prevent, they will have to take action. Unclear requirements such as BitLicense create uncertainty, but also the absence of any definitive regulatory statement. Smart regulators can encourage innovation even if they protect against abuse.
When the Federal Communications Commission received a petition in 1994 to prohibit "the provision of … telecommunication services over the Internet" by non-tariff and non-certified entities ", he faced a similar challenge to that of New York compared to Bitcoin in 2013. Voice over the Internet Protocol startups (VOIPs) that were developed to provide services were not subject to price, universal service contribution, consumer protection, emergency services and other requirements that telephone companies traditional ones had to face.
The FCC managed to steer a course through chilling innovation and the abandonment of its mission, gradually bringing VOIP services within a set of accrued obligations. Today, the majority of Americans who have landline phones in their homes use VOIP technology, without even knowing it. At the same time, real-time voice and video messaging on services such as Skype, Facetime and WhatsApp has been a hotbed of innovation and adoption, with offers that look very different than traditional telephone service.
If regulators can follow the FCC model, they will support the realization of the full potential of cryptocurrencies.
Disruptive startups are not necessarily on the side of deregulation. For example, when Microsoft used its monopoly power at the end of the 1990s to threaten web-based services, the US government intervened through antitrust enforcement to restrain it.
The Internet may seem very different today if there was no independent market for Web browsers, or if Microsoft had implemented its plan to charge a small commission on all e-commerce transactions, taking advantage of its hammerlock control on the desktop.
Furthermore, the awareness that governments were operating to control abusive practices has helped to foster trust in the new and unknown word of virtual transactions, whether in the form of PayPal transfers, Amazon sales or Netflix subscriptions. Over time, Internet advocates began asking for government intervention to enforce network neutrality rules, which prevented broadband access providers from discriminating against non-affiliated services and privacy protections.
Sign of maturity
Actually, there are important questions about where to draw lines around the surveillance and allowed uses of the technology.
Criminals and terrorists will try to exploit the blockchain, just as they exploit other technologies whenever possible. Governments will react in an exaggerated way and will propose rules with collateral damage to legitimate operations.
The point is that these are not new challenges. Regulatory requests do not represent the end of the cryptocurrency innovation; report the ongoing ripening of the blockchain.
Contrary to what he / she or they might think, Satoshi Nakamoto did not create a technology without trust. Cryptocurrencies and other blockchain-based systems eliminate some expensive trust relationships, but they do so to make the transactions themselves even more reliable. Hundreds of billions of dollars in cryptocurrency market capitalization based on nothing but the collective belief of the participants in the independent network could be the largest self-generation of trust in history.
The law, its brothers, regulation and governance, are often seen as a mechanism of ambiguous application. The goal of such an application, however, is not to punish. It is to open the freedom of action by setting the rules of the game.
A referee gives a red card to a hand in a soccer game to not stop an innovative form of play, but to protect the integrity of the game. Fraud, theft, criminal activity, unjustified regulatory arbitrage, governance errors, corruption and manipulation are the main obstacles to the growth of blockchain and cryptocurrency markets.
If you want to change the world and do it sustainably, the laws and regulations are your friends.
Image of the bird cage via Shutterstock
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