Ian's Crypto Journal: Crypto (Regulation) Is The New Cannabis

The contestation between states & federal regulators

Hey everyone, Ian here. 

First off: The newest Crypto Tonight playlist. It’s pretty much all Rufus Du Sol because I saw them live on Saturday night...was very sick. You might say I’m mailing it in this week but tbh this is all I’ve been listening to. Also, I really missed concerts: incredible to be in a stadium with 22,000 people again.

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Crypto (Regulation) Is The New Cannabis

I was reading a Presidential Working Group report on stablecoins, which had some recommended regulations that Congress should implement (here’s a tweetstorm I wrote about it.)

The report was largely focused on how stablecoins, issuers, and custodial wallets all need more regulation. Here’s great summary from Sidney Austin LLP’s blog, saying that the potential regulations for custodial wallets was particularly concerning. Matt Homer, who leads crypto at NYCA, and previously worked at the New York Department of Financial Services (and Plaid!) called it “a slap in the face of state regulators.” 

While federal regulators might be looking to limit and control uses around blockchain, Bitcoin, and crypto technologies, some states like Wyoming, Texas, and Illinois are taking a different approach. They’re creating friendlier environments for crypto founders to build companies in an effort to attract more corporations to the state and, in turn, revenue. 

Sound familiar? A similar sort of situation developed with federal and state governments around cannabis regulation too. States like Colorado and California eagerly adopted legalized sales of cannabis at the state level, but the federal government hasn’t acted. This leads to a ton of issues for entrepreneurs and new businesses.

Blockchain has already been regulated at a state level: most notably in New York and Wyoming. The New York Department of Financial Service created a piece of legislation called the Bitlicense back in 2014 - which applies to any digital currency business that has customers or operations in NY State. The statue is so arduous that only two dozens companies even have the license, according to Coindesk

Things have changed since then though: states are now eagerly looking at enabling crypto innovation as a way of unlocking new revenue sources. Wyoming, by contrast, has taken the other direction: In 2019, they created a new bank charter called special purpose depository institutions, allowing crypto companies to hold customer deposits and engage in crypto activities. This, in theory, would make it way cheaper for customers to move money between crypto and fiat, among other benefits. Only 3 have been granted so far but other states like Illinois are looking to follow suit. Similarly, earlier this year, Wyoming also passed Bill 38, which recognized DAO’s as LLC’s—a huge step in legal recognition for DAO’s. 

Texas is quietly becoming the new hub of Bitcoin and crypto mining, after China banned it earlier this year. This amazing report from Castle Island Ventures’ Nic Carter, presented at the Texas Blockchain Summit, cites a deregulated power grid and aligned politicians as some of many reasons crypto mining is thriving in Texas. 

State by State regulation is...fine. Federal regulation is speedier and can be simpler for startups to navigate. But pro-state regulation around crypto and blockchain would not only attract more crypto startups, but, similar to cannabis, drive a boost to local and state economies.

Despite the PWG recommending “urgency” around stablecoin regulation, getting anything passed  takes a while. The fact is that organizing cohesive and clear regulation at a federal level is a lot harder than getting something passed in the state legislature—especially when it has to deal with regulation that could create more favorable conditions for generating revenue. What’s more, crypto promotes the decentralization and democratization of power—many states may view crypto adoption as a way to remain independent from the federal government over time too. 

Figuring out how crypto will be regulated is going to be tough. Here's a graphic from Andreessen Horowitz that outlines just how convoluted financial regulation is. With so many diverse use cases beyond finance, crypto’s arguably even more complex. 

Lastly, what about all the other uses of blockchain and crypto, beyond financial services? Do those need to be regulated, too? Everyone’s talking about DAO’s and tokens but there are equally powerful (though less sexy) use cases being explored for blockchain too, like land registry, data transfer, and even voting in political elections.

My first draft ended with wondering if a crypto-specific agency like the CFPB made more sense that small pieces of federal regulation. Agencies like the OCC and others have regulated financial services for decades. But then I remembered that independent agencies report to the executive branch, and can get super political.

The answer won’t be simple, and, like cannabis, will take time to figure out federally. In the meantime, my guess is more states will start to explore how to promote crypto innovation, and potentially become customers themselves.

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