The 50th edition of the Money Reimagined podcast features one of crypto’s most original thinkers
The crypto regulatory situation in the U.S. is sad. Not because the Securities and Exchange Commission or Department of the Treasury keep proposing new, unpopular rules but because there is a lack of depth and insights into most of the positions and intended actions coming out of U.S. regulatory agencies.
What we have today is hastily concocted and coordinated decisions from various departments that have all been reactive and not proactive. Most of these end up delivering superficial, rushed, harmful, reactive or incomplete policies, not always aligned with helping the industry grow, but often obsessed with preserving the status quo.
William Mougayar, a CoinDesk columnist, is executive chairman at the Kin Foundation. This op-ed is part of CoinDesk’s Policy Week, a forum for discussing how regulators are reckoning with crypto (and vice versa).
Here’s how the mess is created, as each regulator takes a narrow issue and makes it their sole priority.
- The Department of the Treasury is mostly worried about crypto tax evasion.
- The Federal Reserve is scared about the impact of stablecoins.
- The SEC sees everything from a security/non-security vantage point.
- The Commodity Futures Trading Commission (CFTC) looks at these instruments as commodities. It has progressive ideas but those aren’t always in lockstep with the SEC.
- The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is generally focused on anti-money laundering.
- The Department of Justice is targeting know-your customer (KYC) and catching crooks who target crypto ransomware.
These regulators are acting based on what they see from where they sit. They all want to force-fit crypto into their own models as if there was nothing different here. In reality, no one has the full picture! And not one of the current regulators is displaying a genuine understanding of where the industry is headed.
Sadly, we are where we are because none of these existing regulatory bodies have exhibited a deep enough sophistication to get them to implement the right regulation.
They saw crypto as a distraction, not something to study. Now they’re cramming. And by that, I mean, cramming crypto into their current regulatory models – unable to admit that novel technology calls for novel solutions.
The U.S. Congress doesn’t do well passing laws in new areas when they have not been properly researched and crafted. Take the hastily inserted clauses targeting crypto in the bipartisan infrastructure bill or the initial attempt to limit stablecoin issuance rules. Both the House of Representatives and Senate have been on the receiving end of telegraphed policies or viewpoints, and not from a lack of trying. More than 18 bills have been put forth in 2021 by the Congress, each one claiming to be more comprehensive than the next.
Enough of that.
We don’t need 18 bills and six departments fumbling their way into crypto regulation. How about one single entity with a full-time responsibility for this agenda, not half a dozen others with part-time dedication and short-term attention?
The only way to be innovative is to have an expert regulator drive new regulations across the several other mosaics of regulators. The only hope for birthing the right type of regulation is to have someone who is fully dedicated to crypto.
For example, this could start in the form of a special-purpose task force commissioned by the White House, or by creating a temporary agency that could obsolete itself after two to three years of strategy, planning, coordination and thought leadership work in the field of crypto regulation.
The job would involve making the other existing agencies more coordinated, knowledgeable and careful about what they propose. And it would have a holistic approach that takes into account the full spectrum of how cryptocurrency and the blockchain are impacting the U.S. market.
The field of crypto is full of minutia, details and nuances that only a dedicated entity will discern. In the corporate world, it is common practice to create a dedicated team of people when a new field emerges. There is a need to create real experts who can spread their wisdom into other parts of the organization, rather than having disparate groups struggle on their own to master a topic when it has not been on their full-time radar.
The U.S. regulatory landscape is already specialized, but that’s after years of regulatory experience and maturity. Now, if U.S. regulatory entities took it upon themselves to deal with the parts that touched them, crypto would die by a thousand cuts. They will mix the good with the bad, and they will throw the baby out with the bathwater more than once.
We are already seeing this lack of good chemistry exhibit itself as regulatory agencies and government departments continue to produce un-coordinated, piecemeal approaches, while Congress receives bill after bill and struggles to make sense out of them. Regulatory fatigue is setting in.
In contrast, take Switzerland or Singapore. Because they are smaller jurisdictions, they can more accurately wrap their heads around their target areas. In the U.S., there is no single entity that can be the driving locomotive for all other regulators, even if the SEC is believed to be that one.
See also: Coinbase Proposes US Create New Regulator to Oversee Crypto
In an ideal world, innovation precedes regulation. Initially, innovation is allowed to circumvent or avoid regulatory scrutiny. Then, regulation comes in to provide clarity, formalize rules or provide specific guidance that allows many parts of the technology to thrive. The internet was allowed to flourish during the mid-1990s when U.S. policy was driven by a strong White House special adviser, Ira Magaziner, who acted as the internet and e-commerce czar and dictated policy strategy after he deeply studied the topic. As a result, the U.S. became the undisputed early leader in this field.
In contrast, currently U.S. regulators are coming to crypto with the aim to dial back on the innovation and not to set it on the right track. Ultimately, it’s the entrepreneurs who create all the value, and they should be the ones to empower in order to secure U.S. global leadership in this sector. Otherwise, the innovation drain and non-U.S. based activities will continue to grow elsewhere. Not only does this hurt entrepreneurship, but it also prevents millions of consumers from benefiting from wealth creation opportunities around cryptocurrencies.
Will history repeat itself? Will Americans do the right thing after they have exhausted every other possibility? Now is the time to break the existing pattern of crypto regulation by Whack-a-Mole. Now is the time to jump into a new paradigm of holistic, expert and more-sensical regulation.
In 1997, the Clinton Administration published the groundbreaking “Framework for Global Electronic Commerce,” which set forth five key principles:
- Governments should recognize the unique qualities of the internet.
- The private sector should lead.
- Governments should avoid undue restrictions on electronic commerce.
- Where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce.
- Electronic commerce on the internet should be facilitated on a global basis.
In the ensuing decades, the internet transformed our economic and social interactions in ways that have profoundly changed society – for better and worse. Today, we stand at a similar moment for the next generation of the internet, and it’s time for a new set of principles that incorporate lessons learned over the past 25 years.
Tomicah Tillemann is global head of policy for crypto and James Rathmell under him at a16z. This op-ed is part of CoinDesk’s “Policy Week,” a forum for discussing how regulators are reckoning with crypto (and vice versa).
Policymakers are finally taking a long overdue interest in Web 3. But the conversation is overwhelmingly about what policymakers don’t want from technology: fraud, illicit use, unsustainable energy consumption, systemic risk. We believe it’s time to establish an affirmative vision of what we do want from technology. Open societies need a North Star to guide our efforts and innovation.
Web 3 is the most credible alternative for reshaping and redeeming institutions that have fallen short over the last few decades. The list includes Big Tech, Wall Street banks and broken public assistance platforms that have failed to quickly and efficiently deliver needed help to Americans in times of crisis.
Big tech has been embroiled in an unending series of controversies over the past decade, ranging from poor stewardship of consumer data and privacy breaches to disinformation and algorithmic bias. But these platforms are now being disrupted and disintermediated by Web 3. For instance, decentralization has opened up the possibility of a world in which people can own their data and grant applications permission to use it on a limited basis, rather than having that data littered across hundreds of centralized databases.
See also: Crypto Is Too Big for Partisan Politics | Kristin Smith
Decentralized finance (DeFi) is another area that holds great potential. If fintech platforms like mobile payments revolutionized the frontend of finance, we can think of DeFi as revolutionizing the backend – laying new pipes and rails that are easier and more efficient to access, audit and upgrade.
This new generation of digital infrastructure could help realize goals that have long eluded policymakers, such as expanding access to consumer finance products, reducing the cost of capital, enabling capital formation for small businesses worldwide and improving compliance through easy, instantaneous auditability. Policymakers will still need to develop thoughtful regulatory frameworks in this space that protect consumers from bad actors and ensure the stability and integrity of our financial system. However, if we are judicious in how we incubate these tools, we can usher in a new renaissance of economic opportunity.
Web 3 also holds tremendous promise for government itself. The onset of the COVID-19 pandemic led the federal government to make a major investment in Americans who were struggling to make ends meet. The proposals now being considered in Congress would bring even more aid to working families across the country. Yet, our antiquated financial systems leave far too many people waiting weeks or months for help to arrive in moments of desperation, and then even longer for checks to clear.
At the same time, existing systems have proven shockingly vulnerable to exploitation by foreign organized crime rings, which stole tens of billions of dollars from taxpayers by exploiting weaknesses in our increasingly decrepit financial architecture. Tools like stablecoins and digital identity – if embraced by Washington – can enable more efficient distribution of aid to working families and protect our systems from exploitation by foreign criminals.
Decentralization is more than a buzzword. It puts power and control back in the hands of consumers and individuals. Web 3 systems can be more inclusive, more equitable and more resilient. Simply put, they’re a dramatically better alternative to a broken digital status quo.
Technological innovation is often necessary to unlock social change and economic growth, but it is certainly not sufficient. Without a well-conceived public policy framework that recognizes the wide diversity of the Web 3 ecosystem, we may never realize the benefits of decentralized digital transformation.
Failure to get this right would mean two things:
First, other countries – potentially countries with values contrary to our own – would set the standards that define the next generation of global technology.
Second, we will miss what may be our only opportunity to apply the lessons learned from the failures of Big Tech, Wall Street and broken institutions, to implement a new vision for the role we want our technology and our institutions to play in people’s lives.
See also: DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?
The growth of Web 3 has been driven by entrepreneurs who grew up in the aftermath of the 2008 financial crisis and want to improve on the systems of the past. And consumers are actively participating as well: we already see almost one in six Americans under the age of 35 years old investing in crypto, with strong engagement especially among Black and Hispanic Americans. These technologies are addressing a deep demand for solutions in communities that have not always been well-served by traditional finance.
Since its founding, the United States has been home to innovation, imagination and independent thinking. The success of the country has been anchored in philosophy and practice of decentralization – a belief that many independent actors could create a whole that was more than the sum of its parts, and deliver outcomes that were better than what could be achieved by concentrating power in the hands of the few. Web 3 can bring us back to those core values and revive their attendant inheritance of progress, opportunity and inclusion.
Pushback against the idea of regulated DeFi is understandable. But don’t throw the baby out with the bathwater.
Coinbase has rebooted its internal lobbying program and signed a number of new contracts with K Street firms amid recent regulatory strife.
The post Coinbase spent nearly $800K on lobbying in 2021’s third quarter as part of influence revamp appeared first on The Block.
The Securities and Exchange Commission (SEC) greenlighting a futures-based exchange-traded fund for bitcoin has been a boon to holders of the cryptocurrency this week, with bitcoin hitting all-time highs just shy of $67,000 on news of the ETF’s clearance. But let’s be clear: It’s a horrible deal for investors in the fund itself.
Due to a common phenomenon in futures markets known as contango, the manager of the newly listed ProShares Bitcoin Strategy ETF looks likely to incur such significant costs that investors will earn a dramatically lower return than if they’d invested directly in bitcoin. The loss is so large it makes any concerns the SEC had about volatile, inconsistent reference prices for spot-market bitcoin ETFs seem trivial.
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In choosing the futures road to an ETF rather than approving a spot market-backed fund, the SEC seems to have chosen the easiest route from a regulator’s standpoint, given that the underlying contracts – the CME Group’s bitcoin futures – are themselves regulated by the Commodity Futures Trading Commission (CFTC).
If it had instead blessed one of the many spot market-backed ETF proposals submitted over the past eight years, it would have needed to approve the prices quoted by exchanges whose bitcoin listings aren’t regulated by either the SEC or the CFTC. Nevermind there are now sophisticated, trustworthy indexes – such as CoinDesk Indexes’ XBX index for bitcoin – that would serve that role perfectly well. It seems the SEC just couldn’t get beyond the global, unregulated world of bitcoin exchanges and the prices they produce. So it punted to a futures solution.
Yet, in choosing that path over the spot market and essentially approving contango-based losses, the SEC may be doing more harm to the small investors it is supposed to protect than they would incur from whatever uncertainty the spot market brings.
Contango pain
My colleagues David Morris and Omkar Godbole have already done a fine job explaining the challenges posed by contango, where the prices for longer-dated futures contracts are higher than the short-dated ones. (In essence, there’s a cost involved in the ETF manager having to “roll the contract” every month, because the manager will have to sell the lower-priced, expiring current-month contract and buy the higher-priced next-month contract. The greater the contango effect, the more a futures strategy will underperform the price of the underlying asset the futures contracts intend to track.)
But it wasn’t until I talked with another colleague, CoinDesk Indexes Managing Director Jodie Gunzberg, that I realized just how costly this phenomenon is for a bitcoin ETF. (She described the concept as “fatally flawed” in an appearance on CNBC.)
According to Gunzberg, the average “negative yield” per monthly roll on bitcoin futures for the past few years of its existence has been 2.29%. On an annualized basis, if investors held shares in a bitcoin futures fund that had rolled over every month for the past year, they’d have ended up with a cumulative cost of 28% relative to the spot market.
Read More – Policy Week: How Crypto Is Reckoning With Regulation, and Vice Versa
The monthly average negative yield for bitcoin futures is above the average contango cost incurred by crude oil futures, at 1.69% per month, and only slightly below that of unleaded gas, at 2.85%. It’s significantly higher than the monthly contango costs incurred on gold futures, which average at 0.23%.
For commodities, a great deal of the contango effect is explained by storage costs, which mount up over time and thus make longer-dated futures contracts more expensive. Those costs vary from commodity to commodity. Gas and oil are costly to store; gold is not. Hence the disparity in the average negative yield roll.
Yet, bitcoin, which according to Gunzberg’s analysis is in a state of contango 58% of the time, is even cheaper than gold to store. Storage is not a factor at all in its tendency toward contango, which is explained purely by hyper-bullish future price expectations. In fact, the absence of any storage problem makes managing bitcoin futures a very different – and arguably more difficult – proposition than for commodity futures.
Although the overall cost of storing commodities grows over time, the marginal cost of adding more storage time tends to decline the longer the commodity is held. That means the negative yield burden is often lower for longer-dated futures in contango. Savvy investors will offset their losses in shorter-dated contracts by buying the longer-dated ones.
But in the case of bitcoin, where there’s no real storage cost to speak of, that longer-term effect simply doesn’t occur.
“The price of bitcoin futures contracts is reflecting very purely the higher expected spot price in the future,” says Gunzberg. “And there is no convexity in the back end. It’s just straight up. You can’t even play those back-end contracts to your benefit. There is nowhere to hide.”
The other contango-related problem with a futures-backed ETF is that fund managers are forced to hold a large amount of cash to cover the roll payments over time, which creates an opportunity cost because those funds aren’t exposed to bitcoin’s gains. By contrast, spot market-backed ETFs can invest the bulk of their funds.
“Our ETF has 95% of funds under management invested directly in physical bitcoin,” says Alex Tapscott, managing director and head of digital assets at Toronto-based Ninepoint, one of four firms now managing spot market-backed ETFs north of the U.S. border.
None of this – not the comparatively better performance in either Canada or the bitcoin spot market – has deterred U.S. investors so far. It took just two days for the ProShares ETF to surpass $1 billion in assets under management, a record for any ETF.
Demand is so strong, Bloomberg reported, that ProShares is close to exceeding the Chicago Mercantile Exchange’s limit on the total number of contracts an entity can own. Bloomberg’s analysis found that, with a stash of 1,900 contracts in the current October month – just shy of the 2,000 limit for a single month – the fund has had to diversify into longer-dated contracts. It now holds 1,400 November contracts, but may have to go further out the curve into December if demand keeps up. Even then, the fund faces an absolute limit of 5,000 contracts
A decision by the CME to raise the front-end month limit to 4,000 from 2,000 starting in November could ease some of the pressure on ProShares. Meanwhile, competing bitcoin futures ETF from Valkyrie and VanEck will likely pick up some of the slack from pent-up investor demand and take the pressure off ProShare. But if investors respond negatively to the underperformance of their fund relative to bitcoin’s soaring spot price, the rush for the exits could become a stampede.
All of which raises the question: Why on earth did the SEC, with a mandate to protect small investors, take this route? It’s time for a proper, spot market-backed bitcoin ETF.
More from Policy Week
Nik De: What I Learned About Crypto Regulation From a Week in DC
David Z Morris: Lassoing the Stallion: How Gensler Could Approach DeFi Enforcement
Bitcoin ETFs Aren’t New. Here’s How They’ve Fared Outside the US
Some NFTs Are Probably Illegal. Does the SEC Care?
Stablecoins Not CBDCs: An interview with Rep. Tom Emmer
Crypto Learns to Play DC’s Influence Game
Gensler for a Day: Regulating DeFi With Fireblocks CEO Michael Shaulov
Kristin Smith: Crypto Is Too Big for Partisan Politics
Raul Carrillo: In Defense of OCC Nominee Saule Omarova
DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?
Gensler for a Day: How Rohan Grey Would Regulate Stablecoins
zkLink, a cross-chain DEX that utilizes zk-rollups technology, has raised $8.5 million in a seed funding round.
The post Cross-chain decentralized exchange zkLink raises $8.5 million in seed funding appeared first on The Block.
Decentralized exchange (DEX) ZkLink has closed a $8.5 million funding round led by Republic Crypto to help ramp up for its market launch later this year.
ZkLink aims to become the first multi-chain DEX to enable one-click, cross-chain transfers across both Ethereum Virtual Machine (EVM) and non-EVM-compatible chains.
At launch, the first layer 1 chains to be supported will include Ethereum, Binance Smart Chain, Huobi Eco Chain and Polygon.
The cross-chain quest
DEXs can be difficult for beginner users to navigate. Users also often have to use a different DEX for each blockchain network, complicating cross-chain asset transfers.
ZkLink connects separate layer 2 networks with a single layer 1 network for easier token exchanges from a single interface, a structure that also lowers gas or transaction fees.
The project launched its testnet in July and the protocol experienced a 40% spike in users over the past 30 days, coinciding with China’s latest crypto trading crackdown. ZkLink now has close to 10,000 users participating in its open beta ahead of the mainnet launch.
Key backers
Other participants in the funding round included Arrington Capital, DeFi Alliance, Huobi Ventures, Ascensive Assets, Morningstar Ventures, GSR and Marshland Capital.
“Interoperability is the goal of many blockchain projects but ZkLink fully backs up the talk, allowing intuitive cross-chain exchange across multiple chains,” said Andrew Durgee, head of Republic Crypto, in the press release. “We’re very excited to see zero-knowledge technology implemented in this way in the realm of decentralized finance and look forward to supporting the ZkLink team throughout their journey.”
“Trustless interoperability is the holy grail of blockchain, but there aren’t many projects and products tackling cross-chain from a user perspective,” said Michael Arrington, founder of Arrington Capital, in the press release. “ZkLink’s innovative decentralized exchange is tackling this obstacle and making it easier than ever for anyone to take part in secure, safe cross-chain asset swaps.”
The ZkLink investment comes during a busy month for Republic, which consists of several arms, including a private capital division and the crypto consultancy business. Republic Capital launched a $60 million crypto seed fund. Republic Crypto teamed with the venture capital arm of crypto exchange Huobi to back crypto startup growth. Republic is also fresh off of its own $150 million fundraise.
Fireblocks is helping connect institutions to DeFi, giving its CEO unique insights into the regulatory path forward.
The new ETF follows the launch earlier this week of the ProShares Bitcoin Strategy Fund (BITO), giving stock investors a way to bet on bitcoin after years of waiting by the crypto industry.
