Crypto Endangered: Confronting An Existential Threat
In Part 1 of this Defiant Essay, Connor Spelliscy and Holmes Wilson argue that the cryptocurrency industry is confronting an existential crisis. The cause: unwise and unjustified regulation that could thwart the promise of the crypto movement. Smart contracts may be unstoppable, but the crypto industry is not. The U.S. government’s blessing has been crucial […]
In Part 1 of this Defiant Essay, Connor Spelliscy and Holmes Wilson argue that the cryptocurrency industry is confronting an existential crisis. The cause: unwise and unjustified regulation that could thwart the promise of the crypto movement.
Smart contracts may be unstoppable, but the crypto industry is not.
The U.S. government’s blessing has been crucial to every modern information empire.1 While states have no master key that can shut down crypto, they can make it so expensive and high-risk for users to interact with crypto that the vast majority of their populations, and all of their institutions, will abandon it. This is particularly true in countries like the U.S., where the government has robust enforcement arms. The implications of an anti-crypto regulatory consensus would be far worse than the value of your entire crypto portfolio dropping through the floor.
Don’t let the limited government intervention so far lull you into a false sense of security. While good actors in the crypto industry have had a great run with negligible antagonism from Western governments, that appears to be changing quickly under the new U.S. administration.2
There is hope for the industry but only if we all take action.
Where we are now: the crypto industry as we know it is on course for destruction
The crypto industry is facing an existential threat, one that can only be neutralized by collective community action.
Western governments are accelerating their regulation of crypto. Recent examples include the expansion of the definition of broker in the U.S. to potentially include many stakeholders in crypto; the ratcheting up of enforcement efforts by US regulatory agencies targeting the crypto industry; and the European Union’s development of the Markets in Crypto-assets (MiCA) proposal. Regulation is not necessarily problematic — governments play an important role in supporting and overseeing most industries. But antagonistic and draconian regulations will slow the development of the industry or much worse, cripple it, while clear and reasonable regulations would reduce FUD and stimulate further innovation. The crypto industry is at an inflection point.
These developments are particularly important because new regulation in influential jurisdictions, like the U.S. or E.U., will likely drive the adoption of similar restrictions in countries across the globe. So if you think you’re safe because you’re in a jurisdiction that isn’t actively pursuing crypto companies, or you believe you can simply move to the Cayman Islands or the Bahamas or another lax offshore haven, well, think again. Substantial regulation and enforcement in the West will certainly impact your business and legal expenses, as well as the size and trajectory of the entire crypto industry. New rules may also prevent you from taking advantage of the business opportunities you were counting on when you started your venture.
This dance between government and burgeoning industry has happened many times before: over the last 100+ years, government (via regulation) has always been a key player in shaping the development of information technology industries; typically in circumstances where a budding industry energized by openness and idealism is pushed to limit or centralize its offerings to “protect” consumers or national security.3
The state frequently partners with incumbents to shut down or limit promising new technologies…
U.S. policymakers and regulators have frequently partnered with incumbents to shut down or limit promising new technologies that pose a threat to the control of either group. The list is long: AM radio, FM radio, film, television, and the internet… Incumbents learned to work with government to “secure the enactment of seemingly innocuous and sensible regulations that nonetheless spelled doom for any rival.”4The most poignant example of this relationship exists between government and AT&T (in its various incarnations), whose collective actions led to the centralization of radio broadcasting in the 1920s and television in the 1940s through 1960s, and continue to this day in supporting AT&T’s aggressive lobbying efforts to shut down broadband internet competitors.5
Incumbents typically lobby policymakers and regulators to advance these “seemingly innocuous and sensible regulations” to stop new entrants offering competing technologies. Even without incumbent pressure, regulators have a strong bias towards complex legal structures that incumbents can navigate easily and new entrants cannot. Between incumbent lobbying efforts and well-intentioned but misguided proposals, history indicates that crypto should expect destructive regulation.
Where we want to be: a position of safety where destructive regulations lie outside the bounds of serious political debate
To avoid destructive regulations, the crypto community must build a sufficiently broad consensus among political elites and the general public that crypto is a net-positive technology for society, that regulations impacting crypto must support continued innovation in the industry, and that any proposal that damages crypto’s unique value is a political non-starter. Until that consensus exists, crypto is vulnerable to political attack.
To achieve this position of political safety, we first have to understand what victory looks like. A very basic example of political safety is when companies have no fear of nationalization. In the U.S. and Europe, there is broad consensus that the nationalization of industries is illegitimate, capital destructive, and terrible for employment and wealth creation. Whether you agree or not, you can see how someone calling for the nationalization of, say, Google or the telecom industry would be seen as a lonely voice facing scant chance of approval.
Advocates for the VCR were barely able to win the legal and political argument that the machines were useful things and should not be banned…
Closer to the realm of information technology, we have the example of the video cassette recorder (VCR). When the first VCRs appeared on the market, a powerful incumbent (the US film industry) saw the ability to record broadcast video as a threat to its dominance and attempted to ban or cripple VCRs through lawsuits6 and legislation.7 At first, advocates for the VCR were barely able to win the legal and political argument that the machines were useful things and should not be banned. They won by a single vote in a 5-4 Supreme Court decision and then managed to ward off action by Congress. Within a few years, VCRs became ubiquitous in American households and politicians who proposed banning them looked hopelessly out of touch.8 That victory gave the burgeoning VCR industry a period of sustained safety during which it could innovate freely, without having to waste resources adjusting its strategy to the current whims or challenges of government.9
That’s the kind of victory cryptocurrency needs to achieve.
The good news? Achieving it in the current political era is more straightforward than most people think.
The bad news is that it is a lot of work and requires significant resources, time, talent, and passion. But these are all things the crypto industry is well-positioned to mobilize.
How to get there: know the components of victory and allocate sufficient resources to all of them
First, we must get over a misunderstanding in the crypto community: that lobbyists win by simply bribing politicians. While true as a statement of a problem—lobbyists do indeed use money to exert undue influence—it is worse than useless as a roadmap, because in reality lobbyists use their money in much more complex and effective ways than bribery. Dumb money is not enough. Even a populist uprising of voters is not always enough. You also have to win the battle of ideas.
More than anything, successful industry lobbyists and social movements win by enveloping policymakers in an overwhelming sense that their position is the sensible answer. The cause must feel politically inevitable, and present lawmakers with a clear path of least resistance. The less established you are, the more essential this strategy becomes. The more public support and natural alignment with the public interest your industry has, the more effective this strategy becomes. After all, it’s a lot easier to win this battle of ideas when you believe in the fundamental goodness of your work, and when the public believes in you!
That said, even the most righteous of causes involves a lot of people and resourcesspent on the following:
Strong basic arguments for varying audiences and levels of depth.
Strong public support, aligned with these arguments, demonstrated to policymakers through grassroots action, such as calls to Congress or comments in a regulatory process.
Weak, unfounded, scattered public opposition.
Strong intellectual support from academics and experts whether in academic publications, op-eds in major newspapers, appearances on political television, or discussions at policymaker-oriented events.
Broad support from relevant organizations or political coalitions.
Credible narratives about harms from the alternative: jobs lost, customer relationships destroyed, collateral social or political damage, things everyone loves that would go away, etc. These narratives of harm must then be repeated by credible voices, i.e. people who are clearly stakeholders.
High-touch conversations and constant presence making sincere (or seemingly-sincere) attempts to convince, based on strong, in-depth arguments, ideally by brilliant people who are smart, fun to talk to, and who understand the substantive contours of the subject so well that it’s easy for them to pass their understanding on to regulators and their staff members.
Supporting press narratives, e.g. “something must be done!” or “courageous group of activists fights misguided legislation!” advanced through the strategic creation of events and moments. After all, journalists write about things when news happens, so the best way to get the press to tell a story is to make something happen. (Lobbyists are fairly bad at this, but activists must excel at it.)
Demonstration of “political cover” for policymakers, i.e. that all of the above items add up to a reality where policymakers know they do not face significant risk by taking your position. (Just as you are looking for political safety, remember that policymakers are too! If you are speaking with a Congressional staffer for instance, a core part of their job is maintaining political safety for their boss in an unpredictable environment of complex issues; you must demonstrate that, if their boss sides with you, they will be safe.)
If you have ever followed the progress of a political initiative you oppose, much of this will be familiar. You’ve seen strategically-placed op-eds written by prominent voices, aimed at regulators and public opinion. You’ve seen petitions go up, or protests planned. You’ve seen arguments that are frustratingly hard to refute. This is the work of lobbying and activism.
Cryptocurrency’s current position is vulnerable but not hopeless. There are bright spots.
Tomorrow: A Call to Action: Mobilizing to Save the Crypto Movement
Connor Spelliscy is the founder of the DAO Research Collective and the co-founder of the Blockchain Association, the leading industry trade association in crypto.
Holmes Wilson is the co-founder of Fight for the Future, an organization of artists, activists and technologists that advocates for technological freedom.
Authors’ note: This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services.
2. 2 See, for example, SEC Commission Chair Gary Gensler’s recent comments suggesting that he doesn’t see cryptocurrencies lasting long or the OCC Chief’s recent speech equating crypto to toxic pre-crisis swaps.
3. 3 For more information on this cycle, see The Master Switch by Tim Wu.
8. 8 This relates to a concept called the Overton window, a term coined by American policy analyst Joseph P. Overton for the boundaries of acceptable policy proposals. Achieving political safety means pushing the most dangerous policy interventions outside of the Overton window, i.e. the set of things that it is acceptable to discuss. Just as the Overton window can shift or be shifted, safety is never permanent. But it is the best kind of victory you can hope for, and it can provide an industry with a sustained period in which to flourish without fear of regulatory intervention. They sound wacky, for starters. See: https://en.wikipedia.org/wiki/Overton_window
9. 9 A more recent victory that mirrors the victory of the VCR was the 2012 victory in the US against proposed website blacklisting legislation SOPA/PIPA. SOPA’s opponents (including one co-author of this piece) successfully cast it as a dangerous form of censorship, and that consensus remains in place a decade later. This paper provides a data-driven analysis of how that victory was won: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2295953