Want to See More Value From Crypto? Let Us Try!
By Blake West, Warbler Labs CTO and Goldfinch Co-Founder
“When is crypto gonna do something useful?” I’ve heard this a lot. It’s frustrating for two reasons. First, crypto is already useful (e.g., helping refugees, providing alternatives to failed currencies, improving remittances, and more). Second, much of crypto’s promise — especially in the U.S — is effectively illegal due to current regulation. I want to tell regulators, “let us try!”
Crypto is painted as the Wild West in need of a sheriff, when a better analogy is E.T. getting held up by T.S.A. Government gatekeepers who haven’t seen anything like it so they’re refusing to let it fly.
My company Goldfinch, and many others are good faith actors who prioritize compliance. We know the only path to mainstream adoption is through sensible regulation that recognizes innovation. As an example, we created the world’s first NFT for identity, and use it to enforce KYC and AML on all participants in the protocol. Regulators should love onchain KYC. VPN’s can’t get around it, and it can monitored it in real time. Instead, regulators have become hostile to innovation and Americans are paying a literal price every day. Let’s discuss some examples.
Instant Payments, and Credit Card Fees
It takes 2–5 days for bank transactions to settle and you pay ~2% of every credit card purchase bank fees. Blockchains enable instant, nearly free transactions that are as cheap as cash, and convenient as cards. For a long time, blockchains had legitimate technical limitations of speed and cost that prevented widespread use. But that has changed. The latest “Layer 2” batching technology has decreased costs 100–1000x from a few years ago, and transaction speeds are down to 2 seconds. Now it’s the legal issues blocking this daily life improvement.
When Diem tried to launch its payment stablecoin for the world, it was promptly shut down by congress. Banks — who would have to custody stablecoins to make this work — have been told by the OCC to be extremely careful about any crypto activities (read: “don’t try”). More recently, there was Operation Chokepoint 2.0, trying to prevent banks from even serving crypto companies, much less actually use the technology themselves. Beyond banking, the IRS says any crypto transaction, even in stablecoins, is a taxable event. This creates prohibitive operational burdens for both users and merchants to transact in crypto.
The message is clear: the government does not want crypto to be used in any meaningful capacity.
Instant Stock Settlement, Lower Trading Fees
Robinhood’s infamous “trade freeze” during meme stock mania is another example where blockchain could have been useful, if legal issues didn’t prevent it.
The root cause of the Robinhood issue is that U.S. stock trades take two days to settle (”T+2”). Robinhood’s “instant” trades are an illusion. In reality they take on price risk during those two days. Usually this is fine, but when there’s high volatility, you can get a disaster like what happened.
The way to fix this is instant settlement. What you need for instant settlement is a single source of truth that everyone — even counter parties — can agree on. Conveniently that’s exactly what blockchains were designed to do. In fact, if an exchange used a blockchain, there could be instant settlement and we’d make clearinghouses — plus their fees — obsolete. The reason is simple. The trade and the settlement would be happening in the the “same place”.
However our actively hostile regulatory regime is preventing the experiments we need. First, stocks and bonds cannot be issued natively on-chain. In fact, despite years of Coinbase asking for rules, the SEC has simply refused to provide guidance on how a digital securities exchange can register. In addition, broker dealers are not allowed to custody digital assets. There was a call for a “special” broker dealer in 2020 who would be able to custody digital assets, but the SEC rules made little sense for digital securities, and were impossible to comply with. So it’s 2023, and still none have been approved by FINRA or the SEC.
What’s ironic here is that onchain exchanges actually align with regulator interests. Want to enforce any set of arbitrary rules like transfer restrictions? Great, encode it into the smart contracts. Want to have real-time reporting on all exchanges that you don’t have to subpoena? Easy, blockchains are publicly auditable and available 24/7.
The Path Forward
I am not suggesting banks switch to crypto-only, or the NYSE move all trading to Ethereum tomorrow. But I am suggesting regulators allow experiments to happen. If regulators remember the true spirit of their mandates, they would see that blockchains are a powerful ally. Blockchains are safer, cheaper, and easier to enforce rules on. Planes also seemed less safe than cars when they were first introduced, but have become objectively safer while enabling things we only dreamed of before. Blockchains are in a similar place. They are new technology that must be given room to mature.
One idea is to create a “sandbox” environment, where companies fill out only lightweight registration forms with the SEC, but they can do fully blockchain based trades. The exchange would be capped to a small number of users and volume. Users could even sign waivers to ensure it’s controlled. We’d get to see how these systems really work. We’d get to empower the market to try new approaches to age old problems. Then we’d see what benefits and risks are real, and write regulations based on experience rather than fear.
While the zealots of crypto talk about “exiting” the financial system, many of us are far more interested in improving the current system with blockchain. There’s so much value waiting to be unleashed, if only we let it.
