Cryptocurrency regulators are not going to win many popularity contests around here. Regulators of anything rarely do. But, crypto regulators are especially unpopular amongst crypto folks, and for fairly good reasons. The recent crackdowns (as with Coinbase) are making no friends and are having people throw their arms up in the air in frustration.
Mainly, crypto people simply don't know what the rules are. "We want clarity," is what you commonly hear from the crypto community toward governments.
In the U.S., it's not even clear who is to oversee cryptocurrencies. Front-runners are a covey of acronyms and abbreviations: the Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC), and maybe others (?).
Also, it's not even clear what a cryptocurrency actually is. Is it a security like a stock? Is it a commodity like gold? Like pork bellies? Is it money? Is it your own bank? The confusion over what it is leads to confusion as to who in the list above regulates it. Or is it someone else entirely?
A mile in their shoes
I doubt that crypto regulators will get much sympathy from the crypto community. But, as a thought exercise, let's try to put ourselves in their shoes for a moment.
The folks in these alphabet soup agencies are charged with protecting citizens from various financial harms. Now, we can absolutely debate whether it's necessary for the "nanny state" to be watching over us and protecting us. But, to be fair, there have been a slew of bad actors in crypto doing bad things. Any time something of value is involved, scammery follows. With the newness of crypto and an ever-fresh batch of crypto-noobs, the field of scammation is ripe to harvest.
The pump-and-dumps, the rug-pulls, the FOMO-and-FUD roller coaster rides, the hack-and-drains...they're all real and we've all seen them over and over and over. I know it cuts against the libertarian, decentralized and permissionless ethos of crypto, but some oversight wouldn't necessarily be a bad thing.
The trick, however, is clarity. Crypto-folk don't know what's okay and what's not.
Returning to my current "let's give them the benefit of the doubt" mindset, I'm getting the feeling that regulators really don't know what to do or how to do it either. They're learning too and they're in a tough spot as well.
For-instance
Let's take a for-instance, one which we've seen more than once...
Regulator Alice wakes up this morning. Over her coffee, she reads that the DAO which runs Coin ABCXYZ is being drained to certain address. That address is selling everything it's draining. The market is tanking. Come to find out, Darkuser999 found a breach in the code and instigated the drain. Lots of people lost lots of their money. The code had been purported as fail safe, until it wasn't. Now, everyone is trying to sell and recoup whatever they can. Coin ABCXYZ's trust is totally gone, the coin and project is done.
Real losses have been incurred and Regulator Alice feels somebody should be brought to account.
It gets messy, however. First, there is always risk. Those who bought and lost out would have been happy with any gains, unfortunately they are suffering the loss. That's how it goes sometimes...tough. Secondly, if Coin ABCXYZ is decentralized truly, there really is no one to hold to account. Further, if the DAO provided the governance, not only is there no person to go after, the golden rule of a DAO is that the code rules. A loophole in the code, still, is the code. Thus, it can be argued that someone exploiting that loophole is, still, in fact, adhering to the rules of the DAO.
Regulator Alice doesn't quite know what to do. Still, she feels something needs to be done...she can't just let millions get drained (stolen?) and just leave it at that.
She thinks for a minute. She has a family, and a career, and a reputation as a professional. She can't just let this one slide on the crypto mantra of "the code rules." As a bureaucrat, it would be better to come down to hard rather than to do nothing and let it slide. She's not going to let this bring down everything she's worked for all these years. So, she decides to come down hard.
Her plan of action is to then go after the initial devs who wrote the code in the first place. Being open source, the code has been altered by many, but the early devs and the "big names" will be the targets. And, she'll go after the exchanges. Any exchanges that listed the Coin ABCXYZ participated in the wrong-doing...they'll be targeted as well.
Lastly, Regulator Alice has been talking to Senator Smith about what can be done. The senator leans toward crypto as corrupt and exploitive and polluting and undermining to the monetary supply and U.S. dollar. The only solution is to ramp up regulations and prosecutions further, much further.
Frustrating
It's frustrating to crypto folks when we don't know the rules. It's frustrating to devs when they don't know what they can do or cannot do. It's frustrating to companies like Coinbase who seem by all accounts to have in good faith tried to follow the rules, as best they understood them, but are being penalized anyway.
Regulators seem to be taking a shoot first, figure it out later mentality. Or, they seem to be taking on a you're guilty first, prove that you're not, mindset.
And, they're running innovation away. Commissioner Hester Peirce pointed this out in her totally-on-point comments in the last few days. The words she chose were "Stagnation, centralization, expatriation, and extinction." Take a look at her comments, they're strong.
All summed, it's frustrating.
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