The last few weeks have demonstrated government willingness to begin engaging in regulation of decentralized finance platforms. These recent maneuvers provide a view on what angle the regulators will take in approaching various segments of the crypto industry.
The most newsworthy event was the US Treasury sanctioning Tornado Cash users. This act set a departure from prior moves where the US gov’t decided to go after securities violations rather than an outright sanction of a platform. As a result, various blockchain and crypto projects started to follow through (e.g., Circle froze $75k of USDC belonging to a user and Oasis banned sanctioned addresses). Freedom of speech and privacy advocates immediately condemned the act, one user even sent “tainted” ETH to a variety of high profile addresses to demonstrate the absurdity of a blanket ban. While Tornado Cash has been useful with many legal use cases, such as Vitalik’s use of the protocol to send money to Ukraine, the future of decentralized privacy-focused digital asset protocols will likely be challenged by governments around the world.
Another high profile announcement was the Australian government’s “token mapping” project. As the Australian Treasurer indicated, this project’s intent is to “identify notable gaps in the regulatory framework, progress work on a licensing framework, review innovative organizational structures, look at custody obligations for third-party custodians of crypto assets and provide additional consumer safeguards.” This daunting task may provide a clear framework that will enable projects to innovate without fear of overburdensome regulation.
Finally, the Bank for International Settlements published a report calling for a built-in regulator for DeFi transactions. This embedded monitoring approach has been at the heart of CBDC development, an approach that is in direct odds with the ethos of decentralized finance. The BIS noted the importance of a centralized entity to ease integration with legal systems for industries such as real estate and finance. Even renown crypto critic Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, called out this approach as a threat to privacy and unlikely to gain steam in the US.
Smarter regulation will require significant time and effort to get right, the likelihood of creating a robust, global regulatory framework that facilitates innovation seems likes a daunting task today.
What we can decipher from these current events is:
Privacy projects will have a high bar to pass and will need to sacrifice some element of pure decentralization to avoid regulatory conflict;
CBDCs are a growing focus for government’s looking to exert more control as they are likely to include embedded surveillance technology; and
Regulators still need to learn a lot more to even begin to think about “smarter” regulation.
Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.