The EU moves to outlaw brains
The EU moves to outlaw brains
Plus mimicry is the most sincere form of flattery and Jack trolls the #ETH crowd
In this issue:1
The European Union moves to outlaw brains
Mimicry is the most sincere form of flattery
Cash me on Forbes, how bow dah?
The European Union moves to outlaw brains
We’ve talked a few times recently about how governments are increasingly letting go of the idea that they can safely ignore Bitcoin and deciding what they need to do about the possibility that it is real. Some countries have embraced Bitcoin while others are attempting to reshape it with regulation or even legislate it away entirely. (Best of luck)
As this realization percolates through the various government structures we are seeing increasingly strong omens of governments taking concrete action to finally bring the power of the law to bear in crypto. The first and probably most prominently talked about was a statement from Mairead McGuinness, Commissioner of Finance for the European Union:
What McGuinness is referring to is a set of proposed crypto regulations set out by the European Commission (the executive branch of the EU) as part of a broader set of rules aimed at reducing money laundering. Most notably they include the provision that the "travel rule" of the Financial Action Task Force. "Banning anonymous crypto wallets" would be an incredibly aggressive posture (brains are anonymous crypto wallets!) but the actual text of the legislation here is a lot less dramatic.
The travel rule says that any business regulated as a "money service provider" is required to perform KYC/AML checks on any large payments they send or receive. If the proposal to apply the travel rule to crypto goes through it will mean that exchanges and banks will be held to the same standard for crypto payments as they already are for fiat wire transfers. The rules as written only apply to banks and bank-like companies - they don’t actually affect ordinary citizens using cryptocurrency at all.2
I suspect we will see a lot of posturing like this from government officials in the coming years - moderate adjustment of existing regulation to accommodate cryptocurrency being presented as radical action. Tightening regulations on banks and presenting it as action against cryptocurrency as a whole is one way to satisfy the call for something to be done about cryptocurrency without having to admit that it is mostly beyond government control.
Another place you can see that same pattern forming is in the growing pressure on stablecoin companies. On Monday Treasury Secretary Janet Yellen urged regulators to move quickly to adopt regulation for stablecoins, echoing the sentiment of Fed Chairman Jerome Powell’s comments to the Senate Banking Committee the previous Thursday where he warned senators that stablecoins were "growing incredibly fast but without appropriate regulation."
Stablecoins represent a great lightning rod to channel public concern about cryptocurrency into a more productive direction. They fit neatly into existing laws around money-market funds and bank deposits, the threat they pose is relatively clear and well understood and their centralized nature makes them easy to regulate in a way that true cryptocurrencies are not. Lots of action can (and probably should) be taken without needing to confront any existential questions about the role of government or the nature of money.
Governments are caught between a rock and a hard place: relentless pressure to do something about the rise of cryptocurrency but very little they can actually do. My sense is they will reconcile the difference by making lots of noise about the limited range of actions they can actually take. The fact that so few people understand cryptocurrency allows governments to dual track their messaging by saying fiery things to the crowds who are frustrated but don’t completely understand and another thing to the people who are plugged in and paying attention.
Don’t listen to what they say. Watch what they do.
Mimicry is the most sincere form of flattery
We talk a lot about how decentralization is difficult and expensive and causes all kinds of user and developer challenges. It is generally pretty useful to be beyond the reach of government, but it is also kind of a bother. It would be nice if there was some way of capturing the upside of being decentralized without the hassle of actually doing it. One way to do this is to focus your energy on looking decentralized, which is cheaper and easier than actually being decentralized.
In the animal kingdom that’s called batesian mimicry. One frog will go to the trouble of becoming brightly colored and poisonous to ward off predators and then another frog will realize that as long as you are brightly colored predators don’t usually check to make sure you’re poisonous. There are a lot of crypto projects that operate like this - loudly announcing how decentralized they are from a press release that includes their company’s physical address.
Up to this point the word decentralized has had a weirdly mesmerizing effect on government action, perhaps because the whole concept is confusing and foreign. Crypto startups took advantage of that regulatory hesitation to spring forward under the assumption they were in the international waters of smart contracts now and could forge their own rules. But as governments are coming to terms with the power of decentralized cryptocurrency they are simultaneously learning to scrutinize the claims of decentralization with more care.
For example, a protocol like decentralized exchange protocol Uniswap may (or may not) be decentralized, but Uniswap Labs (the company that built the Uniswap protocol) is not. Neither is the website uniswap.org or their twitter account:
Uniswap the protocol remains wild, untamed and free (for now) but uniswap.org has been corralled by government forces and has delisted a suite of tokens many of which were synthetic securities. Uniswap did not give a reason for the decision in their statement but one can reasonably infer it has some connection to this recent speech by SEC chairman Gary Gensler:
Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.
Other projects are responding to the increased pressure by evolving to become more decentralized. Maker Foundation and Shapeshift have announced plans to dissolve their foundation / corporate structures respectively. It remains to be seen if transmuting into a DAO is sufficiently decentralized to deter regulators or not. But it is both interesting and welcome to see that just putting the words "fully decentralized" on your website may no longer be enough.
Cash me on Forbes, how bow dah?
I was quoted recently in a pair of articles on Forbes by personal finance columnist William Baldwin, talking about GBTC and its competitors from the perspective of individuals considering where to invest their money. He goes into detail about some of the trades and positions available to anyone looking to get controlled exposure to Bitcoin without leaving the world of traditional finance.
Other things happening right now:
On Twitter certain hashtags automatically trigger an associated emoji (including notably #btc and #bitcoin). On Thursday Twitter moved to break the hearts of Ethereum fans when they finally introduced an emoji for #ETH … the Ethiopian flag. Here is the Olympics social media team either elegantly subtweeting Ethereum or completely misreading the room. I’m honestly not sure which.
We talked a little bit last week about Miner Extractable Value - here is an excellent (and exhaustive) list of resources for anyone who wanted to learn more about the current academic and practical understanding we have of MEV.
By popular demand, returning to our old format. Ever have thoughts about the newsletter, or questions you’d like us to cover? I read every reply!
That said I don’t want to leave the impression this is totally benign. Here is a detailed thread arguing that there is actually cause for alarm from private citizens that rely on cryptocurrency. There was also a recent failed proposal on the developer mailing list to add the travel rule into the Bitcoin protocol directly. The desire to tame cryptocurrencies and make them traceable is growing.