Balancing Innovation and Regulation: Striking the Right Balance for Crypto’s Future
MIM# 17: Miners move record $BTC to crypto exchanges, new firms added to U.K crypto register, Polygon 2.0 unveiled
Imagine a world where financial power is not confined to the hands of a few but instead, spread across the masses like Nutella on a pancake. A world where traditional banks are about as popular as a karaoke performance by a tone-deaf hyena. This is the world that countless innovators, entrepreneurs, and developers have made a reality since the emergence of the financial messiah Satoshi Nakamoto and his gift to the world, Bitcoin.
Cryptocurrency and its associated financial platforms grant people new liberty via blockchain technology. Users can lend, borrow, trade, and even earn interest on digital assets — all without dealing with traditional intermediaries. It’s like cutting out the overbearing middleman and giving him a one-way ticket to a remote island where he can ponder his existence, surrounded by coconuts and seagulls.
On the other hand, traditional finance is like that strict aunt who hoards all the family’s cash in a dusty old safe. She ultimately decides who gets to play with the money, leaving the rest of us feeling like poor, penniless peasants.
Now, an army of young relatives is threatening Aunt Betsie’s power, and she is attempting to put her boot down to stomp out any hint of an uprising. Aunt Betsie and her archaic ways strongly mirror the actions of the SEC in recent weeks.
The U.S. Securities and Exchange Commission’s (SEC) lawsuits against Binance and Coinbase regarding whether tokens are securities or commodities are at the core of an ongoing debate. According to research from Bernstein, the direct application of decades-old securities laws to cryptocurrency could classify many tokens as securities.
Using outdated securities laws without acknowledging the aim of blockchain networks may hinder the progress of decentralized finance, particularly in the U.S. Cryptocurrency and the blockchain does more than just take power from a single financial authority. It revolutionizes finance through increased transparency, faster settlement times, reduced costs, and flexibility for innovations in the future.
Bernstein also argues that the SEC fails to recognize the efforts of blockchain networks in transforming existing financial systems and achieving decentralization over time. Either that or the SEC simply does not want to give up any power.
However, all is not lost. Jurisdictions worldwide are approaching the classification issue differently, with some regions, like Hong Kong and El Salvador, positioning themselves as crypto hubs to attract talent and capital. Others, like the U.S., are actively attempting to crack down on the crypto market.
Don’t get me wrong, the classification of crypto tokens is a complex and evolving topic. Sure, it is crucial to protect investors, but this must be balanced with the capacity to foster innovation and enable the transformative potential of decentralized systems. Keeping on the topic of the SEC, here is all the news from the past seven days.
Last week’s crypto news
- A federal judge in the U.S. has declined to issue a temporary freeze of Binance US’s assets. The judge has urged the SEC and Binance lawyers to continue negotiating restrictions on the company. The SEC sought to freeze Binance US’s assets as part of its case against the industry’s leading exchange. Expect both parties to reach an agreement soon, allowing Binance US’s business to continue operating while addressing the SEC’s concerns.
- Bitcoin miners have moved 6671.99 $BTC ($174 million) to centralized exchanges since May 31. The largest single-day transfer of 2,606 BTC occurred on June 3. The 14-day average of miner transfers reached 489.26 BTC, the highest since March 2021. Increased miner transfers can be viewed as a sign of confidence, as miners sell more when they believe the market can handle extra supply.
3. Bitstamp and Interactive Brokers have become the first companies to join the UK crypto register in six months. The register is maintained by the Financial Conduct Authority (FCA). It includes crypto firms that have anti-money laundering and anti-terrorism financing regulations. With the additions, the total number of approved firms on the register now stands at 42. The move highlights both companies’ commitment to complying with new regulations and promoting mainstream adoption.
4. Polygon announces an upcoming blueprint for its 2.0 version. Polygon 2.0 aims to establish itself as the value layer of the internet by enabling decentralized finance, digital ownership, and new means of coordination. The new version will consist of a network of zero-knowledge (ZK) layer-2 chains that can communicate with each other, providing a seamless experience similar to a single blockchain. Polygon will reveal further details in the coming month, including announcements on the blockchain’s architecture, token, and governance.
5. The Shiba Inu blockchain testnet called Puppynet has surpassed 20 million transactions and has seen active participation from users with 16 million wallets. Puppynet serves as a testing ground for the upcoming mainnet release of the Shibarium network. High traffic on Puppynet indicates demand for the network, which may positively impact the value of SHIB and BONE, the tokens in the Shibarium ecosystem. Shibarium is an important development for the Shiba Inu ecosystem, transitioning from a meme coin to a serious blockchain project.
Magic’s parting thoughts
Most of the time, the MIM newsletter wraps up in a light-hearted tone. A joke here, a pun there, and a hyperbolic analogy to cap it off. Yet this week, I feel too strongly about the situation developing in the U.S., so I have to continue the rant from the opening section.
Securities laws were designed to regulate centralized entities. However, the SEC’s proposal categorizes any system that facilitates potential buyers and sellers as exchanges — without considering the actual functions performed by a blockchain protocol.
SEC chair Gary Gensler has constantly changed his tune on cryptocurrencies over the past year, flip-flopping between different stances and definitions without solid regulation. To add to the confusion, the SEC and the Commodity Futures Trading Commission (CFTC) have contradicted each other.
The CFTC has claimed certain assets like Ethereum as commodities, while the SEC chair refused to answer the question in a recent hearing. There is a 2018 video of Gensler where he claims ETH is not a security. He seems to have changed his mind in 2022 when he claimed proof-of-stake cryptos are securities. One wonders what he thinks now.
The uncertainty led to a petition filed by Coinbase urging the SEC to provide regulatory clarity for important legal issues concerning cryptocurrencies. The American crypto exchange has been waiting over a year for a response and it could take another four months before the SEC addresses important issues.
Furthermore, the SEC’s new proposal again lacks clarity on two fronts. Firstly, there is no threshold of token ownership defined that would subject blockchain users to regulatory responsibilities.
Secondly, in what circumstances do service providers become responsible for a protocol or application? These new grey areas add to the confusion surrounding whether or not cryptocurrencies are considered securities under the almost century-old definitions provided by the Howey Test.
The SEC’s failure to address these issues creates uncertainty and hinders blockchain participation. This uncertainty is particularly true for groups that involve overseas actors, as U.S. securities laws generally do not apply extraterritorially.
Once again, the vagueness of the SEC has left the burden on the blockchain community to interpret the rules correctly. This ambiguity increases the risk of potential penalties for developers and companies involved in the blockchain space, discouraging the development of free, open-source software.
The proposal lacks a thorough analysis of the benefits of both cryptocurrency and blockchain technology while disregarding the detrimental effects on blockchain innovation in the U.S. However, I believe crypto is far from dead in the U.S.
Based on how the SEC has handled regulation, there will undoubtedly be more twists in the tale as time passes. It will be captivating to see how this one plays out in court. That’s it for this week, Speedsters. See you next week.
