On October 31, 2008 Satoshi Nakamoto changed the world. Someone, or several people, writing under the pseudonym of Satoshi published the Bitcoin Whitepaper. The cryptography was brilliant. It used Markov chains and a distributed ledger to provide what has become the world’s most secure, internet-connected, computing network. But that wasn’t the goal. Bitcoin launched a true rival to gold as a store of value. And Bitcoin launched a true rival to fiat currency whose primary utility has devolved to a means of exchange and unit of account. Finally, Bitcoin did this in a way that was secure, private, and unstoppable.
At this point, many people have heard of both Bitcoin and blockchain. But most of the world doesn’t understand. This reminds me of a quote often misattributed to Ghandi: “First they ignore you, then they laugh at you, then they fight you, then you win.” On this 12th anniversary of Bitcoin, we’re somewhere in the “fight you” phase, but perhaps on the cusp of, “then you win”. Legendary financiers like Jamie Dimon and Warren Buffett no longer mock Bitcoin. Governments, however, are reluctant to allow a truly rival architecture to develop alongside their current compliance regimes. Instead, they are trying to cram the revolution inside their antiquated regulatory frameworks. For some, this is actually a way to fight Bitcoin (and similar ideas), but for most, it simply reflects how little they understand or trust the new architecture.
The architecture of Bitcoin—blockchain—has inspired an emerging blockchain revolution. First, blockchain is not Bitcoin. It is a distributed ledger. Bitcoin uses blockchain as an architecture to provide security, privacy, scalability, and ubiquity (making it a nearly unstoppable force in the market). Bitcoin imitators have often attracted more skepticism, because the tokens used to imitate Bitcoin are either willfully or structurally fraudulent. Often, the problem is inherent in their architecture—just a centralized database, controlled by a central authority, rather than true distributed ledger blockchain.
The success of Bitcoin also inspired some to replicate the Whitepaper to attract capital investment. When this is done simply to raise capital, it has been termed an Initial Coin Offering (ICO) – akin to an Initial Public Offering (IPO). Many ICOs turned out to be scams and have tarnished the industry. The Securities and Exchange Commission (SEC) rightly determined these ventures to violate securities laws and rightly prosecuted their front men. In spite of heroic efforts by Hester Pierce and others in the agency, the SEC has apparently decided that while it may not be able to fight Bitcoin, it will use all of its bureaucratic charm and inefficiency to fight anything that could disrupt the status quo for the largest incumbents in the financial sector.
In America, this is causing capital (and talent) to flee to more friendly jurisdictions. For businesses, these actions are normally associated with people who are fleeing regulation, but for the emerging blockchain economy this flight isn’t to avoid American regulation, it is to find regulatory clarity.
One solution is my bipartisan Token Taxonomy Act, which creates a clear test to determine whether a token should be governed by securities law, leaving the SEC to protect consumers and investors from fraud, while enabling innovators to move forward with confidence. The Token Taxonomy Act replicates principles Satoshi incorporated into Bitcoin, it is: 1) created, not promised, 2) decentralized, distributed ledger technology establishing custody that cannot be altered by a central authority, 3) not reliant on a third party or intermediary, 4) does not represent equity in a company or entity.
While rightly instructing the SEC is most urgent (and could be accelerated by elevating Hester Pierce), other regulatory frameworks need revision. American companies must be able to achieve regulatory compliance using the secure architecture of blockchain alongside existing reporting and disclosure protocols that depend on central control to comply with Bank Secrecy Act and other reporting requirements that are sorely outdated, grossly ineffective, and structurally flawed.
Brian Brooks at the Office of the Comptroller of the Currency is leading. The OCC’s most recent guidance enabling banks to provide custodial services for crypto assets is a perfect example. And at the state level, Wyoming has led the way with a comprehensive legal structure that recently approved of a compliant bank charter for crypto firm, Kraken Financial.
Bitcoin changed the world; we need to adapt our regulatory frameworks to embrace the opportunity, educate the public, prevent fraud, and empower dynamic innovation. Whether governments adapt or not, markets are onto the reality. Bitcoin “hodlers” have been wining since its launch. The original cryptocurrency has outperformed every other financial asset. As central bankers around the world undermine their currencies as store of value, savvy corporate treasurers are starting to load up on Bitcoin. Who knows how Bitcoin, and the separate blockchain revolution, will have changed the world in twelve more years?