Entropy is a crypto hedge fund investing in digital assets based on fundamental analysis
Outlook on Regulatory Bias
Plodding Mediocrity of Crypto Regulations
I am a curious man and I feel strong about crypto community coming short to fully and rationally debate regulatory issues. It pains me to see how opinionated and condescending some people are on any given day, how rationality develops into twitter feud over the time between some bright people. When I first started my quest to understand all things crypto I could not see myself as reading into regulations and deeply contemplating about them and their role, neither could I see that the result of this particular contemplation could be useful for an investment thesis.
I’m coming from pure curiosity and commitment towards investors to understand the regulatory risks. If you don’t go deep enough into the broad picture you risk to limit yourself with a generic banter. This curiosity and commitment led me to see the picture at first and then to dig deep into its peripheries, ever expanding it. As a result it shaped into “Plodding Mediocrity of Crypto Regulations”. I invite anyone to read it and I commit to periodically keep expanding my views as the industry and my curiosity develops further.
My point was to bring a lot of ambiguous regulatory issues and to filter them through a fundamental perspective and current regulatory landscape. I did not intend to be brief at any point, being brief is for pitches and white papers. Neither I tried to bring solutions. I needed to avoid brevity in pursuit of illustration of how big the issue is, how tied it is to the current laws that govern transactions, market infrastructures and even human behavior, this isn’t easy to see and adapt to the promises this community gives us. Tweets tackling these issues are bad but because we’ve taken it as a main communication channel we confined ourselves to its unfit forms to convey regulatory opinions.
If by the long form my major goal was to show the complexity and the amount of existing legal constructs we want to challenge, the issues that I included are of illustrative nature. My major point was to bring a question of classification, to get to its core, bringing up the difference between commodity and currency. This legal thread led me to see how the Forex market infrastructure (first decentralized one) plays a definitive role in shaping the nature of transaction. Another important finding was the acknowledgement of the role of disclosure and issuance mechanism of an asset. Questioning these issues on a fundamental level in order to gain insight into crypto regulations is not something that I’ve read a lot about.
I aborded these topics because of the status quo in bitcoin’s commodity classification, which risks to raise long-term stability issues and current taxation approach contributes to it as well. In my understanding once we’re clear on the classification of the major cryptocurrency we can proceed to review the nature of financial instruments in other token products. Clear classification will result in much clearer jurisdictional borders of respective agencies. The last but not least is the legal approach towards exchange infrastructure. Seen that unclear classification takes its toll on who must oversee what exchange depends on asset classes traded, I’d go further and say that seen how Forex — a decentralized market, treats its participants, requires furthermore thought about how we are going to look at decentralized exchanges from regulatory perspective, because disclosure mechanism are not developed, we might at some point go back to the debate of privacy/security again. These are tough questions, not that technology is new, but this technology challenges some of the very important and current constructs that make financial markets work.
Why did I bring this up? I want to point to two tendencies that I see running in crypto. First is where the wider community subdued to the the regulatory views and the second is where crypto lawyers seem to act like litigation attorneys. Both of these tendencies are based on a regulatory bias. This bias didn’t come to existence out of the blue, it had its progression. A brief chronology of attitude towards regulations looks something like this to me:
First: We didn’t like regulators — “Oh look they are be bitter because they missed the opportunity”. Second: Regulators were right — “Oh look at all these scams out here, they are ruining this space”. Third: Let them do their thing — “Oh look, prices went down too, they know something legit I guess, let them deal with it, let them regulate”.
Right there we got tricked by a) conformity bias, where we took a position of laisser-faire to the ones who displayed knowledge on the issue and had their concerns reflected in the market prices (not that they saw it coming though) and b) by doubt-avoidance tendency, where we ceded to question the fundamentals, because we passed flambeau to people with regulatory knowledge.
This is where the wider audience subdued to the regulators and crypto lawyers to do their job, this is where status quo came into existence. Not all regulations are created equal and wrong regulations that do not align to fundamentals are foreword for the future goat rodeo.
Instead, community must keep regulators on their toes, it must keep questioning the fundamentals and must be going beyond generic banter. Given the current state of matters we do not need opinionated litigation lawyers lecturing us. Regulatory issues in this industry require policymakers’ outlook rather than litigation lawyers’. We’re not in litigation times, we’re in the policy making times. And while these two are at some point intertwined in common law systems (e.g. Sherwood v. Walker for contract laws), the agencies and participating community can remove both unhopeful and hyped narratives by providing detailed explanation of how current things work and how they might accommodate decentralization. Otherwise we risk building something that at some point will not work. Discussion here is bigger than sum of its parts, what we will challenge on the road to decentralization and to what extent is the question to which we are seeking the answer.
The most reasonable approach to move ahead is the formation of Self-Regulatory Organization (SRO). There are currently few initiatives towards this and if their intent is to harmonize crypto with the real world regulations it should bring more transparency of intentions, it will (by its essence) reward the honest participants and will mirror more committed community’s outlook, we need this now to make the future regulatory framekwork sustainable. But prior to move towards SRO, first community needs to self-organize and because community seems divided on regulatory issues I’m not thinking that an efficient SRO can be achieved right now at this moment. We’ll start to self-organize in order to self-regulate only when we will need to survive.