There are two main trends that, in my opinion, will impact regulations around cryptocurrencies, blockchains, and DeFi.

1). There is a very predictable cycle of how regulators approach most innovative technologies. We have seen it happening with cryptocurrencies over the last few years, and now we can see it again with ChatGPT. Here are the main phases of the cycle:

Ignore, because it is too new and it does not impact a lot of people, since the new technology is distributed among a very narrow and usually sophisticated group of users. Regulations either don’t happen at all or happen “by exceptions” or using some form of “letters of no objection”.

Blanket sweeping ban. Technology adoption grows. Either many people get hurt (lose money in ICOs or become victims of scammers and hackers), or there is an existing industry/ incumbent players who get disrupted or otherwise see this new technology as a threat to how they do business, and then incumbents take legal action (Uber vs taxies, Netflix vs Hollywood, crypto bans of various severity in India, Pakistan, China, Nigeria, US (to be continued…).

Calibration and selectively targeted regulations. The technology becomes more sophisticated, develops its own quality standards, products within the industry become more specialized (e.g. institutional vs retail, centralized vs decentralized), and track records of good behaviour become available. At this point, regulators typically develop more targeted, specific instructions and requirements, and define service categories, license types, and eligibility criteria.

My opinion is that with respect to cryptocurrencies, we have reached phase 3 of the cycle, and it would have been brilliant news unless there was another factor.

2). Extremely high and ever-increasing levels of ideological bias, ideological oppression, and politicization of financial regulations.

It is a theory expressed by Peter Thiel (and many others) that most of the great scientific and technological discoveries of recent history have been stopped or curtailed for political and ideological reasons: for example, nuclear power, genetic engineering, stem cell research, climate science, artificial intelligence have been hindered and converted from being just a science problem into “social problems”. I am seriously suspecting that cryptocurrencies will take the same hit. The question of how to regulate cryptocurrencies is no longer a question about what is good or safe for the consumers of the economy in general.

The future of cryptocurrencies is largely dependent on and defined by other political priorities in a country. For example, the U.S. has a history of enforcing its financial regulations outside of the domestic market through SOX, FATCA, Dodd-Frank, and sanctions. SEC went after many major US and non-US crypto projects with various warnings, litigations, and enforcement. I would not be surprised at all if they try to enforce their views that most crypto tokens are securities and that most crypto exchanges and staking activities are illegal unregulated investment services throughout the Western world and would sanction crypto exchanges that don’t have the securities exchange license at this point. They did it to the Tornado Cash project, and there is nothing here to stop them. The sad part of it is that 2-3 years ago you could just argue that the technology is too new and the regulators just don’t understand it, they just have not caught up with it. It is no longer the case. Gary Gensler, the SEC chair, taught a blockchain course at MIT (not kidding). He understands the technology, he just has a view that it’s a bad influence and should not exist in its current form. It remains to be seen, how this extreme politicization and ideological bias will impact crypto regulations going forward. My suspicion, it’s not going to be a positive influence.

Hope it’s helpful! 😉 What are your thoughts?

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P.S. Did you know that I am regularly adding new templates and training to the Fintech Compliance Templates Library? It includes FinTech Compliance Self-Starter Package with new FinTech license application templates, such as a regulatory business plan, organizational design plan, and templates for creating financial projections! Have a look here! ✨