Convoluted U.S. Blockchain Regulations are Creating Talent Flight to Asia
The Bitcoin whitepaper is days away from its 12th anniversary and the United States has yet to establish a clear regulatory framework under which the cryptocurrency industry can operate. U.S.-based blockchain startups are plagued with a murky regulatory landscape at best, leaving developers and entrepreneurs to navigate a regulatory minefield while attempting to “buidl” at the same time.
Meanwhile, there are plenty of countries that have embraced blockchain innovation with favorable regulations for businesses and consumers alike that pave the way for robust product development. South Korea, China, Japan were quick to adopt blockchain technology, and now Singapore’s crypto profile is on the rise as well. As a result, Asia has begun attracting top talent in the blockchain space while the United States takes a backseat.
In recent weeks, Ripple CEO Brad Garlinghouse bemoaned the regulatory uncertainty, threatening to move his cross-border payments start-up overseas if the United States doesn’t get its act together. San Francisco-based Ripple boasts more than 500 employee across nine global offices. The company is looking to the UK, Singapore, Japan, Switzerland and the UAE as possible alternative locations in which to domicile the company. Ripple’s Garlinghouse recently stated in a tweet,
“US interests, companies & innovation are all at stake in this race for control of our future global financial infra. China, UK, and others are far ahead — US is out of sync and needs to implement a clear reg framework now.”
He isn’t alone, as entrepreneurs continue to grapple with rules that stifle technology innovation. Messaging app Kik in recent days reached a settlement with the U.S. Securities and Exchange Commission for its $100 million token sale over what the regulator considers an “unregistered offering of digital Kin tokens in 2017.” Kin Founder Ted Livingston battled it out with the securities regulator in court for about a year before the two sides agreed to a $5 million settlement. The list goes on and on.
U.S. Regulatory Landmine
Chief among the gripes that the cryptocurrency community has with regulators and lawmakers is the lack of a taxonomy framework in which the parameters for a token are clearly defined. While the buckets that digital currencies typical fall into are either security or commodity, the jury is still out on how this is decided. And even though the ICO craze might be behind us, there are still new tokens coming on the scene, particularly in the DeFi space.
On one hand, if the regulatory pendulum swings to the security side, then cryptocurrencies would fall under the direction of the Wall Street watchdog, the SEC. But if it swings the other way, and tokens fall under the commodities bucket, then they would be regulated by the Commodity Futures Trading Commission (CFTC), which has taken a friendlier approach to the broader crypto market. The CFTC, for instance, has gone on the record saying it believes that Ethereum should be categorized as a commodity. Bitcoin is also not a security considering there was no token sale in which to raise funds to launch the network and therefore it does not pass the Howey Test.
The SEC has been applying existing regulation to the burgeoning cryptocurrency space, which market participants argue doesn’t fit. Wall Street regulators have relied on the Howey test, a law that dates back to a 1946 Supreme Court ruling, to determine whether a token fits the bill as a security. The main premise for the Howey Test is whether an investment contract exists “with a reasonable expectation of profits to be derived from the efforts of others,” according to the SEC.
As of last year, Kik’s Livingston had set his sights on the creation of a new Howey Test, one that is designed for the cryptocurrency market. Instead, the judge ruled that Kik satisfied the criteria of the Howey Test, which is what placed a bullseye on the Kin token for regulators. Mati Greenspan, founder of Quantum Economics, once summed it up this way, stating,
“When we’re talking about programmable money, the old rules simply don’t apply anymore.”
Among U.S. regulators, the CFTC has been the one to embrace cryptocurrencies the most. CFTC Chairman Dr. Heath Tarbert recently told Morgan Creek Digital Co-Founder Anthony Pompliano at the LA Blockchain Summit that he would like to see the United States out front for blockchain innovation. But he is not sticking his head in the sand and warned that “other countries are coming in and starting to potentially take the lead.”
Indeed, this reality has already begun to play out, with China’s central bank digital currency (CBDC), the digital yuan, already undergoing pilot testing in the country for months. In recent days, the People’s Bank of China published a draft law that paves the way for the digital yuan. The formal launch of the DC/EP, as it’s known, may still be a couple of years away, but in the United States, the Federal Reserve has only just revealed that it is considering a CBDC. Chairman Jerome Powell, however, made it clear that he is more interested in getting it right than being first.
Marco Santori, chief legal officer at Kraken Digital Asset Exchange, is quoted by Forbes as having stated that entrepreneurs are in “mostly a state of confusion,” which does not bode well for American innovation. In the same article Forbes spotlighted the CEO of a cryptocurrency startup based in the state of Massachusettes. While the conversation was during the ICO era of 2018, not much has changed. At the time, the tech entrepreneur expressed a lack of confidence in lawmakers to get regulation on cryptocurrencies right, suggesting he was considering a move to Switzerland.
Silicon Valley is Losing Its Sway
The United States has long prided itself on tech innovation, but its influence has begun to fade. A 2019 KPMG survey revealed that nearly 60% of hundreds of leaders polled believe Sillicon Valley will lose its prominence as the tech innovation hub of the world in a few short years. The shift will be fueled in part by the “decentralization of technology innovation spurred by investment in other cities and regions globally.”
In the same vein, one of the world’s leading Bitcoin ATM operators, CoinFlip, has made a bold prediction. He believes that the next Apple or Amazon of the world will be a blockchain start-up and one that hails from Asia and not Silicon Valley. In an interview with Business Insider, Weiss blames the lack of regulatory clarity in the United States for stifling innovation. He believes that Singapore is going to be a beneficiary of this dynamic, forecasting that it could emerge as the winner for the world’s biggest blockchain company.
Understanding that business may leave the US, along with top talent, Weiss and CoinFlip have been behind numerous regulatory drives in recent months to provide better clarity to restrictive and convoluted laws. Weiss has testified before New Jersey’s Science, Innovation and Technology Assembly to support blockchain reforms, while also publicly advocating for California’s AB2150 to better classify crypto assets.
The US must make up a lot of ground, however. In March, Ripple and cryptocurrency exchanges Coinbase and Binance were included on a list of companies that were deemed exempt by the Monetary Authority of Singapore from the Payment Services Act (PSA), a crypto law that went into force in January 2020. As a result, these companies were able to continue providing payment services even without holding a PSA license for a while. This type of support can go a long way for a blockchain company, especially one looking for a new home.
If the United States wants to have a seat at the blockchain innovation table, it owes it to developers and entrepreneurs alike to refine the law and prevent a talent exodus to Asia, one that has already begun showing signs of happening.
