Fitting Square Pegs Into Round Holes - The Daily Gwei #342

It's time to update the rules and regulations for the modern digital age.

When it comes to classifying what a specific crypto-asset is it seems that regulators take a very general approach where they basically state that most things are securities. I think that this is the wrong approach because the “security” classification (and others like it) were created for “old world” assets and I believe that we now need updated laws and regulations for digitally native assets.

I think ETH is the perfect example of a digitally native asset that does not neatly fit into any of the current asset classifications that regulators has. For example, one of my favorite explanations of what ETH actually is comes from David Hoffman’s October 2019 piece that states that ETH is a ‘triple point asset’. The ‘triple point asset’ thesis states that ETH can exist simultaneously as a capital asset (staking), a transformable/consumable asset (gas fees), and a store of value/collateral asset (DeFi). As far as I know, we haven’t really had an asset like this before - and if we have, it’d probably only exist in a very limited fashion. So in this case, the task for a regulatory agency like the SEC is figuring out what to classify ETH as and so far, the consensus seems to be that ETH is a commodity (though this isn’t an official SEC stance). While I think that classifying ETH as a commodity is probably fine (and maybe even accurate), it still doesn’t really reflect what ETH actually is.

ETH isn’t the only asset that is difficult to classify using the old laws and regulations as there is a world of ERC20 tokens and NFTs out there that can be programmed to do just about anything. For example, imagine that there are NFTs that are part of a collection and every time one of the NFTs are sold, a portion of the proceeds goes to the rest of the NFT holders as a “dividend” of sorts. Does this make each NFT a security that can only be traded on regulated exchanges? Maybe the SEC would argue that it does but that’s only because they are looking at this NFT through the very narrow lens of the existing securities laws. This isn’t even mentioning all the ERC20 tokens out there that have various different characteristics and perform various different functions.

The funny thing is that even if an asset gets classified as a security it doesn’t stop it from being traded on “unregulated” venues. For example, Uniswap can’t blacklist tokens at the smart contract level, regulators can’t force LPs to remove their liquidity and they also can’t stop people from trading the token on DEXs. On top of this, DEXs are going to just continue chipping away at CEX volumes until one day most trading just happens on DEXs - what are regulators going to do then? I think that they’ll simply be forced to adjust their policies to meet the reality that they are facing else they risk losing any perceived “control” they thought they had.

I believe that regulatory agencies around the world need to work on drafting new legislation if they want to have any hope of regulating crypto-assets (even though I still think regulation here is a bit of a fool’s errand anyway). The current laws simply don’t work and applying them to crypto feels like trying to fit a square peg in a round hole - and I’m sure that the regulators are away of this - but the real question is do they even care enough to rectify the situation?

Have a great weekend everyone,
Anthony Sassano

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