Money Crypto Versus Tech Crypto
Bill Hughes, Senior Counsel and Director of Global Regulatory Matters
| Consensys
As the Government is now considering the next phase of cryptoasset regulation, it is vital to the UK’s ambition of being a leading global crypto hub that policymakers understand that investment in crypto assets and building the blockchain technology infrastructure require different regulatory responses.
With the Financial Services and Markets Bill receiving Royal Assent, the Government is now considering the next phase of cryptoasset regulation. There is a clear need to take action to protect investors from bad actors, which was no better illustrated by the FTX collapse last year. But what the Government seeks to regulate, and how, are critically important questions if the UK wants to maintain global leadership in crypto markets.
From the perspective of Consensys, a market-leading crypto software company, the Government is on the whole, striking the right balance between protecting investors and fulfilling the UK’s ambition to be a leading global crypto hub. This is because the current approach instinctively accounts for the fact that there are really two, not one, crypto ecosystems and that the risks and regulatory responses for each are different.
One side of the crypto ecosystem is about investment. Call it “money crypto.” In essence, it is about buying, holding, lending, and trading tokens as investable assets. This side rightfully has the attention of regulators not only in the UK but also around the world because it is the side that poses the most risk to the investing public. When money crypto says “it’s still early,” this means that most people haven’t invested yet.
This is the side that FTX was on, and it is important to observe how and why FTX failed. The circumstances that led to its collapse are not unique to crypto but instead are the well-recognised symptoms of centralisation and intermediated finance, which unfortunately manifest even in the heavily regulated space of traditional finance.
The other side of crypto is not about investment but instead about building peer-to-peer computer networks where participants transact by using globally accessible software. Call it “tech crypto.” Tech crypto wants these new computer ecosystems to work and provide real world utility. When tech crypto says “it’s still early,” it means that a lot of the key tech that will define the long-term use has yet to be built. While this side is less well understood by regulators, the approach taken by the UK Government demonstrates that policymakers intuitively understand that the underlying technology is different from the investment side of crypto. Building on this foundation, furthering the understanding of tech crypto and how it differs from money crypto would help the UK maintain its global policy and market leadership.
In some sense, the essential difference between money crypto and tech crypto is encapsulated by the centralised versus decentralised debate. Centralised finance (CeFi) is the beating heart of money crypto. Intermediaries define the investment landscape and are the driving force. There are both good and problematic actors, and risk abounds.
In tech crypto, by contrast, the defining feature is software serving as a transactional counterparty or intermediary. It is much more DeFi (decentralised finance) than CeFi. Tech crypto is the foundation of the decentralised web, Web3. Web3 is the next phase of the internet that has the power to transform the economy as we know it.
Money crypto and tech crypto present different risks that policymakers are starting to address in the UK and abroad. In money crypto, the risks look more or less as they do in traditional finance. Tech crypto, on the other hand, encompasses some of these categories but includes entirely different ones, too: hazardous self-custody, vulnerable smart contracts, good and bad actors having equal access, and public, pseudonymous and irreversible transactions. DeFi opens up a whole different problem set with which public policy is largely unfamiliar.
To have a smarter discussion and reach better solutions, the tech crypto ecosystem must help bridge the gap
Because money crypto has been driving the regulatory discussion, regulators the world-over have generally over-emphasized the investment aspect of crypto. The good coming from money crypto taking the lead is that money crypto risks are front and centre when it comes to prospective regulation. The UK has appropriately started to address these risks with the Financial Services and Markets Act (FSMA). The bad is that policymakers risk falling into the trap of thinking that policy solutions for money crypto should be applied in equal measure to tech crypto, despite the different risk profile.
Tech crypto has not been as prominent a voice. As a result, policymakers are generally much less informed about tech crypto, or fail to recognise it as being at all distinct. For example, while policymakers have heard of Ethereum and the meteoric price rise of ETH tokens since 2016, few understand that Ethereum is a computing platform. Almost no one understands the protocols being built on it.
The balance in the conversation needs to shift to accommodate the reality that money crypto and tech crypto present different baskets of public policy challenges. To have a smarter discussion and reach better solutions, the tech crypto ecosystem must help bridge the gap and engage with policymakers in the UK so that both sides can better understand the challenges and, importantly, start thinking about solutions that leverage not only public policy but also all the potential the tech itself holds. Consensys and other tech crypto market participants are passionate about bridging that gap and being constructive players in the public policy conversation.
A coherent approach from policymakers would be addressing money crypto regulation first and then getting to tech crypto later. In that regard, the UK has generally got this right with the FSMA, in addition to the overarching approach set out by HM Treasury. This tiered approach makes sense because money crypto is much more readily regulated and represents a substantial part of the crypto’s overall economic mass. While we are doing that, we can more closely study, evolve our views, and hopefully reach a greater consensus about risks and mitigation strategies relating to the global, permissionless peer-to-peer crypto space.
Striking the correct balance is crucial, but the UK is off to a commendable start. If policymakers broadly understand the difference between money crypto and tech crypto and regulate intelligently, the UK is likely to lead the world in this digital revolution.
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