In Parts 1 and 2, we looked at Custody and Professional Funds. Now let’s examine Regulatory Clarity. What do people mean when they say that regulatory clarity will usher in a bull market? Just as we debunked in the previous two pieces the myths that “custody will save us” or “the professionals will save us,” here we question whether “regulators can save us.”
All the regulatory clarity in the world will not help ICOs if the underlying token economics are broken. The free market has a way of sorting itself out irrespective of either hawkish or dovish tones from regulators. The Chinese ban on ICOs in Sept 2017 did little to prevent people from finding ways to buy and trade ICOs. A mere three months after the ban, the crypto market witnessed its largest “alt-season” ever, with many ICOs going 10x, 20x, and even 100x.
Similarly, we have now seen dovish ICO stances from many countries the past six months (Singapore, Japan, Switzerland, France, Malta). Some crypto fund managers have said they will “pivot to Asia.” Very large and respected companies in Asia have done reverse ICOs where they airdrop tokens to their existing customer base. These include LINE, the WhatsApp of Japan, and Kakao, the WeChat of Korea. Even in the US, the ICO crackdown has been largely muted. While subpoenas are numerous, enforcement has been limited to obvious scams. Moreover, the penalties have generally been in the form of monetary disgorgements, even in the case of egregious scams such as Centra, rather than jail time. None of this has prevented the implosion of both the public and private ICO markets.
The real pain point is that token operators who have wanted to give more cashflow-like benefits to their tokens have been unable to do so because they fear being labeled a security. It is no coincidence that two of the best performing tokens this year (BNB, MKR) have accrued value because they actually have a tie to the productivity of the platform they are associated with. In the attempt to “protect retail investors,” governments ironically ended up forcing teams to strip away anything which may actually lead to long-term token value.
On the flip side, some DEXs (EtherDelta) had launched non-anonymously and with the hope of capturing centralized profits. They have found themselves netted by the government, and would have been better off sticking to a truly decentralized and anonymous ethos. Others have blamed regulatory concernsfor shutting down their ICO projects — yet their competitors persisted by adapting to regulation. It is hard to believe that regulatory action in the US has prevented any bona fide ICOs from happening.
Crypto Exchanges/Trading
Liquidity continues to consolidate into unregulated venues: Bitfinex, Bitmex, and Binance, to the detriment of the highly regulated BitLicensed US exchanges such as Coinbase, Gemini, and Itbit.
Here are some reasons:
- Regulated exchanges don’t have competitive leverage trading offerings
- Regulated exchanges have weaker breadth of token offerings
- Most users trust unregulated exchanges more than regulated exchanges (people want to protect their data and privacy)
In summary I think further regulatory clarity is a mixed bag. Lots of things that appear bullish (pro-ICO regulation, more regulated fiat on-ramps) will not result in much bullish price action on its own. Conversely, it is quite a healthy sign that most developed economies are respecting the crypto industry and letting people do what they want within the existing laws of the land. It would be even better if regulators consistently applied the standards that they apply to non-crypto markets to crypto itself — as Ms. Peirce aptly points out.
The most important point is that Bitcoin is fundamentally antifragile to government actions — both positive and negative. Its value accrues largely independently of whether or not regulators decide that it should.
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