From Chokepoint to Checkpoint

Much of the recent news around Chokepoint 2.0 has led to a flurry of takes around the stifling of innovation and the creation of analogies to previous inflection points in US history, including the advent of the automobile, privatized space travel, and the internet itself. The general idea that the United States is giving a leg-up to competitors by trying to shut down crypto is not a new concept, we even wrote about it last year.

What Financial Institutions Stand to Lose Without Embracing This Industry

The financial industry, and specifically banking, could reap enormous benefits from crypto. Crypto can reduce operational and credit risk with simultaneous execution and settlement while catalyzing a material increase in revenue due to an expanded international customer base’s newly open accessibility. In addition, the inherently transparent nature of blockchain will permit previously unattainable levels of proactive regulation and compliance.

Imagine if the state of real-time banking industry deposits were available to the Federal Reserve in the same fashion as MakerDAO’s dashboard. Presented with a nascent bank run, it would be feasible that the Fed could assess the extent of support required on an almost real-time basis. With that capability in the bank regulators hands, such runs could be nipped in the bud before they gathered momentum to shut the bank down. Further, banks could integrate with blockchain technology for payments and to access on-chain credit and liquidity, spurring higher turnover and innovative products for their customers. Banks and the financial industry are poised to benefit from the greater security and transparency presented by crypto as compared to traditional models.

At UDHC, there’s no belief that crypto will put anyone in the financial industry out of business. The two are complementary and should be thought of accordingly. Crypto isn’t a boogeyman, and the upswing in adoption over the past few years proved that. With appropriate regulation, a new paradigm of finance will emerge that brings crypto and traditional finance together.

The conflict over what constitutes “appropriate” stems from whether there is truly a need for new regulation or there is stifling, uncorrected confusion around the application of current regulation. Crypto Twitter certainly has its theories. At the extreme, it thinks regulators are pursuing the goal of a blanket ban, forcing crypto onto foreign soil. And, dragging crypto from US shores would thus launch a thousand competing economies up and to the right.

But let’s level set and assume a ban isn’t the goal. Maybe, regulators are generally unsure how to approach crypto, just as crypto is unsure how to approach regulators. And despite this mutual lack of incisive assessments, we see article after article lobbing criticisms at regulators, some valid and some not so valid as to be extreme. Then we see regulators dig in their heels, launching indiscriminate enforcement campaigns and sweeping pronouncements. Neither does crypto nor well-meaning regulators any good.

Regardless, what we don’t hear often enough are ideas about how to think of regulating crypto and an application that will make sense to everyone.

A starting point

One of the stickiest problems for the public policy and regulatory space or, for that matter, anyone trying to understand crypto is the concept of decentralization. It is virtually impossible to find a definition that suits everyone outside of “not centralized” because the term is ubiquitous and dynamic. Consequently, we need to constrain the concept to decentralized protocols.

A sufficiently decentralized protocol is a permissionless, non-jurisdictional public good.

In other words, it is infrastructure for businesses to develop on. As such, those businesses are represented by front-ends or user interfaces, which become the regulatory touchpoints required to ensure consumer and investor protection. These front-ends, belonging to revenue-generating companies looking to profit from decentralized protocols, are the primary candidates for current regulatory tooling.

Fundamentally, a decentralized protocol needs to allow for self-sovereignty; a proficient user could engage with a protocol via a CLI but simultaneously Citibank could create a front-end that uses the protocol in the backend.

Code is widely considered speech, and the first amendment protects it in the US. But executed code is an action that has an impact, and that impact needs to be considered and arguably regulated. In a spectrum of UIs, where those impacts manifest, for-profit front-ends provide regulators with a clear starting point. This is not a be-all-end-all solution, but a conceptual flag in the ground - something to anchor us, something to hold onto while we take a breath, something to be built around so we keep this innovation and its many benefits in the US.

To dive deeper into regulating DeFi this way, we wrote a full breakdown.