With help from Derek Robertson
While Coinbase’s problems with the SEC have flared up just in the past week, they represent the exact scenario that has been keeping crypto executives up at night for far longer.
In fact, Coinbase spokeswoman Lisa Johnson told me the company had been working for several months on the lengthy petition it filed with the agency last Thursday to formulate new rules pertaining to digital assets — an effort, in part, to head off charges of listing unregistered securities.
It was an unfortunate coincidence, then, that the SEC unveiled a complaint the same day implicitly accusing the company of doing just. Johnson said Coinbase hadn’t been aware of the SEC’s impending complaint.
And in the months leading up to the petition, executives had been howling for more explicit SEC guidance, with the threat looming that the federal government would conclude much of the industry amounted to trafficking unregistered securities.
”That’s the Sword of Damocles over this trillion dollar industry,” said Jay Verret, professor of law at George Mason University and a critic of the SEC’s approach to crypto, who said the issue has hung over the industry for the past five years.
But the industry was not looking for the sort of guidance that came in last week’s insider trading complaint against a former Coinbase employee, which declared that several crypto tokens offered by the exchange qualify as securities — or the sort that could come from the logical consequence of that finding: The investigation of Coinbase for possible listing of unregistered securities, whose existence Bloomberg reported on Monday.
Even before this week’s news, industry representatives had been complaining of “regulation by enforcement,” in which the agency makes clear its interpretation rules by punishing crypto firms that run afoul of them. That was the approach it employed in February, when it fined the trading platform BlockFi $50 million for offering an unregistered security.
Despite those complaints, crypto critic Rohan Grey said the ambiguity has actually helped the industry skirt the law.
“It’s mostly been non-regulation by enforcement,” said Grey, research director of the Digital Fiat Currency Institute, a group that supports the issuance of digital currencies by central banks, “because the SEC is worried that they can’t necessarily win the case.”
And the broader legal uncertainty around digital assets presents other challenges for regulators, too. In a talk at the Brookings Institution on Monday, Commodity Futures Trading Commission Chairman Rostin Behnam spoke of a “regulatory vacuum” that has prompted the commission to start “thinking creatively” about how to apply its authority.
In short, entrepreneurs moved quickly into a legal gray area based on their interpretation of the law, agencies are now moving to enforce their own interpretations, and Congress might, at some point, pass legislation that codifies new rules.
For its part, the SEC has maintained that many digital assets count as securities, and its chairman, Gary Gensler, has said that most crypto exchanges are offering at least some securities, whether or not the companies acknowledge doing so. That’s a problem both for exchanges and for many issuers of crypto-assets, few of whom have registered them as securities.
How big of a problem has become clear over the past week: Coinbase stock is down by about 20 percent, representing billions of dollars in market cap.
At least the company’s investors were warned. Because Coinbase stock definitely is a registered security, the company had already declared the risk that the SEC would disagree with its view that it does not list securities — subjecting the company to potential investigations and penalties — in a disclosure on file with the SEC.
The novelist Neal Stephenson — yes, the one who coined the term “metaverse” — has a knack for explaining technologies before they actually exist.
As such, he’s in high demand from actual tech companies, having advised Jeff Bezos’ Blue Origin and the virtual reality company Magic Leap. His latest venture is a partnership with Bitcoin veteran Peter Vessenes to launch LAMINA1, a blockchain they call the “base layer for the Open Metaverse.”
I interviewed the two of them about their goals for the project, which is meant to provide the technical underpinnings for a creative, artist-friendly metaverse space. A condensed and edited version of the conversation follows:
Neal, people like to point out that your novel “Snow Crash” is a dystopian story, but its metaverse is basically a neutral technology. Do you see this project as trying to steer it in a more useful or noble direction?
NS: Trying to steer anything like this at a high level is probably not going to work. It’s an open-source, bottom-up phenomenon, so trying to build it in a top-down way is probably not going to end well.
“Snow Crash” is both a dystopian novel and a parody of dystopian novels. There’s nothing inherent in the metaverse that makes it dystopian or utopian… I am not a believer in the argument that you sometimes see on the internet that there’s something inherently dystopian about the metaverse. It is what we make it.
Neal, the blockchain community is more explicitly ideological than others you’ve advised. How did that influence your approach to this project?
NS: I’ve known people who are interested in forms of cryptocurrency since the mid-1990s, and a lot of them got into it specifically because they were thinking about metaverse-style applications. They realized there’s no way that you can have a distributed community without other people’s code running on your machine, which raises obvious security and privacy issues, and those friends have been working for a long time on cryptographic approaches to making that possible.
There’s always been a strong motivation among crypto people toward basically idealistic objectives, and although not everyone may agree with how they go about it — libertarianism is not a universally beloved way of thinking — it is strongly motivating for a lot of the people who have been working in this area for decades, and it is motivated by a belief that it can lead to a better society.
Peter, what is your case to people who see blockchain as merely a vehicle for financialization?
PV: I think Bitcoin is underrated — like, really underrated — in terms of its social impact.Bitcoin was a totally new way for humans to collaborate. Blockchains are not companies in the traditional sense. I don’t think there’s any other human structure that successfully pulled people in unison towards something that ended up being worth a trillion dollars at its peak.
I look at the lessons of that, and see there’s finally a way to monetize open source software through the combination of the community, payment rails, and whatever you want to call it, Web3 or crypto incentivization — there’s got to be a way to use it for more than just Bitcoin, and build a new way for people to to work and collaborate. — Derek Robertson
A huge change is coming to one of the most vibrant and long-running VR spaces.
VRChat — a metaverse-like space known for its copyright infringement-skirting avatars, bizarre role-playing, and problematic memes — announced this week that its next update would crack down on the user-driven modifications to the game’s code that made such things possible. That means, for example, no more full-scale re-creations of Nintendo games.
The kind of modifications that will now be banned comprise a large part of the game’s lifeblood. Until now VRChat mostly turned a blind eye to the code workarounds users deployed not just for cultural chaos, but for everything from improving accessibility to speeding up the game’s somewhat archaic graphical engine.
VRChat’s tweet announcing the update inspired a… robust response from fans, with upwards of 3,000 replies and just as many quote retweets. VRChat’s rationale for the change is that it will make the game a safer and smoother experience, and they’ve tried to respond to some of the most pointed criticisms in a follow-up blog, but the incident is another reminder that the incentives toward growth in virtual worlds are sometimes directly at odds with what their most dedicated users want. — Derek Robertson
Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.
Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.
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