Salvation Lies Within

The biggest threat to crypto has always been a brutal regulatory crackdown. We’ve never been in a weaker position than we are today, and some rapid, proactive moves are needed to survive. We propose a “User Bill of Rights” and several remedial steps toward self-regulation of the crypto markets.

Having lived through the 2015 and 2018 bear markets as a full-timer in crypto, market drawdowns don’t usually make me queasy. This time is different.

I’m not worried about my personal portfolio. But I *am* acutely aware that the world is gawking at the unwinding of a $40 billion algorithmic stablecoin protocol, mere weeks after a $100 million hack / $200 million hack / $600 million hack, not to mention a tax deadline that likely put thousands of speculators net underwater (if not bankrupt) as crypto, NFT, and tech markets crashed and dropped portfolio holdings below many capital gains liabilities.

We could get [very bad worded] by policymakers as a result.

The CBDC shillers, Citizen Protectoooors, and regulatory henchmen have an unprecedented amount of ammunition to fire at us at the exact time: a) the country looks for a convenient scapegoat as we enter recession, b) the political winds shift away from some of our allies and in favor of some of our enemies as we approach the midterms (thanks SCOTUS), and c) crypto’s biggest boosters are financially wounded and burnt out from a rollercoaster market cycle.

The time has come to be proactive about basic self-regulatory and consumer protection measures, while aggressively defending basic crypto user rights. We can acknowledge crypto’s risks and shortcomings without conceding an inch on the right to code new protocols, self-custody assets, or transact on p2p networks.

Let’s also be honest: an earnest discussion of *user rights* has been largely absent from the institution-led policy discussions so far. That’s a shame because there are three popular, populist arguments for crypto that hold regardless of market conditions. Now more than ever, we need to lean into them:

1. Trust in institutions is declining, and crypto networks present a credible alternative to centralized monopolies. Progress is messy, but we have a right to explore alternatives.
2. We also have a Constitutional right to financial privacy (4th Amendment) and peer-to-peer transactions (1st and 4th). The right to own personal wallets is inviolable.
3. Community-owned protocols offer better economics, upside, and user rights than tech monopolies, even if they come with new risks that reflect their early stage.

Crypto’s institutions (the exchanges and VCs mostly) may already be pushing these arguments with policymakers, even if they use slightly different words. But I worry these words sound empty if they aren’t supplemented by a groundswell of user feedback to policymakers. Do you, the users, prefer protection from crypto protocols, or from government overreach?

If the latter, let’s push policymakers to make a simple two line commitment to crypto, while we crowdsource a proper user bill of rights.

Something like this:

I, ______, am committed to safeguarding crypto innovation in the United States, and will:

1. Oppose any and all efforts to ban or restrict the use or personal possession of Bitcoin and other digital assets in the United States.

2. Oppose any and all efforts to unfairly target or impede the development, accessibility, and security of Bitcoin and other digital asset technologies.

While we work towards this…

A “User Bill of Rights” for Crypto

Congress regularly passes resolutions, which are distinct from bills. Sometimes it’s easier to pass these since they don’t typically have legal significance. Sometimes they are just about constituent issues or expressions of support for random causes.

The original Bill of Rights was adopted as a joint resolution of Congress.

Could we introduce a Digital Asset (DC’s preferred term) User Bill of Rights as a joint resolution? It might not have legal significance, but it would be a positive and proactive signal that shows policymakers will take property rights seriously even if they regulate crypto’s investors and intermediaries.

A lawmaker’s expression of support for this resolution would be one way to signal that they are pro-crypto, similar to the simple pledge above, and we should see which, if any, members are willing to co-sponsor it. A Digital Asset User Bill of Rights also has better odds of symbolic passage than a comprehensive crypto bill this session (though the latter would be an incredible achievement).

Here’s a first draft that could use work:

The users of digital asset applications and owners of cryptocurrency and other digital assets, having property rights in their assets protected by the Constitution to the same degree as physical assets, require a commitment from their government to preserve their rights as enumerated in the following Digital Asset User Bill of Rights:

RESOLVED

Article the first…owners of assets held or controlled privately and in digital form possess the same rights against unlawful search, seizure, and warrantless surveillance as physical assets held or secured on private personal property.

Article the second…users of digital assets that operate outside of the traditional financial system have the right to decide, subject to mutual consent of both parties, when and if to share their personal identity with the entities with whom they transact.

Article the third…digital asset users and owners have the right to receive equivalent priority from law enforcement agencies in response to cases of fraud and theft against their property interests.

Article the fourth…digital asset users and owners have the right to a clear financial and consumer regulatory compliance framework that provides the same flexibility and viability as laws that adapted to the creation of the internet and exemptions that facilitate the formation of private capital.

Article the fifth…digital asset transactions mutually consented to will not be presumed to take place within the United States merely by virtue of the fact that the technology with which they are transmitted or verified are located in the United States.

Article the sixth…citizens and residents of the United States have the right to transmit value over digital means, both domestically and internationally, without the mandated use of regulated financial institutions.

Article the seventh…digital asset users and owners have the right to consent to crypto specific risks and the right to rely on the principles of decentralization and trustless blockchain mechanisms as substitutes for intermediary-dependent finance.

Article the eighth…digital asset users and owners who provide liquidity to applications that do not purport to be federally insured depository institutions or regulated exchanges have the right to maintain those relationships in their current form, without those relationships artificially altered into a regulatory construct of intermediary-dependent regulation

Article the ninth…digital asset users depend on computer code. The development of the code language on which they depend must be given the same respect as any other expression of speech protected by the first amendment to the Constitution.

Article the tenth…sharing information with other users about blockchain technology and its potential use will not be presumed a crime but will instead be presumed a protected act of free speech.

This covers some positive rights of all crypto users and defends sacred turf: code is law; your keys / your coins; if you have any questions, get a warrant.

As we draw a line in the sand for user rights, the entities within crypto may also have some remedial defensive work to do.

Quick Wins and Industry Standards

We founded Messari during the height of the ICO euphoria, after Dan (my cofounder) and I had been looking at ways to short the entire 2017 house of cards. We even had a name picked out - Icarus Capital - that fit our activist strategy, but we simply didn’t trust the integrity of the reference market data feeds, the exchanges we’d have to use to go short, or the lenders we would need to borrow from. We figured it would be better to focus on building long-term solutions for the industry by fixing its information asymmetry problems.

In some respects, we are right back to where we started.

Fixing information asymmetry problems is the stated objective of both Messari and of the Securities and Exchange Commission. We just happen to disagree on the issue of whether most tokens are securities. And whether it is acceptable to block “retail investors” from investments on the grounds they “lack sophistication” in the internet era.

Let’s look at 1) the SEC and its mandate, 2) crypto’s data solutions and our ability to improve upon the SEC’s *product*, and then 3) identify some quick consumer protection fixes we could implement as an industry while we flesh out broader regulatory issues in front of us this year.

The SEC

The SEC aims to promote capital formation, while ensuring markets are fair and efficient and investors operate on a level playing field. Information asymmetry and risk disclosure is an especially big area of focus. The SEC requires public securities issuers to report standardized (think GAAP) financial information to the SEC’s EDGAR website. They require rigorous risk and material financial disclosures on a periodic (10-Q’s / 10-K’s) and event-driven (8-K’s / Form 4’s) basis, and the EDGAR data permeates every major financial information source.

It’s helpful as a foundation, but it’s far from perfect. Uncle EDGAR has an outdated UX and has had his own issues with giving preferential access to high-speed traders. Modern hedge funds tend to profit from performance insights they glean between filing periods. The SEC also governs the voting process which requires EDGAR filing, a noisy shareholder proposal process and heavy-handed regulations. Finally, they wield enforcement authority — a proverbial hammer looking for a nail that is arguably too primitive and slow to adapt to a market like crypto that evolves at internet speeds.

Their mission is important. Their execution, historically, has been inadequate.

Crypto Data Vendors

The fact that blockchains are public data ledgers, and most protocols operate in the open with fully open-source code and decentralized contributors, presents an interesting dilemma when considering information asymmetries and “disclosures” rules. The data is wide open to public inspection, but there’s no one to standardize its format or delivery. An individual analyst can scrub the data directly (read: Messari & Ripple) or cobble information together from a variety of public sources. Messari, Nansen, Dune Analytics, Coin Metrics, Flipside, AmberData, Token Terminal, and others all provide excellent resources for crypto’s market participants.

For our part, we’ve worked to build a bottoms-up financial filing equivalent in a realm where the appropriate centralized “disclosers” of information are difficult to define. Our team has built a library of in-depth project histories and diligence reports, tracks key protocol events and governance items, and pulls together evergreen “financial statements” from the ledgers themselves. One of our primary goals is to rebuild the EDGAR 10-Q from first principles, at scale, with 100x improvements in the associated analytics and the periodicity of the reports.

Regulators should like that! The truth is out there, it’s just not evenly distributed.

Remedial Self-Regulatory Efforts

Policymakers should be patient and exercise restraint when it comes to crypto, but that doesn’t mean that they will. We have a lot of ground to cover in replicating and developing compliance tools that meet modern financial regulations. In the meantime, here are several quick wins:

1. Rally Behind Safe Harbor Disclosures: The industry is furthest along with a model disclosure framework for SEC compliance thanks in large part to Commissioner Hester Peirce. If the SEC wants to foster a more effective disclosure and compliance environment for token issuers, doubling down on a team of lawyers dedicated to suing us isn’t constructive, particularly when many of the cases they bring involve settlements against entities who committed no fraud (e.g., BlockFi settlement) or will take years to settle (e.g., Ripple lawsuit). The SEC should look at what LexPunK Army — some of the best crypto lawyers in the business — have developed with respect to model disclosures and trading rules for tokens as part of their exemptive proposal Regulation X. Or the Commission could open a call for public comment. Or listen to their own commissioner’s calls for a Safe Harbor. The DeFi Education Fund has offered a relevant set of principles.  Let’s collaborate on crypto’s version of GAAP reporting for global investors.
2. Create Disclosures Rules for Exchanges and Institutional Token Holders: The publicly available nature of blockchain transactions often obviates the need for many centralized government disclosure structures. If a large holder or “whale” seems to be buying, selling, or attempting to manipulate the markets, dedicated monitors of block explorers will often post this information directly to Twitter. But the proliferation of privacy-preserving technology means that this won’t always be the case. Regulators could require large crypto investors and custodians to disclose trading activity (such as ownership thresholds, token vesting schedules, and net changes to trading positions) on a periodic or event-driven basis. As an industry, we should work towards this transparency now.
3. Adopt a Standard User Risk Waiver and Invest in Education Centers: The onboarding process for new users to centralized crypto services and DeFi protocols alike should include plain English risk disclosures and links to independent, community aggregated reference materials. Imagine a less shitty version of a GDPR pop-up that reminds users — with standardized language — that their principal may be at risk when using a DeFi frontend or third-party custodian. A simple “caveat emptor” pop-up and link to proper diligence materials would force users to explicitly acknowledge the risks they accept as early users of emerging products. Indeed, the best DeFi protocols already provide a wealth of information in their white papers and user agreements that meet many of the goals of existing consumer protection disclosures. Some even feature APY calculators on their interfaces that are more straightforward than those of their traditional financial institution counterparts.
4. Create Standards Around Proof-of-Reserves and Proof-of-Collateral: This seems like a non-negotiable at this point. Exchanges and custodians that support stablecoins should demand proofs of reserves and collateral behind the assets they list. That doesn’t mean that each supported asset will require a 1:1 reserve or overcollateralization rate necessarily, but it does mean that collateral and credit-worthiness gets listed right alongside APY. The exchanges, custodians, and institutional lenders themselves should also commit — immediately — to proofs of reserves and collateral. This won’t be a choice within a matter of months. Best to make the investment proactively today, and notch the goodwill win while we can.

Let me be clear: these proposals *will* become table stakes for our future discussions with regulators. As an industry, we have a limited window of time remaining to be proactive about drafting self-regulatory measures ourselves, and this is merely the low-hanging fruit.

It’s a starting point we can work on today in the aftermath of a massive washout, the backlash of which will be felt for years to come. Let’s get going.

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