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The Scoop

Crypto exodus from US is “an absolute fumble” by government, says VC

Tue Jun 13 2023

Crypto Crackdown in America and Market Implications

  • Adam Cochran joins the podcast to discuss the crypto crackdown in America and its implications on the market.
  • The regulatory uncertainty has had an impact on the market, with market-making firms stopping the use of Binance US due to regulatory uncertainty.
  • The fate of Binance US is uncertain, while Binance itself seems different.
  • Regulatory enforcement has created a chilling effect with no clarity, leading to fintech products dropping assets and OTC desks avoiding dealing with them.
  • This has resulted in fractured liquidity in different jurisdictions and an increase in problematic fraud in the space.
  • Robin Hood's business is mostly equities, so it doesn't make sense for them to list crypto assets without clarity on their designation as securities or not.
  • The suit against Binance has had a larger economic impact than the Coinbase suit, but if both cases were found negative, the Coinbase case would have deeper implications for the broader market.

Impact on DeFi and International Perspectives

  • The SEC's enforcement actions could have dangerous effects on DeFi, with validators potentially being considered broker dealers if they route an order on chain.
  • American users and developers may go offshore to unregulated entities and take higher risks.
  • A16Z announced that they're moving some of their operations to the UK due to the ongoing regulatory environment in the US.
  • Other countries are trying to find a balanced approach to crypto regulation, such as Ontario's security commission having a framework for crypto.

Negative Consequences and Offshore Shift

  • A successful VC firm is turning their attention and capital away from the US due to the treatment of the crypto industry.
  • The US government and industry have fumbled this opportunity, and it may be too late for them to catch up.
  • Valuations are down in the venture landscape, but there are still deals getting done.
  • There is a proliferation of offshore teams, anonymous teams, overseas projects, and founders who have moved to other jurisdictions.
  • Other funds are only investing in fully on-chain decentralized things, but there is a need for investment in ramps and infrastructure that are under attack.
  • The litmus test for proper decentralization is still evolving.

Challenges with DAOs and Security Designations

  • There is a divide between the CFTC and others on how to view DAOs.
  • Gabriel Shapiro suggests dividing business operations in a DAO, so they only vote on variables in a protocol and make adjustments.
  • Consortiums of people working on protocols rather than businesses are becoming more common.
  • It's harder for L1s to separate financial incentives from development because it's often one set of people developing it.
  • A safe harbor provision at the L1 level may be necessary.
  • The SEC's view on security designations has been disagreed with by some.

Regulatory Uncertainty and Market Structure

  • Judges and regulators can be swayed by soft factors that shouldn't matter in securities analysis.
  • The situation at Solana is complicated, with the community wanting clarity from leadership.
  • The return of regulatory uncertainty to the crypto industry is weighing heavily on market action.
  • Inorganic price movement from centralized players with big war chests has been a factor in past cycles.
  • Fractured regional arbitrage may indicate deteriorating market structure and liquidity issues.
  • Market structure has deteriorated, leading to big gaps in lending and liquidity provisioning, resulting in inefficiencies and people not engaging with the market.

Concerns about Binance and Checks and Balances

  • Binance has risks due to corners being cut or accounting errors being overlooked, which could be unearthed by a DOJ case.
  • This could lead to weakness in the foundation that Binance has been built upon, resulting in negative consequences for the industry.
  • Organization of large scale and nature may not have all the necessary checks and balances in place.
  • Proof of reserves that is transparent and not commingled with corporate funds would be a good start.
  • Ethereum and ERC 20 tokens can be easily audited for asset verification.
  • Possibility of jurisdictional criminal liability exists, but doomsday scenario is unrealistic.
  • Expectation of some consequences, hopefully ending in a fine.