Move Fast and Break the Law

First, let me try to take myself and the firm I represent out of this particular blog post. This is simply a series of ruminations I’ve made during the 8 years that I’ve been observing the cryptocurrency industry.

Here is a sign that I had put in our office years ago:

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This is of course, a cheeky twist to a famous startup phrase from a famous company — an attempt to emphasize our unique position of being caught between east coast regulations while maintaining an appropriately aggressive west coast sensibility. Having been at both Goldman Sachs and Y Combinator, I’m a product of both training camps.

The idea of “risk tolerant” approaches to a fundamentally new industry has been around for years, with countless lawyers and consultants offering companies the services to help tow the line.

There is a time when something is so new that risk tolerance towards regulation is a legitimate business strategy. And then there is a point when things have been defined adequately that not holding companies accountable for unlawful behavior because of concerns of “disrupting innovation” instead become the seeds for encouraging reckless behavior for future disasters. I think we are closer to the latter than we are the former. In the world of cryptocurrency, some things have been figured out from a regulatory point of view and many other nuances are undoubtedly still up for grabs. But a lot is now very clear.

I was there in 2008 at an investment bank, when insurers like AIG had legitimate retail businesses threatened by the actions of a few leveraged players within their sprawling organization. Leverage is not an evil in of itself, but it needs to be appropriately regulated. I lived by Times Square and caught, randomly, friends I knew from college taking their belongings out of Lehman Brothers (now Barclays) because of the disastrous leveraged investments in exotic structured products in one minority division of the company. The cascading consequences matter a lot to the broader system.

As many academics opined so often during the 2008 financial crisis, the signaling effects of what policy makers do and enforce, and therefore what drives financial actors’ risk decisions going forward, will have profound effects in a market for years to come. At this juncture, I think it’s worth a discussion as to what policies in crypto trading are important, which need further clarification, and which need clear enforcement today.

It is no secret in the cryptocurrency industry that there are plenty of activities engaged at scale in this ecosystem that are simply against the current law and have not been appropriately policed due to concerns about stifling innovation. Well, allowing rampant proliferation of exotic instruments such as credit default swaps was once seen as encouraging financial innovation as well — before that innovation almost destroyed the broader financial system.

Narratives inevitably change when negative outcomes play out, and enforcement of existing laws is key to encouraging the right outcomes.

Paul