Sand Turning To Gold

Originally posted on Mirror.xyz: https://mirror.xyz/rkmasiello.eth/l1gbyQk5SZw3r-OmmMCUp1zwEVPQAPIR0CTKyBUsggA

Note to the reader: This essay's initial draft was written in September 2023, prior to the recent crypto bull run. It's easy to overlook background issues when faced with numbers going up – most do. My entry into crypto began in early 2017, purely as a speculator with virtually zero knowledge about the coins I was buying. In the time since, I’ve launched a few projects, some successfully, from algorithmic trading, to Bitcoin mining, to DeFi lending. From my viewpoint, the general perception of the industry at large has not changed much. Crypto will keep creating overnight millionaires, but soon they might not be in the U.S. There’s still time to change that.

Introduction

Gambling is fun. In my early 20s, being from and living in New Jersey, I’d often go to Atlantic City to hit the casinos, despite it being a major hassle to drive to from North Jersey. A storied city, A.C. was made famous in the late 1800s as a major vacation locale, known for its boardwalk, beaches, shopping, and more. The legalization of gambling in the late 1970s marked A.C.’s turning point in the revitalization of the city and its effort in becoming the East Coast rival to Las Vegas – and at one point it very nearly was. In the time since, however, A.C. has become mostly a dump; a shell of its former glory ruined from decades of political corruption, poor city planning, and a lack of investment diversifying its attractions beyond gambling. Now it sits struggling to shrug off its legacy and reinvent itself. As other, closer, better gambling options became available to me, I stopped going to Atlantic City altogether.

Crypto is on the precipice of becoming Atlantic City; an industry with massive opportunity relegated to a historical afterthought only memorable for the casinos it produced.

This isn’t a “blockchain, not crypto” essay. Cryptocurrencies offer numerous use cases such as alternative stores of value (like Bitcoin), decentralized computing networks with corresponding utility tokens (such as Ethereum and Solana), and tools for distributed decision making (every DAO governance token). A particularly useful product can be found in stablecoins like Tether and USD Coin which offer a crypto-compatible digital dollar.

Yet, the industry's predominant appeal and greatest market fit currently remains speculative investing in tokens – essentially a new form of gambling. Despite being widely owned in the U.S. and representing tens of billions of dollars in value across numerous underutilized blockchain networks, the vast majority of cryptocurrencies (and their corresponding ‘product’ for lack of a better word) offer little real-world utility to the average person, with only a few providing practical applications or tangible societal benefits.

This is a problem. U.S. policymakers acutely understand this, and in a concerted effort to score cheap political points appear intent on regulating crypto out of existence to rectify their lack of oversight in stopping some of the notable frauds the industry has produced (FTX & SBF, 3AC, BitConnect, numerous celebrity endorsed NFTs, the list goes on). This approach, of course, neglects to acknowledge how crypto embodies American values, propels job creation, and opens avenues for financial inclusion and wealth accumulation, especially for the underbanked and those marginalized from traditional financial systems. And given that the U.S. regulatory blueprint exerts dominant influence over global capital markets and their regulations, crypto can't afford to be at odds with D.C. for long if it hopes to survive. While crypto will likely never escape its speculative nature, the industry needs to produce better, more meaningful use cases relatable and understandable to the everyday average person to insulate itself from, not just Washington backlash, but potential long-term societal disregard. Haven’t we all heard “You’re still doing that crypto thing?” enough?

For crypto to evolve beyond mere speculation and become a societal benefit, it needs a two-pronged strategy: first, to develop practical applications that genuinely improve daily life, leveraging its core advantages of financial transparency, lower costs, and open access. Second, the industry must adopt sensible consumer protection measures. Ignoring these factors will continue to undermine the value crypto offers, allowing easy dismissal by Washington. By tackling these issues, crypto can cement itself as a valuable component in the financial tools and products used by everyday people. Earning public trust, understanding, and adoration isn't just about survival; it's crucial for the industry’s long-term viability.

“Down Here, It's Just Winners and Losers”

The influence of Washington, D.C. over technology as well as global financial markets cannot be overstated. Given that U.S. regulations often serve as a template for other nations, in addition to the U.S. dollar's role as the global reserve currency, a regulatory stance adopted by D.C. can signal a cascade of similar decisions globally.

Washington D.C. has a track record of initially opposing innovation. This resistance is exemplified by the history of cryptography, a saga particularly relevant to cryptocurrencies, given their foundation in cryptographic encryption. In the early 1990s, cryptography was emerging as an essential tool for privacy and security. The U.S. government, spearheaded by agencies like the NSA, categorized encryption algorithms like DES and AES under "munitions" laws due to concerns about their potential to obstruct surveillance and law enforcement efforts. This led to stringent export restrictions, hampering software developers and tech companies from distributing or selling strong encryption software internationally. This era, aptly termed the "Crypto Wars," saw the government eventually relent, influenced by industry pushback, economic imperatives, and legal considerations related to First Amendment rights, marking a significant turn in technology policy.

Today, a modern "crypto war" is taking place in D.C., fueled by the collapse of notable crypto firms and scandals like FTX's Ponzi scheme exposure, resulting in a broad SEC crackdown and significant fines in 2022. The Biden White House and figures like Elizabeth Warren have become vocal critics, often using crypto's challenges as key talking points in their diatribes, contributing to its unpopularity in Washington. This isn’t just a “they don’t like it” type of issue - there is a significant effort by D.C. to stifle the industry. While the issue at hand should center on the problems of centralization and human greed, the discourse from Washington often questions the very utility of crypto, despite its significant potential. Washington's response, often indiscriminate between innovators and fraudsters, echoes past financial crises such as Enron and the Madoff scandal. This trend of reactive, sweeping measures by D.C., instead of nuanced legislation, is a familiar response to being caught unprepared.

The rise of peer-to-peer (P2P) lending platforms, such as LendingClub, Prosper, and Funding Circle, echoed regulatory challenges similar to those facing the crypto industry today. These platforms, founded on the concept of connecting individual borrowers with lenders outside of the traditional banking system, initially faced skepticism and scrutiny. Both LendingClub and Prosper grappled with legal challenges from the SEC, requiring significant adjustments to their business models. Despite this, the growing public reliance on P2P platforms and their ability to fill voids left by traditional banks made complete regulatory suppression difficult. Yet, their undeniable benefits, from often offering lower interest rates for borrowers to ensuring attractive returns for individual lenders and streamlining the lending process, changed this perception rapidly, as the broader public's increasing dependence on them prompted regulators to evolve from their initial apprehension. Regulators began establishing more accommodating frameworks, ensuring that while the industry thrived, necessary consumer protection measures remained in place.

“Everything That Dies Someday Comes Back”

The U.S. government's handling of cryptography and P2P lending platforms reveals a consistent pattern: public approval and strong industry advocacy is crucial in enabling innovation to overcome regulatory challenges and flourish. These two examples were not randomly selected -- they serve as precursors for the crypto sector to learn from and improve upon. Blockchains excel in areas like identity, provenance, settlement, and custody, crucial to finance. The crypto industry has already developed valuable financial service platforms, typically referred to as decentralized finance (DeFi), which. benefit from the transparency and open access of blockchain networks. However, the industry continues to struggle to distinguish these utilities from the speculation inherent in these platforms. Compounded by typically user-unfriendly interfaces, this leads to user confusion and vulnerability to scams. Simply put, while the underlying technology is impressive and offers real value, the practical usability for the average person remains severely limited. Endlessly building crypto platforms for crypto people is a dead-end.

Rethinking how crypto solves problems is essential for the industry's long term viability. The focus should be on making the benefits of crypto accessible, rather than overwhelming users with the intricacies of the technology itself (we have more than enough people building wallets). Just as most people don't understand the intricacies of how a credit card transaction leads to a package arriving at their door, the complexities of crypto technology shouldn’t be front and center for users. The technology should work seamlessly in the background, as all great technologies do, without needing to educate users on the mechanics of blockchains, transactions, or wallets. It should just work.

As an aside, there will always be those within the crypto community that (loudly) proselytize the virtues of self-custody, the evils of central banking, and benefits of shedding one's worldly possesses to accumulate more Bitcoin – I’ve come to accept that these people are not serious about advancing crypto in any reasonable way and are as much a problem to the advancement of the sector as the scammers and grifters who benefit from ignorance and greed. These people still want crypto to only be the Bitcoin of 2009. In spite of them, crypto has evolved into a sophisticated financial technology with its own asset class, with an emphasis on the technology. The successful technological platforms we interact with daily are those that abstract away complexities, ensuring ease of use.

Crypto's potential to revolutionize financial and capital markets is immense, offering streamlined costs, transparency, and significant consumer savings, especially in lending sectors like consumer, commercial, mortgages, and microfinance. With high consumer debt and rising interest rates, crypto's benefits could be far-reaching. Its protocols enable efficient capital flow and interoperability, reducing costs and increasing efficiency beyond traditional market capabilities, yet crypto lending is still less than 0.1% of the multi-trillion dollar lending market. This gap highlights the industry's focus on internal needs over broader applications. By creating practical, user-friendly financial services that leverage crypto without overwhelming customers with technical details, the industry can expand its reach. While incorporating crypto into product narratives is becoming more common, the challenge remains to make blockchain transactions accessible to mainstream consumers, who are not yet ready for these complex processes. Unlike the early days of the internet, there isn't time to gradually educate these technologies to the public. Crypto needs to go mainstream, soon.

This need for a generalized customer-centric approach also underscores the importance of consumer protection. In the absence of comprehensive regulations from D.C., the crypto sector must take the initiative to educate its users about the risks involved, even if it means implementing measures like Know Your Customer (KYC) procedures and blocking transactions from suspicious sources. While this might seem contrary to crypto's original “permissionless” ethos, adapting to serve the greater good is vital for the industry's survival and growth. Simple yet effective measures can demonstrate to regulators that the crypto industry is committed to consumer protection, taking proactive steps to ensure safety and transparency. We can always offer permissionless access at the protocol level.

As crypto starts to address everyday financial challenges – like leveraging stablecoins for seamless global transfers and offering lower cost loans – its value proposition becomes more evident. Just as P2P lending platforms demonstrated undeniable advantages over conventional banking systems, crypto solutions, when they provide palpable benefits and efficiencies to everyday people, can make it increasingly challenging for regulators to merely dismiss or curtail them. As the public's usage of transformative crypto solutions grows, a blanket resistance from U.S. regulators becomes less tenable. Embracing and integrating these protocols won't be a mere choice for D.C. but will be an imperative for maintaining America's preeminence in global finance and technology, all while appeasing their constituents.

“Meet Me Tonight in Atlantic City”

In his 1982 ballad "Atlantic City," son of New Jersey Bruce Springsteen sang about the high-stakes gamble of rejuvenating the city with casinos, capturing the gritty realism of such a wager. Fast forward to 2012, Atlantic City's Revel Casino, the newest and most luxurious in decades, opened despite years of financial and construction issues. Yet, within just two years, this towering structure – the fourth tallest in New Jersey, boasting two nightclubs, numerous dining venues, sports and concert spaces, and a massive 130,000 sq ft gambling space – shut down, having declared bankruptcy twice. Springsteen was right to be uncertain; Atlantic City bet big and lost.

Contrastingly, Las Vegas, the western counterpart to Atlantic City, is thriving, transcending its reputation as simply America's gambling heart to become a global hub for tourism and entertainment. Its success lies in diversification, offering a broad spectrum of attractions, professional sports teams, and local industries to appeal to the masses, not just the gamblers alone. This strategy has led to an average annual salary about 10% higher than the national average and cemented the Las Vegas-Henderson-Paradise metropolitan area as a top 30 metro by GDP in the United States. Vegas, which had its own run of challenges, succeeded by broadening its appeal, something Atlantic City realized too late.

Crypto faces a similar juncture. D.C., with its history of stifling innovative technologies and financial shifts, poses a significant threat. To counter this, crypto must generate applications with net societal benefits that genuinely appeal to users who will advocate on its behalf, coupled with enhanced protections. The crypto industry needs to allure users with the excitement of the 'casino' but retain them with its potential as the future of finance. Failing to adapt and diversify could mean meeting the same fate as Atlantic City – a gamble crypto cannot afford to lose.