BlockFi Progress With Regulators Pioneers New Frontier Of Finance

Crypto enthusiasts often espouse economic anarchy as the future and a coming utopia. Most people prefer regulation to perishing by the law of the jungle, and scams and hacks are a major drag on the adoption of this breakthrough technology.

The jungle is certainly an efficient landscape for growth but anything that makes even a simple slip-up quickly becomes a predator’s next meal. Few choose to live in jungles; people prefer the manicured environment of highly regulated environments.

Beyond the libertarian dream, the future of crypto will be regulated. Some of us may remember how the internet was said to be impossible to regulate and how no government could pen it in. This turned out to be a naive position. The same goes for crypto. We give governments power to regulate, and they do; if necessary, they do it at gunpoint.

However, new technology cannot be un-invented, and its thermodynamic efficiency ultimately upends less efficient practices that come ossified with all sorts of gatekeepers and their rent-seeking behaviors. The dark side of regulation is that often the regulated vested interests have captured the regulators and will strive to stunt or suffocate innovation. Regulatory capture can be seen everywhere, from presidents that aren’t allowed to go swimming, right down to the petty acts of bureaucratic pettifogging.

It is not surprising that regulatory capture is an issue in financial services where crypto is relentlessly upending the intrenched structure. It is a huge complex with a vast array of powerful stakeholders where crypto is a new natural enemy.

What is at risk for entrenched players is no more clearly seen than in the crypto savings and lending landscape where the legacy system of banks and old school institutions with their pitiful yields, lock ups and financial repression show up as exploitative when compared to DeFi and “centralized” platforms, like BlockFi, Celsius, Compound and Aave. With an insulting 0.1% yield offered by the U.S. banking system, the 8%-plus yield at BlockFi seems too good to be true. What is not to hate about such parallel mechanisms if you are an established bank or for that matter a state exerting financial repression via low interest rates and high inflation?

Businesses like Compound and BlockFi are extremely well funded and their business models are real, so the core risk of using these platforms is not that they might be shams but that they might be shuttered by the established system as too disruptive to the status quo to allow to flourish.

Anyone depositing will have had to keep a strong nerve recently as regulators moved in on these platforms in a series of moves which seems to underline that there were serious problems ahead for fintechs attempting to revolutionize finance.

So yesterday BlockFi announced it was making progress with the SEC and NASAA to come to an accommodation, so their business could emerge from being in grey areas to doing something clearly allowed. This will be a great relief for anyone wanting to earn meaningful interest on their saving in an environment where crypto is the only way to get more than a peppercorn for their capital. Many countries’ regulators have by passive aggression driven this kind of innovation away, so it is a very positive sign for crypto, and for that matter the US as a whole, that the US regulator has engaged.

I looped up with BlockFi to ask them a few questions and this is what came back:

Q. Do you feel you now have a pathway for BlockFi and its crypto yield products to become part of the regulated mainstream?

A. This is the increased regulatory clarity we’ve been hoping for. We were the first crypto company to receive a state-level license to issue crypto-backed loans to U.S. consumers in 2018 and this is the next major example of how we prioritize cooperation with regulators. 

With today’s resolution, we are leading the creation of a new regulatory landscape for crypto and our clients. And we intend to file or confidentially submit a registration statement to the SEC for BlockFi Yield, a new crypto interest-bearing security. 

Q. Do you see the business model holding up to allow the sort of yields we have seen in the past, with regulatory burden adding to costs and reducing flexibility?

A.  We expect the client experience of the BlockFi Yield to be similar to their experience with BIA.

Q. How long is the road ahead for BlockFi and other crypto platforms to be part of the mainstream?

“We envision a world where people everywhere use financial products and services powered by blockchain technology as easily as using traditional payment rails or banking products like retail loans and interest bearing accounts. All product adoption curves start with Innovators, expand to Early Adopters and then “cross the chasm” to the Early Majority. Regulatory clarity and transparency is a critical component for bringing the Early Majority into the fold and driving mass adoption of blockchain technology. And BlockFi is leading the way as a pioneering brand built on trust and transparency.”

Obviously, this is great news for depositors like me sweating news about regulatory issues, but much more important is the clear implication that U.S. regulators are engaging to normalize rather than taking a route to prohibit which has been the road of choice for less enlightened regulators.

Make no mistake, it is only in the very long term that government is unable to cripple technology. The world is full of countries unwilling or unable to embrace technical progress. So it is great news that the innovators of crypto are able to engage with US regulators to tame the ‘dark forest’ that is the current crypto reality.