The Pomp Letter - Is Crypto Dead In America?

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To investors,

Social Capital’s Chamath Palihapitiya recently said on the All-In Podcast that “crypto is dead in America.” He was referring to the recent increase in regulatory scrutiny, including more enforcement actions from the SEC.

There is a lot of truth to what he is saying. It is hard to deny that regulatory pressure has drastically ramped up. It started with the collapse of Three Arrows Capital and Terra/Luna, continued with the unraveling of the alleged fraud of FTX, and hit a climax with the second and third largest bank failures in US history earlier this year. Whether you believe crypto is the culprit or not, the door has opened for regulators to apply more pressure to the industry and they are taking advantage of the opportunity.

Before we continue, it is important to call out the difference between bitcoin and the rest of the crypto industry. Bitcoin is the only digital asset that has been labeled a commodity by every US regulatory organization. They all agree that bitcoin does not meet the security standard and therefore is not subject to those rules and regulations. The rest of the crypto industry, from Ethereum down to the smallest asset, is still widely debated — are they securities? Are they commodities? Are they currencies? How should they be regulated? Who has jurisdiction? What is the proper framework for entrepreneurs who want to participate in the industry?

There are more questions than answers.

Palihapitiya has a good point that “the United States authorities have firmly pointed their guns at crypto.” The critics of the crypto industry believe this is a positive development. Their argument is that Gensler and the SEC should have acted long ago, because it is obvious that crypto assets are securities and industry players have been skirting the rules for more than half a decade.

The proponents of the crypto industry vehemently disagree. Some will argue that the introduction of decentralization means these assets don’t meet the securities standard, while others will argue that these new assets need entirely new regulatory frameworks. As an example, Coinbase announced last night that they are suing the SEC over the organization’s refusal to answer a rule-making petition that was filed last summer.

There is nuance to this debate that usually is lost though.

Most people will focus on the technical rules and who wins in court. They will look at the data, they will read through the various public filings, and they will scrutinize the SEC’s actions. This is the quantifiable approach to measuring impact of crypto regulation in the US.

However, it appears that Palihapitiya is referring to the qualitative impact, which is more important in my opinion. Regardless of whether the SEC ends up winning their various enforcement actions, or if there are new rules passed or not, the posture of the US government and their regulators has become abrasive. We have even seen US politicians suggest banning this new technology. The abrasive stance deters entrepreneurs from building their companies in the United States or serving customers with US citizenship.

We have seen a number of companies move off-shore in the last few years. Hundreds of founders have moved to places like Dubai, Singapore, or various islands with more friendly regulation to start their next business. And Coinbase has even alluded to the fact that they could move their business to a new jurisdiction if the lack of clarity continues in the US market.

This is probably what Palihapitiya means when he said “crypto is dead in America.” It is no longer clear that the US is the best place to start a company or project in this new industry. In fact, many people would argue that it is better to start those businesses elsewhere in the world.

The reason this is important is that the crypto industry is not going to die. If the US continues to be abrasive, the industry will shift to locations outside the country. I have long been a proponent of founders starting, building, scaling, and exiting their companies in America. The rule of law, access to capital, and dominant culture have been tailwinds for entrepreneurs. But the market is shifting under our feet and there are numerous data points that tell us people are changing their minds.

Americans have to remember that we live in a global world. Facebook only had ~ 15% of their users in the US when I worked at the company in 2014/2015. I am sure that number is much lower now. Bitcoin is similar — majority of mining hash rate is outside the US and there are hundreds of millions of people who participate in the crypto industry from international markets. In some ways, the global nature of these assets is what makes them attractive.

If that doesn’t convince you, understand that our country’s adversaries see the US’ abrasive stance as an opportunity. Bloomberg reported that China’s state banks have been opening their doors to crypto companies:

“Chinese banks have been directly reaching out to crypto businesses over the past few months, adding to signs that the city’s push to become a major digital asset center has backing from Beijing, even though trading of crypto has been banned on the mainland for well over a year.”

At the same time that the US is ramping up regulatory pressure and pushing crypto companies outside our borders, the Chinese are opening up their banking system to those same companies? That seems more than a coincidence.

Chamath Palihapitiya nailed it when he said “crypto is dead in America.” That does not mean it has to stay that way though. It would only take a few small decisions from our politicians and regulators to return to embracing new technology, which would provide the foundation for the US to re-take the leadership role on a global stage.

I remain optimistic about the United States’ position over the long run. It just may be a bumpy ride along the way.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

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