Blockstack and regulators give Blockchain shot in the arm

This summer was a big one for blockchain news. For the most uninitiated, the shiniest objects were the Congressional hearings to understand Facebook’s new cryptographic asset, Libra better. For the average crypto investor, it was that the SEC allowed even unaccredited investors to buy a stake in a company called Blockstack. But blockchain regulation is coming of age too.

For the real crypto-regulatory obsessives like me, there was something even more significant this month. Something that not many noticed but which could have even larger implications, allowing digital currency to come into its own as an asset class faster than anyone had anticipated, and offering the potential to fund a boom in new ventures and applications sitting atop blockchain technology.

Let’s begin the story with Blockstack.

This month, the SEC allowed Blockstack to crowdsource funding for its tokens, marking the first time that a digital asset had received agency approval. It also may have marked the unofficial end of the lawless age of initial coin offerings, or ICOs, which resulted in countless prosecutions and lawsuits, such as the recent civil action against struggling messaging startup Kik.

Even before the SEC’s blessing, Blockstack was a success. It successfully raised money from traditional investors — the company had managed to get $50 million in funding from some of the country’s most prominent venture funds. Now, it can raise money from anyone, with less fear of the unknown that had previously hung over the industry.

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That’s good news.

Here’s even better news: even after setting aside the Blockstack story, you can already start to see the future regulatory structure for blockchain take shape… if you know where to look.

For instance, in a recent joint statement on broker-dealer custody of digital assets released only weeks ago, the SEC and the Financial Industry Regulatory Authority (FINRA) took a big step forward in their understanding of the blockchain industry and its technology, as evidenced by their recognition of the unique “nature of distributed ledger technology, as well as the characteristics associated with digital asset securities” and their acknowledgment that it may impact the ability to comply with recordkeeping and reporting rules. However, they clearly hold tight to their belief in the current regulatory system, stating that “whether a security is paper or digital, the same fundamental elements of the broker-dealer financial responsibility rules apply.”

There’s no denying that with cryptocurrencies, digital tokens, or blockchain technology, the learning curve can be steep. For proof, look no further than President Donald Trump’s unenlightened and, I would argue, incorrect tweets about Bitcoin only last week.

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But the wording of those two recent statement suggests to me that regulators, or at least some of them, are starting to get it. The first sentence says they’re curious enough to make quick progress up the steep learning curve. The second sentence says they’re willing to apply old rules to a new idea.

Maybe this happened simply because of Blockstack’s willingness to plough the road. The company spent 10 months and a reported $2 million working side-by-side with the SEC to develop a protocol from scratch. One of the company’s co-founders even jokingly called the expense “our donation to the crypto industry.” (The fact that Blockstack is projected to raise $100 million makes that “donation” seem well worth it.)

But whatever the reason—time, experience, or a combination of the two—the government regulators who were once viewed as detractors are now looking more and more like facilitators. And that has massive implications for blockchain entrepreneurs.

The industry has attracted some incredibly bright minds who also, for complicated ideological reasons, often seek to subvert existing systems rather than play well within them. A ‘donation’ like the one Blockstack made is often viewed as too costly. These are brilliant problem solvers. From their perspective, those upfront costs are just an opportunity to find a new workaround. And when it was still assumed that the government would stand in the way of entrepreneurship, rather than working alongside it, that problem solving and cost avoidance made even more sense.

Now it no longer does.

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I understand this perspective because I spent years myself in completely different industries, lobbying and waiting for regulatory change that never came. But whereas in my previous life, the government never seemed to learn the right lessons, it’s now clear to me that blockchain regulators aren’t just listening, they’re evolving.

Unlike more traditional industries, blockchain represents so much financial opportunity, and produces so much noise, that the regulatory framework seems to have been fast-tracked, at least relative to how quickly things usually move.

To those in the industry who’ve enjoyed this uninhibited, rapid growth, all of this formality could be interpreted as bad news. But the fact is, by following the same well-worn regulatory path that has been applied to various industries like oil and gas, commodities, and more, we can now better predict what’s coming next legally for blockchain.

And that is a powerful advantage for what some consider a still-emerging industry.

The time is now for the industry to grow into its new status as a mainstream technology. If today’s innovators want blockchain, and the digital assets that come along with it, to become ubiquitous, if they want the broader public to start using these tools and enjoy the profits that come from that adoption, then they need to understand that they don’t have to start from scratch.

Companies like Blockstack that get started now will be that much further ahead once regulations roll out in force. The only question is who else is prepared to join them.

Brent Wadman is a Partner with Messner Reeves’ Corporate, Crisis Management, Natural Resources Practice Groups.

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