When the White House released an executive order from President Joe Biden on March 9 asking for government agencies to study digital assets and cryptocurrencies, it was met with applause by the industry. Cryptocurrency values shot up when the announcement was made, but I still think investors are underestimating the impact of regulation on digital assets.
Billions of dollars are pouring into Web3 developments, non-fungible token (NFT) projects, play-to-earn gaming, and more. Regulation could actually help unlock this industry even further.
Cryptocurrency is about building
For most of the last decade, the cryptocurrency market was about trading tokens. The values of Bitcoin (BTC 3.85%), Ethereum (ETH 1.21%), and even meme coin Dogecoin shot higher and that attracted more attention and traders. But trading cryptocurrency is a lot like trading currency. There aren't many fundamental utilities behind the cryptocurrency itself, but rather it's what developers do on the blockchain that makes cryptocurrencies exciting.
When people talk about the utility in cryptocurrencies it's not the crypto itself they're talking about, it's the underlying blockchain they're talking about. For example, NFTs on the Ethereum blockchain can be built with smart contracts that contain information like where royalties should be sent if that NFT is sold, but they're not Ethereum cryptocurrency.
The cryptocurrency literally becomes the currency that makes the blockchain work. On Ethereum, it even allows blockchains to be built on top of the Ethereum blockchain with other attributes, like Polygon, which is what's known as a Layer 2 blockchain because it lives on Layer 1 Ethereum.
I say all of this because I think the potential disruption from cryptocurrencies and blockchains will come from what people build on top of the blockchain. NFTs and decentralized finance are a piece of the puzzle, but we could have new digital identities, wallets, homes, and anything else builders can think of. Cryptocurrency is about building.
Building with a set of common rules
Like building a house, developers do need a set of rules by which to build with. These aren't rules like where they can build, but rather what is and isn't allowed between digital assets, owners, and any value they create.
For example, some cryptocurrency projects are being sued today because they're being called a security or new currency, which isn't allowed in the U.S. without the right registration. But rules are grey because most securities regulation was written nearly 100 years ago.
This has an impact on investment because venture capital firms and individual investors don't know what's legal and what's not. Can an NFT promise to give 50% of a company's earnings as a payout (dividend)? Is a $20 sale of a 3D model a taxable event? Can trades happen with anyone in the world?
These seem like simple questions, but they may be in a legal grey area in cryptocurrency today and that's a challenge if you're a builder or investor creating a project on top of a cryptocurrency like Ethereum or Solana.
Investors are waiting
The amount of money flowing into crypto and blockchain companies is staggering. Venture capital company Andreessen Horowitz looked to raise $4.5 billion in crypto funds earlier this year, Alexis Ohanian's venture capital firm, 776, recently closed a $500 million fund, and Bain Capital just launched a $560 million crypto fund.
Investors are already pouring money into this industry and if the rules are defined further that investment could grow and unlock incredible innovations over time.
Setting the rules will unlock a new phase of innovation
One of the reasons investors, founders, and developers in the cryptocurrency area have asked for regulation is so they know the rules of the road. The best actors want to use NFTs and tokens as a disruptive force in business, not as something nefarious.
This is why regulation, especially in the U.S. and Europe, is generally seen as a good thing for cryptocurrencies and investors. There's been billions of dollars poured into the industry already and the right regulation may bring enough legitimacy to unlock even more value from the blockchain.