Crypto optimism in the age of the doomer

Rebecca Rettig

Contributor

Rebecca Rettig is the chief legal and policy officer at Polygon Labs, where she oversees all global policy matters and regularly meets with policymakers and regulators across the globe. With unique and deep-rooted expertise representing companies at the forefront of the financial service industry’s digital transformation, Rebecca spent over four years advising blockchain clients on legal and regulatory matters. In 2019, Rebecca was recognized as one of the top 100 women lawyers in NYC.

Last winter, I found myself at a dinner party in the city. It was a mixed crowd, by which I mean people who understood my work, those who didn’t, or those who were skeptical of it. I’m a crypto lawyer and policy advocate, so I’m used to questions like: Are you a lawyer for Bitcoin? And do you even use a bank?

As we all know, the crypto industry had been rocked at the end of 2022, which meant I fielded more questions than usual. At one point, a friend pulled me aside and asked, “Is this the end of crypto? Are you okay?”

Now, a year later, I can answer with confidence: Not only was it not the end, but 2023 was also actually good for crypto. I’m more committed to this space than ever, and going into 2024, I’m assured that the technology will persist — that crypto is here to stay — even in the face of repeated negative press, continued naysayers, and persistent global regulatory pressure.

The optimist’s case for crypto is simple: Technical maturity is occurring in tandem with regulatory headway and wider adoption.

But to be an optimist in crypto is actually to be a realist, to acknowledge not only the exciting developments we see entering 2024, but also the challenges we must take head-on in the year ahead. I call this approach “crypto optimist realism”: an acknowledgment of both how far we have come and how far we have to go.

Even if 2023 exceeded the expectations of optimists like myself, it does not mean that 2024 will be a cakewalk. In fact, in the three issues that matter most to crypto — technical advancement, regulatory progress, and adoption — the tailwinds taking us into 2024 will be met with continued headwinds we must overcome to progress into a mature industry.

The technology advanced faster than anyone imagined. Now we need to show why that matters.

In the wake of centralized “crypto-in-name-only” financial collapses, 2023 bore out a vitalized recommitment to advancing sustainable, hardened, decentralized networks. The technology, across varied networks, is finally getting to a place that can deftly handle what “normies” would expect from the internet itself, whether it be for financial, social, communication/messaging, or informational applications.

Last year, the industry obsessed over zero-knowledge technology, zkEVMs, and scaling solutions, rightly so. Massive technological leaps came to life at scale, defying the expectations of many who believed that if such technology were possible outside of mathematical theorems, it wouldn’t be possible for decades.

There are now faster, more affordable, and more efficient ways to transact and interact on the internet, secured by decentralized databases hosted by computers globally that allow individuals to preserve and control their own data, value, and content. The current state of blockchain definitely feels like something out of “Neuromancer.”

But here we are, living it.

Now the challenge is ensuring that millions of people worldwide can live this future, too.

The first chasm to cross is how to talk accessibly about what blockchains actually do and why they’re better, at least for certain use cases, than what we have now. The use of insider terms (“rollups,” “smart contracts,” “oracles”) with the traditional world is often counterproductive. Jargon makes the tech and the industry esoteric, isolationist, and inaccessible. So much of the lexicon associated with blockchain developed for a small, developer audience, which means to grow alongside the expanding reach of the tech, we must change how we talk about it, too.

With some tech challenges well on their way to being solved at scale, a primary hurdle remains to make the why of blockchain better understood.

This means explaining how the technology provides real, tangible benefits in a manner easily grasped on a global basis and across techies, normies, and industries.

“Regulatory clarity” advanced in unexpected ways, but the AML quicksand requires a solution

For those of us engaging on policy matters, the end of 2022 was existential. It was hard to fathom how regulators and policymakers could engage meaningfully after the industry writ large had been plastered with integrity issues that arose from the downfalls of businesses that shall not be named (and that you know well by now). Much to my pleasant surprise, last year saw significant engagement by policymakers around the globe on crypto matters, in many positive ways I could not have anticipated. Globally, 2023 saw:

Japanese lawmakers published a “Cool Japan” whitepaper in April. It proposed a law for decentralized autonomous organizations (DAOs — another word to make accessible!) as ways for less connected towns and communities to be engaged with the government and open up to non-yen-backed stablecoin (with stringent stablecoin regulation)The EU formally passed and began implementing the Markets in Crypto-Assets regulation (MiCA). A first-of-its-kind comprehensive legislation focused on centralized businesses and service providers in the crypto space, MiCA sets out stringent requirements for crypto businesses in the EU while also allowing for continued innovation on the tech side.The U.K.’s Treasury Department issued a comprehensive proposal for crypto regulation.In France, policymakers began thinking about frameworks for decentralized finance (DeFi), taking the technology seriously enough to consider regulations that won’t stifle innovation while also protecting consumers and preserving market integrity.Hong Kong and the UAE created crypto licensing regimes for centralized crypto businesses and service providers, including — in Hong Kong — a new proposed regime for issuance of stablecoins.In the U.S., two major pieces of proposed legislation, the Financial Innovation and Technology for the 21st Century Act (FIT Act) and the Clarity for Payment Stablecoins Act, made their way out of the House Financial Services Committee in a bipartisan manner, with potential preparations to move to the House floor in 2024. And last June, the U.S. House Committee on Energy and Commerce conducted a major hearing on nonfinancial use cases for blockchain. This was a firsthand demonstration that policymakers are beginning to grasp the extensive scope of what can be accomplished using blockchain.

In parallel, advancements on crypto policy in the U.S. also came in hoped-for but unexpected decisions from the courts.

Numerous federal judges — appointed by presidents from both parties — showed a particular understanding of the nuances and differences presented by the technology and the way the industry functions. The Ripple, Grayscale and Uniswap courts all recognized much of the arguments around decentralization and self-custody that the industry has been making for years. In doing so, these courts showed that certain regulators’ positions really try to fit the crypto square peg into the TradFi round hole, with limited results.

The decision in Risley v. Uniswap Labs et al. is particularly noteworthy for two reasons. First, the decision dives deep into the technology around decentralized finance. It recognizes that software developers innovating with new technology cannot be liable for the actions of unknown, unaffiliated third parties who may engage in “bad acts” via the software (a corollary to the decisions in Napster and Grokster more than two decades ago). Second, the decision recognized that we don’t know what crypto assets are at this time — “securities, commodities or something else.” Making that distinction is a decision in Congress’ purview. This latter recognition is also noteworthy since the SEC’s case against Coinbase, which hinges in large part on whether “tokens are securities,” is before the same court.

Despite these advancements, the industry does not have the “regulatory clarity” for which it has been asking. In fact, the challenge for 2024 is greater than ever: How do we work with regulators and policymakers globally to combat bad actors using crypto for illicit means? This question, one that’s generally referred to as the AML (anti-money laundering) issue, is crucial for crypto to not only flourish, but also to survive.

How the industry can and should address the question of AML requires its own article (or articles!), but our challenge on the regulatory front is clear. The industry must band together to provide viable solutions that speak to the regulatory goals of detection and deterrence of bad actors.

Broader use cases now abound, but we need to make them more useful

It will come as no surprise that I would dub 2023 “the Year of the Use Case.” It was a year in which I was involved in helping launch an open, interactive website, The Value Prop (thevalueprop.io), to showcase use cases for blockchain technology all over the world. This site aggregates novel blockchain-based applications already in existence.

Think avatars on Reddit, digital shoes on Nike, or loyalty NFT reward programs with Starbucks. Think major brands experimenting with what it looks like to let go of total control over loyalty programs and points, instead relinquishing these into the custody and ownership of users. The California DMV looked into tokenizing car titles; there are experiments with putting land registration on-chain in Peru; and around half of Indian states have begun to incorporate across different services, including police complaints.

Think tokenization of off-chain assets in the financial sector and beyond, where JPMorgan, Franklin Templeton, BNY Mellon, Mirae Asset Securities, and many others have already begun tokenizing assets, with some estimates putting the number of total tokenized assets already at $3 billion. Projects like Courtyard and Regen Network allow for tokenization of assets like Pokémon cards and carbon credits.

While the former group will allow our current financial system to move more quickly and efficiently, the latter will transform who can participate in the economy, and how.

Across nearly any vertical you can imagine, some element of blockchain has begun to appear.

Although more and more people are interacting with some aspect of some blockchain every day, many without even knowing it, the challenge now is focusing the industry on use cases that are the most impactful, the most game changing. Builders need to keep building, but in ways that have powerful appeal. That means thinking beyond the long-standing narrative of “banking the unbanked,” which, for better or for worse, is a story we have moved beyond.

In order to ensure that adoption proliferates and the value of this technology is accepted, especially in the face of very loud crypto pessimists (the doomers!), builders should lean into product-market fit (PMF) that is already strong with some crypto use cases, like stablecoins. Building and innovating on this success means thinking beyond old narratives, with PMF in mind.

This will be a challenge. So much of this space has been focused on price and volume for a number of years, indicators of adoption.

This winter, I skipped the dinner parties, opting to work and plan for some of the challenges discussed above. The momentum of 2023 has led to a growing sense, even among friends and acquaintances who don’t follow the space closely, that the industry and I are okay, that crypto is here to stay.

Regardless of the challenges the industry faces going into 2024, I am as optimistic as ever: Those who are still building are the best, most passionate people who will allow the industry — and this technology — to reach its full potential.