CWC Newsletter #14 (February 10, 2020)
By Taylor Ryker, Analyst
What can we learn from the history of the American Telephone and Telegraph Company (AT&T) and the future of blockchain technologies? How did AT&T dominate the telecommunication industry in the 20th century, and what can blockchain companies learn from their successes and mistakes? The history of AT&T reveals the importance of government regulation.
Currently, US government regulations for cryptocurrency companies are choking development because of the fear that their cryptocurrency will be deemed a security, which means unaffordable costs for compliance and legal services. Some cryptocurrency companies have already been forced to close up.
In addition, the US Securities and Exchange Commission (SEC) has penalized specific cryptocurrency initial coin offerings (ICO) for selling unregistered securities, such as Telegram, Paragon Coin, and REcoin.
Overview of Government Regulations: AT&T and Cryptocurrencies
Although AT&T was forced to breakup in 1982 due to violating anti-trust laws, the first half of the 20th century reveals the unprecedented growth of AT&T in dominating the telecommunication market with the protection of US regulators.
In 1913, AT&T and the US government came to an agreement called "The Kingsbury Commitment" that forbid AT&T from buying its rivals without the approval of the Interstate Commerce Commission but allowed AT&T to dominate the telecommunication market. Financial historians viewed this agreement as a form of regulatory capture.
From 1917 to 1982, AT&T controlled the telecommunication industry and aided in the technological advancements in the US. Under the auspices of AT&T, Bell Telephone Laboratories (Bell Labs) saw the creation of the transistor, the laser, and programming languages C, C++, and S, to name a few. In addition, 9 Nobel Prize winners discovered or invented their prize winning research at Bell Labs.
On the other hand, the cryptocurrency and blockchain space for the past decade has seen a mistrust and dislike of regulators. A significant issue is how to best navigate different government regulations for the cryptocurrency and blockchain ecosystem around the world. Government regulations within the cryptocurrency space are stymying real progress within the US.
The US government and regulators view cryptocurrencies as a tool for the black market. They cite the fact that bitcoin is used for illicit transactions as the primary reason for regulations, such as anti-money laundering (AML), know-your-customer (KYC), and money transmitter licenses.
In response to burdensome government regulations, blockchain developers and cryptocurrency entrepreneurs are heading to friendlier jurisdictions, such as Singapore and Malta. More non-US countries from around the world are enticing US developers and investors to set up shop with less regulations or receive capital gains without burdensome taxes.
Some crypto enthusiasts would say that government regulations and government overreach is one of the defining reasons for the rise of cryptocurrencies. The initial thought behind cryptocurrencies, such as bitcoin, was to have a means of value and transactions outside the purview of the government. A decentralized and immutable answer to the corrupt and centralized bankers on Wall Street circa 2008. Bitcoin is viewed as a tool for freedom by some.
There are cryptocurrencies called privacy coins that do not want to be detected by any national government or central authority. Some of these coins are Zcash and Monero.
However, if cryptocurrencies are to survive and not be banned by central banks and national governments, there needs to be a shift in perspective when viewing relationships with central authorities.
AT&T benefitted the US government because it would provide everyone in the US with phone service. Similarly, I can foresee a future where the US government desires to give its citizens a digital currency or cryptocurrency based on the US dollar. But which blockchain will the US government pick? I believe it will be those blockchains that works with US regulators.
Regulating Blockchains and Cryptocurrencies
The two prominent blockchain protocols that are publicly working with government regulators are Ripple (XRP) and Block.one (EOS). Ripple believes that regulation should protect investors from unnecessary risk while promoting and supporting innovation. Concretely-speaking, Ripple expanded their presence by setting up an office in Washington D.C. specifically for government and regulatory affairs.
Block.one and US government regulators from the SEC came to terms in late 2019 that deemed the EOS crowd sale (ICO) not a security. The SEC fined Block.one a one-time $24 million penalty for their unregistered ICO. However, it did not force Block.one to admit or deny any of the SEC's findings.
To be closer to the regulators and government officials, Block.one opened an office in Arlington, Virginia with the support of the Virginia State government. Governor Ralph Northam approved a $600,000 grant to help finance Block.one's new office because it would provide 170 new jobs.
Block.one's CEO Brendan Blumer, in a statement about the new office, said, "We are excited to be setting up Arlington, Virginia as our US headquarters. The region boasts a rich combination of security, engineering, and IT skills that we seek, and its proximity to the nation's capital positions us close to the policy innovation around digital assets and distributed ledger technology in the US."
Others have also opined the need to develop effective means and guidelines to best regulate digital assets and cryptocurrencies. Timothy G. Massad lays out a helpful overview of the current situation and expresses support for clearer regulations that does not harm the nascent space.
Concluding Thoughts
If cryptocurrency companies and start-ups want to survive in the US, they would be wise to understand the history of US government regulations and to emulate the relationship between AT&T and regulators in the first half of the 20th century.
In response to an unfriendly regulated cryptocurrency environment, SEC Commissioner Hester Peirce announced on February 6, 2020 a proposal to provide a safe harbor for crypto and blockchain development. The proposal grants a three-year grace period to allow for these companies to comply with security laws. This is a welcome relief for many starts-ups and companies so that they may commit their resources to innovation and development rather than compliance and legal services.
If the proposal is approved, the future of cryptocurrency and blockchain development looks bright. Hopefully the US is able to compete with other blockchain-friendly jurisdictions across the globe because cryptocurrency supremacy may be the new arms race that will decide who dominates the digital world of tomorrow.
Disclaimer: KJ Kingsley is not a financial advisor and holds the digital tokens or cryptocurrencies represented in the content above. This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post constitutes a solicitation, recommendation, endorsement, or offer by myself to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of any of the author’s employers.