Ethereum Scrutiny Might Actually Be Good News

Founder’s Note: I’d like to introduce you to Vin Narayanan. He’s our new senior managing editor and analyst. Vin knows his stuff when it comes to crypto, and today he’s giving us an update on the latest crypto regulation news.

– Adam Sharp, Co-Founder, First Stage Investor


Dear First Stage Investor,

Ethereum hit the mainstream press this week when The Wall Street Journal reported regulators are investigating it and other cryptocurrencies not named bitcoin.

The main question is whether cryptocurrencies, especially ones that have had initial coin offerings, are securities that require SEC regulation or commodities that don’t. The Commodity Futures Trading Commission has already ruled bitcoin a commodity.

To no one’s surprise, both regulators and the Journal are late to this party – really late.

Ethereum has been trading since 2014. Ripple, another cryptocurrency that’s caught the eye of regulators, has been trading since 2012. These issues aren’t exactly new.

They should have been addressed by now. Then again, this is the government we’re talking about!

The good news is when it comes to resolving these types of issues, regulators hate picking winners and losers (they prefer the markets and lobbyists take care of that).

So whatever action regulators take, the long-term effect on these currencies shouldn’t be significant. But that doesn’t change the fact that regulation is coming.

We’ve been saying that for quite some time at First Stage Investor, so it shouldn’t be a surprise to you. And frankly, that’s not a bad thing. A good regulatory infrastructure will provide a sense of order and certainty that will allow cryptocurrencies to thrive.

The key word in that last sentence is good.

The reason the internet – especially e-commerce – took off in the late 1990s is the Clinton administration made a conscious decision to take a hands-off regulatory approach. That meant online purchases weren’t taxed at the federal or state level. And companies operating on the internet were given wide legal protections in copyright and free speech lawsuits.

That friendly approach to regulation paved the way for the internet boom. Without that friendly and open regulatory framework, the internet as you know it today wouldn’t exist.

No Facebook. No Twitter. No Amazon. No Netflix. (Some people would argue this is a good thing, but that’s a separate discussion…)

The cryptocurrency world is at the same crossroads that the internet was in 1998. The government has a choice. It could create a burdensome regulatory infrastructure that stifles innovation and growth. But I believe it will adopt common-sense regulations that will allow the crypto markets and industry to thrive.

Typically, governments err on the side of encouraging innovation and growth – especially when existing stakeholders are already on board. And in this case, the list of existing stakeholders is impressive.

Goldman Sachs is a few weeks away from opening its bitcoin trading desk. (Just count all the former Goldman officials who’ve worked either in this White House or the previous one.)

Peter Thiel’s venture capital firm, Founders Fund, participated in a $15.5 million funding round for Tagomi Systems, a company focused on bringing Wall Street-type trading to the cryptocurrency market.

Thiel is the one Silicon Valley executive President Trump likes – and that means a lot right now.

We expect the government to take a pro-growth regulatory approach to cryptocurrencies for these reasons. But we’ll have a better idea on what the government is thinking about on May 8.

That’s when the House Science, Space, and Technology Committee holds its blockchain hearing. In theory, this hearing is about improving supply chain management and battling counterfeit goods.

But rare is the government blockchain hearing that doesn’t address cryptocurrencies. So stay tuned. We’ll cover the hearing for you and keep you posted.

Good investing,

Vin Narayanan

Senior Managing Editor