Coffee Series with Cryptoasset Analyst Nate George: DeFi Regulation, NFT's, and the Metaverse

How will DeFi regulation effect the markets?

DeFi regulation is a complicated topic. Chairman of the U.S. Securities and Exchange Commission Gary Gensler frequently describes himself as a “cop on the beat” for the crypto industry and is not shy about his goal to push further regulation to the sector which he feels lacks sufficient investor protection and regulatory oversight. Gensler’s focus on the crypto industry has been reiterated on numerous occasions throughout the past few months, stating that teams building DeFi protocols should “come in” to work with the SEC and “get registered”. Members of congress as well as industry experts have asked Gensler on several occasions what he means by “register” as the applicability of registration and reporting requirements to DeFi applications is unclear. Gensler thus far has failed to clarify his comments in that regard.

Going back to the September hearing between Chairman Gensler and the Senate Banking Committee, we saw multiple members of the Senate including Senator Toomey express concerns over Gensler’s approach to regulating the market. Gensler has also seen significant push back from SEC Commissioner Hester Pierce, who put out an official statement in December criticizing Gensler’s regulatory ambitions. This is the latest of many public criticisms from Pierce regarding Gensler’s overall regulatory agenda and particularly his approach to regulating crypto. It is certainly interesting to see pushback spanning from retail users and industry experts to congress and even within the Commission.

Members of the Senate and House have also repeatedly asked Gensler for further clarification over his regulatory actions, which are much more invasive than most of the other G20 nations. Lack of clarity over what is and is not a security is another concern. Gensler frequently refers to the Howie Test but without giving any real guidance or clarity over how the multi-pronged balancing test should be applied or interpreted in the crypto context.

Overall, despite Gensler’s frequent comments on how he plans to regulate crypto and threats of using enforcement actions whenever necessary, there is still a great degree of uncertainty over how Gensler ultimately will attempt to regulate the space. One thing that has become clear is that there is a strong interest from the general public, industry participants, and members of numerous US government and regulatory bodies to support the cryptocurrency market and push back on regulatory attempts that would potentially “stifle innovation”.

Lastly, it is important to note that DeFi and the cryptocurrency industry as a whole, is global and permission less. While the US may take a more heavy-handed approach to regulation moving forward, there are numerous countries, including many G20 nations, that have taken a far more accommodative approach. Additionally, the focus on DeFi regulation is already starting to prompt founders to build permissioned DeFi protocols that seek to build more compliant “walled garden” ecosystems that cater to institutions who must be more sensitive to regulatory and compliance risks.

The US may be the most impactful regulator for the space, but as a truly global asset class, the pace of crypto innovation, whether permissioned or permission less, certainly does not stop with Gensler or US regulators.

What role will NFTs play in the future?

NFTs are one of the more interesting things to take off in 2021, spanning everything from generative art to brand and user engagement mechanisms to products that require differentiated asset issuance such as on-chain identity, on-chain insurance coverage, and real-world asset ownership receipts.

NFTs are most commonly associated with art, profile pic NFTs, and engagement methods. Projects like Bored Ape Yacht Club and FlyFish Club are trying to build exclusive social clubs with a Soho House-like spin. Quantum Art is pioneering photography NFTs, and projects like Art Blocks are building platforms that allow for the source-code of generative art algorithms to be embedded in the metadata of each NFT, essentially putting the instructions to generate a piece of art via code directly on the blockchain.

Additionally, we are starting to see brands like Nike, Adidas, Pepsi, Budweiser, and many others venture into the NFT space in search of new and exciting ways to engage with their customers. While these are really interesting use cases that I am particularly interested in (maybe slightly obsessed with), there is an entire world of opportunity for innovation with the use of non-fungible assets on the blockchain that stretches far beyond just art and membership related use-cases.

NFTs, or Non-Fungible Tokens, are just that – non-Fungible. In the future I imagine the uses here could encapsulate any case where unique and differentiated information needs to be attached to a token. Think legal agreements, physical objects, ownership interest receipts, identity, jurisdiction and accredited investor status, etc.

What role will the metaverse play in the future?

The “metaverse” has become one of the biggest buzzwords of 2021, with Facebook changing its name to Meta (referencing metaverse), Microsoft rolling out metaverse related products, and the explosion of interest in NFTs from both traditional brands and crypto natives. What I think is most interesting about the “metaverse” is how widely discussed it is, but how rarely it is defined. I think that is mostly because it’s such a fluid concept, and so it could be interpreted as something as simple as talking to friends on twitter or as complex as going to a virtual office and having meetings in VR. Historically, interacting with the internet was relatively one dimensional, to me the term metaverse applies to any online activity that adds further dimensionality to online interactions. While this could vary in terms of complexity, I think the term metaverse technically can apply to the wide breadth of multi-dimensional online interactions such as video games with voice chat and zoom calls as well as more complicated interactions such as play to earn games with ecosystem specific micro economies, virtual reality, augmented reality, etc.

One thing that I am willing to bet on is that the current pace of innovation in technology, software, cryptocurrency, and computing sectors will bring in scores of disruptive metaverse-related companies and continue changing the landscape of communication, collaboration, and value exchange. Distance between people can be measured not just in miles but also in clicks, and as a result we are likely to see friendships, companies, and culture becoming even more globally distributed.

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