A series of tubes

Vol #49 - August 13th, 2021

Congress has been log jammed the past week over the trillion dollar infrastructure bill. 

While it has received bipartisan support across a diverse range of issues, the most disappointing oversight of the Senate’s draft is the way that digital assets were both included and treated. 

Legislation is a complicated and messy exercise in sausage making. Politicians are forced to grapple with issues beyond their interest or technical know-how, where the implications are far reaching. This can be particularly frustrating for nascent industries who suffer from their own growing pains. 

Digital assets are still brand new. The first idea of bitcoin was only conceptualized in 2009. Adoption is moving quickly - far more quickly than the internet, radio or washing machine -  and it’s important to set the right framework to allow the innovation to blossom, while the grift is weeded out. 

Only 14% of American adults own digital assets, but 49% of the population under 40 does.  

The most specific concern from the crypto lobby came from the definition of a “broker” and what types of protocols and participants might be required to report transactions to the IRS. Under the draft framework, network validators are treated the same way as a branch office of a bank.

While at a high level there is much agreement on the need for reporting and regulation, the concern is how old world paradigms are applied to emerging technology. The specific terminology used can have a powerful effect on how we understand something new. 

It’s inappropriate to bundle digital asset regulation into securities regulation that was written 87 years ago. While the industry absolutely needs some regulation and guidelines, new technologies demand new frameworks, and that must be done more holistically than a few sentences couched in a two thousand page license to print one point two trillion dollars. 

When the debate over net neutrality was raging in the senate fifteen years ago, Ted Stevens of Alaska ran the committee in charge of drafting the bill. He described the internet as “a series of tubes” , making the analogy that they can get clogged up with excess traffic. Stevens was mocked mercilessly for his naïve understanding of the issues. 

That is not necessarily a technically incorrect answer. The “internet” is plugging into a connected series of computers. The “cloud” isn’t nebulous, it’s just someone else’s computer. What makes the cloud powerful is that there is now infrastructure to access data everywhere in a secure and efficient manner. 

To dismiss the internet as nothing more than tubes is the same as assuming that digital assets are nothing more than cryptocurrencies. It misses the landscape altering significance of a new technology. 

The crypto space seems cursed with bad naming conventions. The term currency becomes a hang up because it immediately connotes finance and automatically implies certain use cases. Bitcoin for example, is a far competitor to the dollar as a medium of exchange which is how we typically think of currencies. But what about as a store of value?

Blockchains are secured by miners, and as the recent ESG debate around digital assets has highlighted, these miners consume a lot of energy. But miner is also an imprecise term - they’re much closer to an accountant or bookkeeper. The connotations and emotions likely change when you imagine the energy use of an industrial drill splitting rock, compared to the buzz of fluorescent lights in a suburban office park. 

The next revolution that distributed ledger technology promises is a return to scarcity and authenticity. The first wave of the internet was about the Cambrian explosion of information. Organizing and accessing the world’s content and media was what drove the early pioneers from their basements and garages to the vistas of Sand Hill Road. 

Today anyone with an internet connection can become a blogger or a producer (ahem). We are drowning in content precisely because it is free and cheap. While in many ways we benefit from the removal of gatekeepers and institutions; trust, credibility, and ownership are difficult to manage. 

The trustlessness of blockchain technology promises to upend not just the tiny cornerstone of finance and currencies that we’ve seen, but everything from art to social media and gaming. The NFT market for penguins and squiggles might seem infantile, but is there anything more authentic than pure and public provenance?

The broker reporting definition for crypto participants may have snuck in as part of the horse trading, but the importance of developing a robust regulatory framework for digital assets is as important as any road or bridge in the infrastructure bill.