Caution is the Word on Cryptos

My post this week is later than I anticipated. Thursday through Sunday of last week I was at the Statesmen Project in Dallas where I had the opportunity to talk to a group of church and business leaders about the positive impact local currencies can have on communities and the world. To say that it was well received would be an understatement.

People intuitively know we are moving through a time of profound change, where economic and financial system foundation structures are being re-defined – or should I say re-imagined. Our future monetary system has yet to be defined, but there are plenty of people re-imagining what it can be. Because of the massive run up in price that Bitcoin and Ethereum have enjoyed, it seems that more and more “experts” are emerging in the crypto space. This includes investing analysts and those who think they have the next world changing form of money.

Time for A Shakeout?

That means caution is warranted. I am a firm believer of the positive role that technology and cryptocurrencies will play in our future monetary system. But first we must go through some serious growing pains. It may very well be that we are not too far from the first major crypto shakeout.

Last week the People’s Bank of China labeled crypto Initial Coin Offerings (ICOs) as “illegal and disruptive to economic and financial stability.” This sent Bitcoin and Ethereum prices tumbling as the digital ink began to spill hailing in an era of extreme regulatory oversight, if not outright bans of cryptocurrencies from nations around the world.

That’s a little overstated.

Much of the alarm came because the action from the PBOC followed the SEC coming down on the┬áDAO (Distributed Autonomous Organization) ICO and labeling it a security instead of a currency. Truth is, the DAO had many of the hallmarks of a security. It provided ownership in an organization and a way to profit from it through a form of distributions. The fact that it failed spectacularly after the ruling doesn’t change the fact that its structure was more like a company than a currency.

We have to deal with reality. In today’s world, we have to expect and accept that those who push the regulatory envelope too far are going to be reigned in.┬áTruth be known, the ICO market has gotten a bit frothy. China also has the problem of cryptos becoming an increasingly popular way for capital to flee the country. So, there is no surprise they did what they did. The People’s Bank of China stepped in to protect its turf – and the Chinese people, from something they know little about.

Regulation Coming to ICOs?

Going forward, let’s keep a level head about things. Will there be a battle over cryptos? You bet. Will ICOs be regulated? Likely. Is that a good thing? Depends on the nature of the regulation.

Right now, it appears as though regulators are trying to make the clear distinction between what has the hallmarks of a legitimate currency and what has the hallmarks of a business entity or a fraud. The recent SEC ruling means those of us working to establish legitimate local currencies on the technology backbone that is emerging would do well to take a measured approach. Design currencies and the entities that govern their issuance accordance with existing law.

If we play within the existing rules, at this time there is nothing to fear. Taking a smart and measured approach will give the underlying currencies a measure of stability, which is essential to build the trust necessary to make the project a success.

So, caution is the word right now in the crypto world. That goes for investing in existing currencies as well as the design and deployment of new ones. A shakeout of some degree may be coming in the next few weeks or months. It may be a major, highly publicized series of events, or it could be the introduction of moderate regulation that instantly creates winners and losers in the space. On the other side however, everyone will have a clearer picture on how to design and introduce new currencies that will have a much better chance at long term success.

And that’s the environment we want to operate and invest in.