September 8, 2022

Digital Assets and Gary Gensler’s Historical Spin

By Chris Lehane

Securities and Exchange Commission Chair Gary Gensler recently asserted that when it comes to digital assets, the federal government can rely on rules that have applied to the financial markets since the 1930s. No need for new ones. Gensler pointed to the Motor Vehicle Safety Act, signed into law by President Lyndon B. Johnson in 1966, to make the case that laws passed to protect consumers decades ago can keep protecting them even as “new technologies come along.”

Chairperson Gensler, your own example, when not drawn so narrowly, is in fact one of government support for private-sector technological innovation that helped position the US as a global economic force equipped to help preserve democracy. Let’s quickly review the history of the car:

Over the course of the 1800s, European inventors worked on what were then called “mechanically propelled vehicles.” Early proponents envisioned cars ushering in the democratization of travel at scale and a fundamental transformation of how people lived, worked and moved around—to say nothing of how food could be delivered without rotting, and supply chains could be expanded and diversified.

Skeptics scoffed at the clunky technology. Critics doubted people’s capacity to operate and maintain it. And governments, some beholden to deep-pocketed legacy companies of the time, pointed to a lack of suitable roadways to justify using regulations to block it.

In the UK, where some of the earliest cars were introduced, growth of the nascent industry was stunted by the 1865 passage of what was called the Red Flag Act, which required three people per vehicle, one of whom had to walk ahead of it with a red flag (doable because of another requirement—that cars move no faster than 4 MPH) so as to warn others on the road and wave the car aside to make way for horse-drawn transport.

Across the Atlantic, however, a young country busy transitioning from a pre-Civil War agriculture-based economy into a global industrial powerhouse took a very different approach—one that merged private-sector innovation and imagination with public-sector enlightenment and creativity to figure out how to best unlock new technologies to advance the common good.

Henry Ford (despite his flaws) made the US the global heart of the auto industry, mass-producing affordable cars in collaboration with open-minded local, state and federal officials. Public health and safety concerns over horse-drawn vehicles in increasingly crowded cities moved local officials to support the switch to cars. The vastness of the US prompted states to invest in better roads.

And at the federal level, auto industry regulation did not begin in 1966 with the Motor Vehicle Safety Act—it started in 1916 with the passage of the Federal Aid Road Act with policy actions designed to support the scaling of car transportation.

The big-picture lesson here is the progress made possible by partnership between an innovative US private sector and an enlightened public sector:

  • Led by Ford but joined by others, the US became the global hub of the auto industry, eventually embodied by the “Big Three.”
  • A new model for industrial production emerged: the assembly line.
  • This new model helped the United States become one of the world’s largest economies.
  • Our economic and manufacturing might was later foundational to America’s ability serving as the “arsenal of democracy” during the Second World War.
  • The approach of the Big Three, impact of New Deal labor policies, and the efforts of the United Auto Workers, Teamsters et al ensured that a fair day’s work paid a fair day’s wages and resulted in a generation of post-World War II Americans who entered the middle class and juiced the network effect of a consumer economy.
  • It was ultimately the strength of the dynamic US economy that overpowered the Soviet Union.
  • And, as we are seeing today in California and in the recent federal climate legislation, this partnership between a forward looking public sector and a creative private sector continues to be critical – resulting in the positioning of the U.S. as a global leader in the transition to the next generation of cars – electric vehicles (including the production and manufacturing).

Chairperson Gensler, if we’re going to look to the history of tech policymaking, the real lesson is that the 20th Century did not become the American Century through the waving of red flags. Instead, it was government’s embrace and cultivation of innovation that encouraged builders to build for the benefit of the nation’s economic security and national security.

LBJ may have signed the Motor Vehicle Safety Act in 1966, but that same year, he also previewed the establishment of the Department of Transportation with a nod to how “[e]nlightened government has served as a full partner with private enterprise in meeting America’s urgent need for mobility.”

Much as the car was a technological inevitability, so is the next generation of the web. If we’re going to look backward for lessons on how to proceed on digital assets, let’s make sure they are lessons that lead us forward, not lessons that keep us mired in the past. And as we think about the role of digital assets and the next chapter of the Internet, the key takeaway here is that when a creative government partners with responsible builders the winner is the common good.

February 1, 2023

All Eyes on the U.K.: Crypto on the Thames

By Chris Lehane and Tomicah Tillemann

Crypto founders have spent years asking policymakers for regulatory clarity. That goal got closer this week—just not in the United States.

There has been a lot of noise, finger-pointing, and posturing about crypto regulation in the wake of several high-profile meltdowns in the industry. In the absence of meaningful new legislation—a.k.a. new rules for new things—many American officials continue to pursue regulation by enforcement, a posture that’s been unhelpful for builders working to create innovative, compliant products and services in web3. These recent trends are disappointing, but there are bright spots emerging overseas.

By abdicating its position of regulatory leadership, the U.S. is creating opportunities for policy arbitrage. Other countries are stepping in to provide needed regulatory clarity and protection for consumers. That’s why we’re monitoring the United Kingdom’s early, encouraging efforts to develop web3-friendly policies. There are still a lot of questions to be answered about how the rules in the U.K. will evolve, particularly around DeFi and stablecoins. However, the British government made an important announcement about their intention to provide regulatory clarity for digital asset projects in the U.K. this week. We are working closely with our portfolio to capitalize on this progress.

What’s Happening

The U.K. has taken a meaningful step toward a post-Brexit regulatory update for its financial sector that looks to be a sincere, serious effort to transform Britain into a global hub for digital assets. Today, U.K. Treasury official Andrew Griffith announced the beginning of what will likely be a rapid process to develop and formalize comprehensive rules for digital assets. This is the beginning of a consultative process, not the end. Many of the details still need to be finalized before we will know the full impact of the new regulatory package. At a minimum, we expect the new rules will cover best practices for exchanges, custody, and lending. They will also address issues related to consumer protection, operational resilience, and data reporting.

Why it Matters

While the past decade has been littered with governments making promising gestures that ultimately end up hindering innovation, there is reason to believe that the momentum in the U.K. could prove more meaningful to the long-term prospects of the ecosystem. Unlike the U.S., where the separation of powers complicates legislative action, the U.K.’s parliamentary system enables the party in power to act decisively. The new rules probably will not be delayed by partisan divisions. The U.K. has a long history of using policy innovations to further their global leadership in financial markets and well defined processes for making and updating financial regulations.

What Comes Next?

  • The consultations announced today will likely move quickly. The government has committed to collect input from the public by April 30.
  • Guidance on how to participate in the consultation is available here. We encourage members of the community to take part in the process. Policymakers want perspective on how to build a smart, successful framework to support economic growth and future innovation.
  • The government will likely seek to have comprehensive rules in place for both businesses and consumers by early next year.

The rulemaking in the U.K. represents the country’s first big effort to reshape its financial sector in the aftermath of Brexit. This broader package of reforms and regulatory updates will be critical to both the U.K.’s economy and London’s future as a financial hub. The bill could finally establish the certainty and clarity that the builders and communities have been seeking for years. If that happens, London may emerge as a destination of choice for web3 projects.

The new rules could also empower specific regulatory agencies—the Financial Conduct Authority and Payments System Regulator—to provide oversight for the sector. The Bank of England may get new powers to regulate the use of digital assets for payments and stablecoins. In the same way the Telecommunications Act passed by the U.S. in 1996 was grounded in a policy commitment to make the America a global leader in innovation, the new rules in the U.K. are based on a commitment to make the U.K. a global leader in the next generation of finance and technology innovation. Again, it is still too soon to speak with certainty about the ultimate outcome, but it’s a hopeful ambition that stands in contrast to the current posture of many regulators in Washington.

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