The world of crypto is buzzing, but a big question mark hangs over it: regulation. Right now, a lot of regulatory attention is focused on if a cryptoasset is sufficiently “decentralized.” Is that really the best approach to take? A dozen of the nation’s experts discuss the fraught issue. Marcin Kowalczyk, a blockchain regulatory analyst, believes that the current obsession with decentralization is the wrong approach. DeliciousNFT.com is exploring why this approach could be fundamentally broken and what a better solution can entail.

Instead of fixating on decentralization, regulators should be asking a more fundamental question: Does this cryptoasset represent a direct claim on a business's assets or profits? This change in mindset will help establish a transparent and consistent regulatory environment. This will help both regulators and the crypto industry use it to their advantage. Think of it like this: if a cryptoasset functions like a stock, giving holders a share of a company's earnings, it should be regulated more like a stock. If it’s just a digital commodity, like Bitcoin, then the game has to change. This basic but comprehensive approach transcends the decentralization debate and addresses the crux of what the asset is really intended to be.

Better, more predictable regulatory framework would be a miracle. That clarity will give confidence to businesses and investors. In turn, they’ll be able to operate more confidently and invest in the sector less painfully. Regulation provides the foundation for a safe and secure environment for users. By protecting more users, more people will be able to safely adopt cryptocurrencies, resulting in even more mainstream acceptance and use of digital assets. Regulation is the best way to proactively reduce the risk of fraud and other illicit acts in the crypto industry. This, in turn, builds trust and confidence among users within the industry.

Why Decentralization Isn't the Whole Story

It’s really hard to define. What exactly does "decentralized" mean? How decentralized is decentralized enough? These are difficult questions, with no easy or clear solutions, and they generate a confusing patchwork of knee-jerk, inconsistent, and unpredictable regulations.

Furthermore, many projects that claim to be decentralized still have centralized aspects, such as a core team that controls development or a foundation that holds a large portion of the tokens. That complicates efforts to apply a simple “good idea/bad idea decentralized/centralized” test. A better, more commonsense approach is to focus on the economic reality of the cryptoasset. Does it provide the holder an ownership interest in an actual enterprise? If not, it should be regulated like the highly centralized and concentrated industry that it is—even if the underlying technology is very decentralized.

A Better Way Forward: Focusing on Economic Reality

So, what should a better regulatory framework be? In other words, it would adhere to the principle of “economic substance over form.” Regulators should ignore labels, conventions, and marketing to determine the real function and purpose of a cryptoasset. They can no longer simply focus on its technical attributes alone.

This new approach would allow for far more clarity and predictability for businesses and investors, while still offering important consumer protection and fraud prevention.

  • Mining Production Cost: This framework estimates the floor price of a cryptoasset using the cost of production, similar to the "All-In Sustaining Costs" (AISC) for gold.
  • Network-Value-to-Transaction (NVT) Ratio: This framework compares the network value (market cap) to the network's daily on-chain transaction volume, providing insights into the asset's usage and value proposition.
  • Market Cap to Thermocap Ratio: This framework compares the market capitalization of a cryptoasset to its total addressable market (TAM), providing insights into its potential market share.
  • Token Issuance: This framework evaluates the total value of tokens issued by a project, providing insights into its potential market capitalization and liquidity.
  • Discounted Cash Flow (DCF) method: This framework estimates the present value of a cryptoasset's future cash flows, providing insights into its potential value and growth prospects.

We’re seeing some encouraging signs that regulators are beginning to head this way. Recent regulatory developments suggest that US regulators may be on a different course. Now, they are focused on providing regulations that are clearer but still supportive of innovation. The creation of the President’s Working Group on Digital Asset Markets, chaired by David Sacks, aims to shape a more coherent regulatory approach and encourage blockchain innovation. The SEC set up the Task Force to address decades-old ambiguities in crypto regulation. Among its goals are creating clearer registration pathways for emerging technologies, improving disclosure frameworks, and providing a clear-cut enforcement strategy to foster innovation.

Recent Developments and Future Trends

Enabling in-kind creations and redemptions of ETF shares for crypto assets would reduce transaction costs substantially. This change will improve tax efficiency and reduce tracking errors, helping to further innovation within the crypto ecosystem. Expanding it to permit custody of security and non-security crypto assets would be a game changer. This amendment would greatly increase its usefulness and encourage creative and innovative uses within the industry. These are all positive steps towards protecting the public from corrupt practices.

By starting with the economic reality of cryptoassets, regulators can develop a policy paradigm that is effective while still encouraging innovation. That will allow us to explore the full potential of this exciting new technology. At the same time, it will better protect consumers and prevent illicit activity. DeiciousNFT.com will be keeping a close eye on these developments and bringing you the most relevant information and analysis to help you stay in the know.

By focusing on the economic reality of cryptoassets, regulators can create a framework that is both effective and innovation-friendly. This will help to unlock the full potential of this exciting new technology while protecting consumers and preventing illicit activity. DeliciousNFT.com will continue to monitor these developments and provide you with the latest insights and analysis.