July was another banner month for the crypto industry with new and positive regulation, the macro environment clearing up leading to an all-time high in Bitcoin while, simultaneously, the rest of the crypto markets roared to life. We’ll begin this month by looking at the regulation that passed and its impact, and then we’ll look a little closer at how the M2M economy is continuing to evolve, this time at the border. Let’s jump in…
Capitol Hill Crypto
So, the week of July 14 was, dubbed “Crypto Week” on Capitol Hill. I have to admit, I was a little surprised to see the legislative efforts moving three crypto bills forward branded like a Discovery Channel Special Event (Shark Week anyone?) And it was probably very sharky on the hill that week. No complaints however as, at the end of the day, it turned out incredibly positive for the industry. The House had three bills on the table and all three passed. These included the CLARITY Act and the Anti-CBDC Survelience State Act, both of which passed and now have been sent to the Senate, and the GENIUS act, which originated in the Senate and is now signed into law.
The CLARITY Act, which fits the “it’s about time” category, solves one of the biggest problems we have had here in the US, namely, which regulatory body is accountable for the actual regulation of digital assets. Bitcoin and Ethereum were both dubbed commodities years ago. Even so, the prior SEC wanted to regulate everything they could and even tried to walk the cat back regarding Ethereum. This had clear blowback from the industry as most blockchains that are purposeful and will last are actually production capital, not financial capital. They aren’t securities. The US Government finally caught on. Now we do have clear definitions and a measuring stick. At the simplest level, assets that represent investment contracts are regulated by the SEC. That makes sense. Assets that are linked to a mature, decentralized blockchain with a distributed token supply (which means there is no one central entity controlling it) are commodities and regulated by the CFTC. That also makes sense. As noted above, most of the ones we care about are… no surprise… commodities. This passed the house, now let’s see if the Senate is on board. Assuming so, this is a big deal and will really help the industry mature. And besides that, it’s correct and captures the sprit of blockchains, what they are, and how they work.
Then we have the GENIUS Act, which is now a Law. The GENIUS act is designed to provide guidance and rules around stablecoins… digital assets that are pegged to a dollar. Because I’ve unpacked this previously won’t belabor it further and simply note that this is a huge step in our ability to use dollars in a digital world. Companies can now issue coins that represent a US dollar provided they are backed by cash, treasuries or insured deposits at a 1:1 ratio. This means that if you have $1000 USDC (which is Circle’s stablecoin, for example) you can be assured that it’s backed by $1000 and you can redeem it. We care about this as consumers because now we can transmit “dollars” directly from people to people, people to entities and even entities to entitles without having to go through a middleman. But wait you say, can’t I do that today? Nope. Not without stablecoins. It looks like we can do that now with Zelle and PayPal but those are centralized companies that manage the transmission of the asset and govern how much you can send… or even if you can send. Conversely, in the physical world if you have a $20 bill you can hand it to a friend and you’re done. It was yours. Now it’s theirs. Boom. No middleman. Now we can replicate this in the digital world. You can send $20 in USDC to that same friend directly and you’re done. It was yours. Now its theirs. Boom. No middleman. That’s the point of stablecoins. It’s the evolution of our dollars. And it’s here, and the government just got on board.
Rounding this out we have we have the CBDC Anti-Surveillance State Act, which prohibits the creation of a government-controlled central bank digital currency (CBDC). CDBCs, which have been discussed for years look like a great thing however in their design the government has full control over them, everything you do with them and, more so, they can dictate if you can do anything with your own money. It is the antithesis of blockchain ethos. Because of this “your” money could be instantly frozen. It could be automatically taxed. It could also be limited to dictate what you can or can’t purchase – and that’s dangerous stuff. China and Russia already have such instruments, which allow them basically full control over how every citizen uses their money. That is a very bad thing. Fortunately, this act prohibits the creation of such an instrument. It’s made it through the House, so now let’s see if the Senate is on board. I hope so.
Semi-Surveillance
Having said that it’s not all puppies and rainbows and we need to acknowledge that. While the GENIUS act is a huge step forward there is one drawback. In this first version they did not put in the kind of privacy protection that I think is warranted. Now, because stablecoins are on a blockchain it’s true, everything in your personal wallet is yours and cannot be taken or manipulated. Think of your crypto-wallet like a safe in your house, that only you can access. However, it is important to know that anything in the blockchain world is easy to see, because one of the other blockchain ethos is transparency. This means that stablecoin issuers – whether they be companies or governments – have full visibility into everything you do with your stablecoins. This can be used to understand spending, potentially leading to behavioral profiling including political views, medical expenses, religious donations, etc. This is one of the big complaints of the big data brokers that we are dealing with today (hello Amazon). On the plus side, with everything transparent it completely takes away the “crypto is only used by criminals” argument (yes, I’m looking at you Senator Warren!) So that’s good. But this act doesn’t go quite as far as it could in protecting individual rights. For a country that has a Bill of Rights that protects freedom of speech, freedom of religion and therefore implies privacy of beliefs (1st amendment), privacy in the home (2nd amendment) as well as clearly speaks against government surveillance (4th amendment) and self-incrimination (5th amendment), I think we should do better here.
That being said, the truth is that the world of big data surveillance is where we are today. Anything bought, transacted or sent in the digital world right now is subject to big data farming. So it’s NOT a step backward. It’s still a big step forward in endorsing the use of this asset, so I think the pros far outweigh the cons. However, as we move into this digital age, it’s something that I think we have an obligation to unwind big data. But, one step at a time. And this is still a good first step.
President’s Working Group Working
One final note here in the world of regulation is that on July 30 the President’s Working Group issued a 160 page report entitled “Strengthening American Leadership in Digital Financial Technology.” At a very high level this is the government’s roadmap – it’s operational plan if you will — to become the world leader in digital assets. Among many other things, this report focuses on the importance of regulatory clarity, the enablement of innovation, the importance of stablecoins and proper regulation, safeguards against illicit use and further provides guardrails for public/private collaboration. It’s a comprehensive roadmap touching most aspects of the industry. Following immediately the next day the SEC announced “Project Crypto” as a proactive initiative to implement the guidelines and recommendations in the report. I felt it critical to include this to get it on your radar but consider this a precis as I’ll need some time to really digest the report. The most important point though is that this is absolutely HUUUUUUGE. It is a fundamental shift from enforcement to facilitation and its message is clear. If the U.S. does not lead the way someone else will.
BlockchAIn: M2M at the Border
While all this is happening – and boy is it a lot – I think it’s important that we keep our eyes on where all this technology is taking us. Last month we opened the concept of the Machine-to-Machine economy, or what I call M2M. As Artificial Intelligence advances it’s going to be accountable for more and more of the basic business functions that we as humans do today. And it will do this because AIs can transact directly with each other via blockchain technology. One of the examples that I discussed last time that currently is being pioneered is smart cars speaking to smart chargers and negotiating charging transactions automatically. Let’s look at another example, this time customs clearance.
When I spoke at the IT Masters Conference in Mexico a few months ago all attendees received a copy of my book, Crypto Decrypted. Well, they were supposed to. Though everything was declared properly – or at least as we were told it should be – the books were stuck on the border for three weeks with a duty required. It took that long for UPS to not only figure it out, but to alert us what the amount was so it could be paid. This was despite hours (and hours and hours) of navigating phone trees, sending emails, updating information and having no less than 15 conversations with 15 different humans at UPS. Anyway, upon resolution, the books in question were released… one full week after the conference ended. It didn’t have to be this way. In the M2M economy it won’t.
The World Customs Organization (WCO) is piloting a Smart Customs Project in Abu Dhabi specifically designed to address customs inefficiencies like this. The goal is to enable near real-time paperless customs approvals by utilizing automated declarations, approvals and even payments via blockchain technology and AI. How would this work? Let’s go back to the books-stuck-at-the-border example and see how this might have taken place more efficiently. First, we enable our package with IoT sensors that communicate with customs and when it gets to the border tech takes over and the AIs do their thing. The dialog could look something like this:
“Hi, I’m a package being sent from the USA for delivery to Mexico City. Here’s all of my data.”
“Ok, this is customs, welcome to the border. I see your data. It says you’ve got 100 books and you’re sending to Hotel ABC. I can see that you have entered everything correctly, but based on your declarations and the content of the shipment you are required to pay an import duty.”
“No problem I’ve already been given clearance do to so provided it doesn’t exceed $100.”
“It’s only $55.”
“Done – payment released.”
“Ok, you’re all set, I’ve noted that you are cleared. Your shipper can proceed with delivery.”
Now, I’ve taken a little bit of liberty here with the “conversation” as the first implementation will simply be via a smart contract which will handle all of the above based on preset conditions of satisfaction. But, I wanted to note how this dialog could look with two machines interacting because in the future this is how it will work. It will be much smarter. As a further example, let’s say that the tariff was 10% more than the pre-authorized amount. Rather than stay stuck at the border for three weeks, get entangled with red tape or worse, or involve pesky and inefficient humans, the smart package could automatically dialog with the recipient (whether human or machine) to determine if a larger payment could be made. In the simplest case our package could send a message and get permission.
“Hi, this is package XYZ with 100 books that you sent to hotel ABC. I’m at the border but we need to pay $110 not $100 for clearance. Is that OK?”
“Yes – I’m the recipient and I approve.”
“Ok, authorizing payment to customs.”
Wouldn’t this be more efficient? On top of this it’s incredibly secure. The recipient wouldn’t need to worry about being scammed because no payment information is being provided at any step. The package is simply authorized to pay the additional amount using the secure wallets already set up! Now, these are incredibly simple examples… but it’s not hard to see this extend so that, in the future, if there was some sort of issue such as missing information, a change in location, a change in policy, etc. machines could negotiate with each other directly and greatly facilitate the process, thereby reducing cost, shipping time, and frustration via undelivered shipments. This is so valuable that it’s not just the UAE, but Singapore, China, Korea and Brazil are all piloting “invisible customs” models using Blockchain and AI. And lest you think this is all Star Trek get ready, because it’s being worked on today.
In Closing
The U.S. Government is getting it done in this industry. We now have rules for stablecoins, progress on specific regulatory categorization and we even have an operational plan for the US to become the world leader in this space. This is a ridiculous amount of progress in the last six and a half months, which really isn’t that much time when one thinks about it. No wonder markets are moving! And, it’s just the beginning. Systems are becoming smarter, machines are preparing to do more heavy lifting and the M2M economy is being piloted. So, hang onto your hats everyone. While everyone is looking at the investment potential (which is also HUUUUUUGE!) that’s the proverbial tip of the iceberg. It’s the transformation of how we are going to operate as a species that’s the real ROI that this technology will be providing.
That’s all for now! Until next time be well, stay safe, and I’ll keep Decrypting Crypto for you!