The Consensus conference took place over 3 days this week in Austin, Texas. Consensus is one of the largest US crypto conferences. 2023 was its ninth installment. Consensus caters to a “corporate” crypto crowd. I was in Austin all week attending the conference, side events, meetings and speaking to hundreds of people. These are my takeaways.
What a difference a year makes
Consensus 2022 was a banger. A record setting 17,000 people attended. The biggest names in crypto were all in attendance. Wall Street and Big Tech were present. Crypto 'tourists’ swarmed Austin on a reconnaissance mission. They were there to learn, figure out how to get involved and not get left behind. Disclosure and Bob Moses headlined nighttime festivities. I was there as well (read my 2022 Consensus Cliff Notes).
That was not the case in 2023.
Attendance was not disclosed, but I suspect it was less than half of 2022. There were noticeably fewer people around. Wall Street and Big Tech were far less prevalent. There was less energy. It felt a little flat. The speaker lineup was focused on policy. There were fewer notable speakers compared to 2022. Understandably, the most notable figures of 2022 are persona non grata.
Gone were the crypto 'tourists.’
What remained were self-selected people committed to crypto willing to pay top dollar to convene in Austin. Unsurprisingly, they’re all constructive on the space. No one spends thousands of dollars and nearly a week in Austin to criticize crypto.
Those in attendance were there to work. They were not there to listen to speakers and walk the halls of the expo. They attended side events focused on their area of interest. Those were the noteworthy events, not the conference itself.
Regulation hottest topic
The dominant theme of the conference was US regulation. The audience was overwhelmingly American. The debate over whether or not tokens are securities raged on. Frustration over the lack of clarity was expressed by all. No insightful views were shared.
We’re at a standstill. The SEC will continue to enforce. Congress won’t pass anything.
The most interesting regulatory point were government representatives from UK, Japan and the UAE present in person stating they’ve got a clearer regulation and are open for crypto business.
Unfortunately the regulatory debate at the conference missed the two most important factors i) banking restrictions and ii) does securities regulation even matter?
Banking restrictions
Crypto media, and this conference, are incorrectly too focused on debating whether or not tokens are securities. It’s understandable, the salacious debate is click-worthy. Seemingly every week the SEC is dropping a new enforcement action. The CFTC disagrees with the SEC. The NYDFS is indicting bad actors. It’s all over the headlines. But it’s not the most important thing in US crypto regulation.
Restricting crypto-related businesses access to the US banking system is the most important thing in US crypto regulation. Crypto businesses still need to interact with the banking system. If they can’t, they can’t run their business/project (read Crypto Crackdown: Regulators Mount Up).
To Consensus’ credit, they did host one discussion on the topic with Caitlin Long. She is outspoken on how damaging restricting access to the banking sector is for crypto-related businesses.
Does US securities law even matter?
People are constantly asking whether or not tokens are securities. But that’s missing the mark. The more important question to ask is: does it matter if a token is a security?
No one discussed this more pertinent question at the conference.
The answer differs for the US and the rest of the world.
For the US, whether or not a token is a security matters for capital and business formations. If tokens are securities, then less American capital will flow into crypto and fewer crypto projects will be formed in the US. The former is a problem. The latter is less so. Here is why:
Capital formation: If tokens are securities, then they’re all unregistered securities. American capital will shy away from investing in crypto tokens. Cutting out the largest capital market from an industry does not bode will for its future. But it’s not insurmountable. Most established US funds have off-shore vehicles. Off-shore entities can continue to own crypto. It’s the new capital that will be harder to raise in the US.
Business formation: US crypto businesses and projects will migrate and be formed in other jurisdictions. There may be some US entrepreneurs that decide not to pursue a crypto venture. But it won’t be material.
For the rest of the world, the US labeling a token as a security has limited impact. The US security debate is not topical in Europe, Asia and the Middle East. On the contrary, they’re pushing ahead with more constructive regulation to fill the US’ void. The US decreeing an asset as a security does not impact how someone on the other side of the world interacts with that asset.
There is an argument that if tokens are securities, then crypto trading volumes will decline affecting price. Token prices will take a hit on the news that a given token is a security. But volumes won’t decline materially. US funds trade crypto mostly via off-shore vehicles. Off-shore funds are legal and typical for venture, hedge and private equity funds. The structure is designed for advantageous tax sheltering for non-US investors. Coincidently, the off-shore structure enables a fund to trade assets outside of the US’ jurisdiction. So even if the US says a token is a security, these off-shore funds can continue trading like they were before. To prevent that, the US would need to change the legality of off-shore feeder funds. That would impact every US based fund. It would have far wider ramifications than the small crypto industry. It’s unlikely to happen.
So does it matter that the US labels a token as a security?
Not really.
At least it’s not as big of a deal as people think. Capital formation is the biggest setback.
The debate about whether or not a token is a security is a demonstration of American naivety and arrogance. Americans haven’t realized that labeling a globally traded asset as a security isn’t going to change much.
DeFi doldrums
DeFi interest has waned. It was all the rage, but DeFi summer has long since passed. Users and investors are left wondering what are we supposed to do in DeFi?
DeFi yields are uncompetitive compared to tradfi yields. There is no point in reaching out on the risk spectrum for a lower or comparable yield in a far riskier asset. People are content earning over 4% in a savings account.
DeFi provides overcollateralized lending. The only use case is crypto trading. It’s inefficient for any business to tie up $150 of liquid capital to get a $100 loan. If margin trading is the only use case for DeFi lending, it’s not that compelling. Under-collateralized lending, lending secured on illiquid assets and lending based on reputation/credit quality are what will make DeFi lending compelling. Those are the hallmarks of tradfi lending. It remains to be seen if the cornerstone of tradfi lending can be brought on chain and if that even makes for better access to capital.
DeFi applications are also believed to be the next target for US regulators. It will be interesting to see what happens if an indictment comes for a DeFi application. Regulators may attempt to indict a DAO and shut down an application. A judge may rule in the favor of the regulator, but shutting down an application isn’t possible. It’s not like blocking a website. Regulators may find themselves with a victory in principle but not in practice. Alternatively, regulators may indict individuals linked to a DeFi application. This type of enforcement action would do nothing to stop the application, but would prevent Americans from developing DeFi applications.
Stop dropping ‘alpha’
This one is personal.
I get irked when project promoters “drop alpha.” Too often it’s not alpha at all, it’s insider trading. Investing ‘alpha’ is the returns above an expected benchmark an astute investor generates from sound analysis of public information yielding a differentiated view. It takes courage to stick your neck out on the line and have a contrarian view for the world to criticize. Alpha is not derived from someone tipping you off on some information that no one else knows. That’s insider trading. It requires no thoughtful analysis nor effort. It requires loose morals and a penchant for a quick buck.
Insider trading is illegal. People rightly go to jail for it. Don’t masquerade sharing material non-public information as ‘alpha.’
Stay curious.
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