Spencer Bogart, a partner at Blockchain Capital recently spoke at the Fintech Unbound Cato Summit on Financial Regulation about the process that cryptocurrency firms go through when they have to approach the regulatory environment.
Blockchain capital is a venture firm that invests in blockchain and cryptocurrency companies and Bogart has been involved in the venture since 2012. He has also invested in about 70 companies in the cryptocurrency space so far.
Bogart stated that when Bitcoin [BTC] stormed into the scene and started off the cryptocurrency space, financial regulators had the big question of how they would fit Bitcoin into the current regulatory and financial system.
According to the investor, the task would have been quite the challenge for regulators, as he believes that it would be easy to tackle something in relation to custody and the simple acquisition of it.
Bogart then added that if a bank were to allow their clients to send payment over the Bitcoin network, they would have a requirement to know who their service providers are. The question arises when users do not know who processes their Bitcoin transaction. Bogart said:
“The transaction goes out, over a network, is processed by the network and processed by a miner who you don’t know. So when a regulator comes knocking and says, ‘hey, who messed up this transaction?’ You don’t really have anybody to point to. So we end up with this weird kind of a ‘square peg and round hole’ problem.”
According to Bogart, the first reaction from the cryptocurrency space as an answer to the question raised by regulators was to strip the cryptocurrency asset from the blockchain technology. Bogart pointed out that the whole enterprise blockchain theme was to get rid of the cryptocurrency asset that is public as anybody could use it and would hence be dangerous. This was essentially the two-year investment theme for the whole industry at the time, he added.
The venture fund investor stated that people in the cryptocurrency space considered focusing on the enterprise blockchain technology that they could actually control.
Through this, cryptocurrency developers could then reverse transactions and do all of the things that can be accomplished in the traditional financial system. However, Bogart believes that people realized that they cannot effectively separate the public cryptocurrency asset from the network.
“So far, what we’ve seen again and again and so early in the story is that assets play an important role in the incentivization of a network for it to function properly. Once you remove that, what we’re back to is essentially a database.“
Bogart added that even though it could be a new form of database and there could be some efficiency in it, a lot of its actual value has been lost.
The investor confirms that as a result of this, a parallel world of cryptocurrency finance has steadily emerged, regardless of the number of safeguards that have been encouraged for portfolio companies. Bogart concluded by stating:
“In general, I think what we’ve seen is our portfolio companies try their best to adhere to regulation but a lot of them have started to move off shore and find more favorable jurisdictions where at the end of the day, the access points here are the internet.”