Two distinct cultures are interested in blockchains. The first sees blockchains as a way to build new networks. I call this culture the computer because, at its core, it’s about blockchains powering a new computing movement.
The other culture is mainly interested in speculation and money-making. Those of this mindset see blockchains solely as a way to create new tokens for trading. I call this culture the casino because, at its core, it’s really just about gambling.
Media coverage exacerbates confusion over the two cultures. Tales of fortunes won and lost are dramatic, easy to explain, and attention-grabbing. In contrast, the technology story is nuanced, slow to develop, and requires historical context to understand.
Casino culture is problematic — and, in the extreme case of the defunct offshore exchange FTX, it’s outright destructive. It takes tokens out of context, wraps them in marketing language, and encourages speculation in them. Whereas responsible token exchanges provide useful services, such as custody, staking, and market liquidity, reckless ones encourage bad behavior and play fast and loose with people’s money. At worst, they’re outright Ponzi schemes.
The good news is that the fundamental goals of regulators and of blockchain builders are ultimately aligned. Securities laws try to eliminate pockets of asymmetric information with respect to publicly traded securities, thereby minimizing the trust that market participants need to place in management teams. Blockchain builders also try to eliminate centralized pockets of economic and governance power, thereby reducing the amount of trust users must place in other network actors.
As of this writing, the last time the Securities and Exchange Commission (SEC), the main regulator of the U.S. securities markets, gave substantive guidance on the topic was in 2019. The agency has since brought several enforcement actions alleging that certain transactions of tokens were subject to securities laws, and it has done so without providing further clarification about the criteria by which it makes these determinations.
Applying pre-internet legal precedents to modern networks leaves gray areas that provide significant advantages to bad actors and non-U.S. companies that don’t follow U.S. rules. The situation today is so complex that regulators themselves can’t agree where to draw the line. For example, the SEC has suggested that Ethereum’s token is a security, but the Commodity Futures Trading Commission, the primary U.S. regulator of commodities, has said that it is a commodity.
Ownership and Markets Are Inextricable
Some policymakers have proposed rules that would effectively ban tokens and therefore, for all practical purposes, blockchains. If tokens were purely for speculation, these proposals might be justified. But speculation is just a side effect of tokens’ true purpose as essential tools that enable community-owned networks.
Because tokens can, like all ownable things, be traded, it is easy to think of them as purely financial assets. Properly designed tokens have specific uses, including as native tokens that incentivize network development and power virtual economies. Tokens are not a sideshow of blockchain networks, a nuisance that can be stripped out and discarded. They are a necessary and central feature. Community ownership doesn’t work unless communities have a way to own.
Sometimes people ask if it’s possible to get the benefits of blockchains while removing any hint of the casino by making tokens impossible to trade, through either legal or technical means. If you remove the ability to buy or sell something, however, you remove ownership. Even intangibles, like copyrights and intellectual property, can be bought and sold at their owners’ discretion. No trading means no ownership; you can’t have one without the other.
One interesting question is whether hybrid approaches can tame the casino while still allowing the computer to be built. One proposal would prohibit token reselling after the debut of a new blockchain network, either for some fixed period or until specified milestones are met. Tokens could still be awarded as incentives to grow the network, but token holders might need to wait several years, or until the network hits certain thresholds, before trading restrictions are lifted.
Time horizons can be a very effective way to align people’s incentives with broader, societal interests. Think of the hype cycle described earlier that technologies go through, with the early hype phase followed by a crash and then the “plateau of productivity.” Long-term restrictions force token holders to weather the hype and its aftermath and to realize value by contributing to productive growth.
The industry needs further regulation, to be clear, and that regulation should focus on achieving policy objectives, like punishing bad actors, protecting consumers, providing stable markets, and encouraging responsible innovation. The stakes are high. As I’ve argued throughout “Read Write Own,” blockchain networks are the only known technology that can reestablish an open, democratic internet.
Limited Liability Corporations: A Regulatory Success Story
History shows that smart regulation can accelerate innovation. Until the mid-nineteenth century, the dominant corporate structure was a partnership. In a partnership, all the shareholders are partners and bear full liability for the actions of the business. If the company has a financial loss or causes nonfinancial harm, the liability pierces the corporate shield and falls on the shareholders. Imagine if shareholders of public companies like IBM and GE were personally liable, beyond any money invested, for mistakes the companies made. Very few people would buy stocks, making it much harder for companies to raise capital.
Limited liability corporations did exist back in the early nineteenth century, but were rare. Forming one required a special legislative act. As a result, almost all business ventures were close-knit partnerships among people who deeply trusted one another, like family members or close friends.
This changed during the railway boom of the 1830s and the period of industrialization that followed. Railroads and other heavy industries required significant up-front capital—more than could be provided by small groups, even when the groups were very wealthy. New and broadened sources of capital were needed to fund a transformation of the world economy.
As you might expect, the upheaval ignited controversy. Lawmakers faced pressure to make limited liability the new corporate standard. Meanwhile, skeptics argued that expanding limited liability would encourage reckless behavior, effectively transferring risk from shareholders to customers and society at large.
Eventually, the factions settled on a way forward. Industry and lawmakers crafted sensible compromises, arranged legal frameworks, and made limited liability the new norm. This led to the creation of public capital markets for stocks and bonds and all the wealth and wonders those innovations have generated since. Thus, technological innovation drove pragmatic changes to regulation.
The history of economic participation is one of increasing inclusion thanks to a combination of tech and legal advances. Partnerships had small groups of owners that counted in the tens. The limited liability structure expanded ownership dramatically, to the point that public companies today have millions of shareholders. Blockchain networks, through mechanisms such as airdrops, grants, and contributor rewards, expand the circle once more. Future networks could have billions of owners.
Just as industrial-era businesses had new organizational needs, so do network-era businesses today. Corporate networks bolt an old legal structure, C-corporations and LLCs and the like, onto a new network structure. This mismatch is the root cause of many of the problems with corporate networks, including their inexorable switchover from attract to extract mode and the exclusion of so many contributors from the upside of their networks. The world needs new, digitally native ways for people to coordinate, cooperate, collaborate, compete.
Blockchains provide a sensible organizational structure for networks. Tokens are the natural asset class. Policymakers and industry leaders can work together to find the right guardrails for blockchain networks, just as their forerunners did for limited liability corporations. The rules should permit and encourage decentralization, not default to centralization as corporate entities do. There are many things that can be done to rein in casino culture while allowing computer culture to develop. Hopefully, smart regulators will encourage innovation and let founders do what they do best—build the future.
The casino should not hold the computer down.
From the book READ WRITE OWN by Chris Dixon. Copyright © 2024 by Chris Dixon. Reprinted by arrangement with Random House, an imprint of Random House and division of Penguin Random House LLC. All rights reserved.
