Regulating Blockchain: Interview with Charles Hoskinson, Part 3

Regulating Blockchain: Interview with Charles Hoskinson, Part 3

. 12 min read

Charles Hoskinson is the Founder of Cardano and CEO Input Output Hong Kong. Cardano is a self-described third-generation blockchain, with use cases spanning from credential verification to decentralized finance to NFTs. Its native cryptocurrency, ADA, is the third most valuable crypto asset by market capitalization.

Apostolicas and Qi spoke with Hoskinson and Joel Telpner, Chief Legal Officer at Input Output Hong Kong, via Google Meet. Click here to read Part 1 and Part 2.

Let’s talk about the recent Infrastructure Bill. Can you give an overview of what happened with crypto, why it’s important, and what IOHK, Cardano, and others in the ecosystem are taking away from the events?

Telpner: I want to start with the positive side: not happy with what’s in the bill, but at least we saw people in Congress speaking much more intelligently about crypto and about blockchain, and we wouldn't have seen that a year ago. I take that as a positive silver lining. On top of that, it is perfectly legitimate for us as a society and governments to say if you invest in certain types of security and you have a gain, you should pay tax on it. And to the extent people are transacting in crypto and they realize profit from it, they should pay tax on it. Anybody that says you shouldn't have to pay tax on this transaction, they’re simply wrong.

So the challenge we have is that in our legacy world for example when you trade securities, you're doing it with a regulated intermediary broker-dealer. The broker-dealer is required by regulations by both you and the IRS, for example to issue a 1099, a 1098, a form that says, “Hey, you made this much gain for which you may have to pay taxes.” And in the crypto world, direct peer to peer trading or through intermediaries, at least as of now, are not subject to the same type of regulatory framework. There’s a legitimate question of do we simply rely on people solely on their own to report, whatever gain they have so that they pay taxes, or do we try to create a comparable system to the legacy one for reporting of these activities. I'm sympathetic to the desires in Washington to find a system for reporting these activities.

Where the problem lies was the solution that they were coming up with. I don't think it makes sense, it's not workable, and they were trying to impose upon parties the role of doing things regulated broker-dealers have to do without understanding that number one, such things are not even feasible in many cases: literally the parties they were imposing the potential reporting obligation on have no way to get the information that's supposed to be reported.

You literally cannot implement the requirements the way the bill contemplates, and secondly, it's assuming that there are all these players out there that somehow can magically start to perform a role for which we have years and years of the legacy system with tools and compliance policies and procedures where they know we know how to do that.

It just doesn't work that way in our world. Again, I understand the need over time, to be able to have a level comparable playing field where if you have profits in crypto activity you should report and pay taxes on it. The solution they came up with doesn't work, it doesn't make sense. And it also distinguishes among the players in the blockchain universe in a way that's inappropriate where it imposes reporting obligation on some players and doesn’t on others in a way that, in my view, is just not simply logical.

Hoskinson: In fact, the authors of the very language that was so problematic tried to change it. However, they were unable to do so because of the archaic practices of the Senate. And the only reason the bipartisan amendment which had about three-fourths of the Senate supporting it was not allowed to be included in the bill was because they require unanimous consent which Shelby from Alabama killed.

I think this is an issue where we're trying to do too much in a single bill. And this is a very political, highly partisan bill. And as a consequence, crypto got dragged into it, and it should have never been dragged into this particular way.

If there's a desire to pass a crypto bill, pass a crypto bill. But don't have an infrastructure bill and sneak in crypto as some sort of tax compliance way to help raise funds for your infrastructure bill; it’s just classic Washington sausage. The good news is it's going to take quite a bit of time but even if it passes to go into effect that gives us time to address it and remediate it. I do believe that we're going to see a lot of legislation in the next 12 to 24 months specifically about cryptocurrencies to finally give regulatory clarity. It's deeply frustrating for me because my industry and those regulating it are sometimes very incompatible with each other, things are said on both sides, which I think are blatantly unfair. And, you know, I kind of have to be the guy in the middle that says, “Can't we all just get along?”

The long and the short of it is this industry is here to stay: it is too big, too prominent, and the youth are on the side of the industry. A very telling thing is if you look at somebody under the age of 30, they're significantly more likely to own a cryptocurrency than a stock or a bond.

And that trend is not going to change and those people grow up, they get bigger jobs, and they have more economic influence. A lot of those people will run for office. So, the next wave of politicians, the next wave of business leaders, the next wave of people working in the US bureaucracy, are growing up with a belief and impression is positive about the cryptocurrency industry. And if that's taken from them, regulated out, all it's going to do is just accelerate the dismantling of the legacy government and the renaissance of the newer government.

The long and the short of it is this industry is here to stay: it is too big, too prominent, and the youth are on the side of the industry.

You see this a lot: certain industries used to be completely monopolized and controlled, like the telephone industry or the airline industry. Then they got over time deregulated and privatized, and the paradigm shifted. And so similarly the FinTech industry is a big renaissance right now. And there are some legacy players that are trying to hold on to things as much as they can. For right now, they have a lot of power, but over time that power is going to decay, because they're going to age out, and consumer preferences are going to change. Also, the United States is in a global environment. If the United States says something is a security, the rest of the world does not have to comply. And in many cases the rest of the world will be moving in a very different direction. If the United States wants to build a wall around innovation, all that's going to do is create jobs in Europe and other places, and it's not going to slow down the rate of growth and progress in the cryptocurrency industry.

A number of lawmakers likely write off  crypto as just a right-wing techno-libertarian fantasy. How you might appeal to policymakers on the left like Elizabeth Warren and Janet Yellen, who have often publicly criticized cryptocurrencies from a variety of angles?

The philosophical issue that I think is very difficult for people in certain areas of the left. If you are of the belief that everything needs to be controlled by a regulator, a bureaucracy, or the heavy hand of government, you're always going to be uncomfortable with a technology that says people should be in control of their own lives. That they should be their own bank, own their own identity, own their own data, and so forth. That's a difficult situation; it's a circle that’s hard to square. I don't understand why they take this opinion overall that it's just a bunch of cowboys and we need to regulate this thing, control this thing to do for the greater good. Now, I think much of that comes from a lack of understanding about the technology.

You have to educate. You have to say, look, this is not a debate of no regulation libertarian crypto anarchist utopia or heavy regulation neo communism. This is a debate of what this protocol needs to do to ensure that it's fair for everyone and that consumer protections are put in. How do you get rid of information asymmetry, how do you get rid of insider trading? How do you automate equal access to the system, so that every single person regardless of ethnicity, regardless of language, regardless of gender, can actually connect to the system and use the system?

By the way, these systems are programmable, which means that the things you care about, whether it be fighting global warming, or it be the rights of minorities, whatever, is part of that agenda that they have, you can use these systems as part of the solution for that agenda. Also, it's transparent, auditable, immutable, and fair. Every single person has inclusive accountability. The left historically has been somewhat anti-war and anti-military industrial complex. Well, wouldn’t it be nice to have perfect accounting and accountability for how our tax dollars have been spent in that sector in that industry? So we certainly don't lose US$80 billion of military hardware. Or we suddenly forget what we spent here and there. That's been a dream for a long time in those political circles. Well blockchain technology, cryptocurrencies, is actually the perfect mechanism of doing that. Every single transaction that Bitcoin has had since the beginning of Bitcoin to January 3rd of 2009 is known. If you can connect metadata identity and other things there, all government expenditures are in real-time continuously audited. So you would never lose a dollar. You never lose accountability; you can actually have the Government Accountability Office (GAO) come in and have some real teeth and understand what's going on. So when you pitch it as a neutral tool, and ultimately if it's applied correctly you get transparency, egalitarianism, you get fairness, you get equal access, and you get oversight of industries they've traditionally had a lot of problems with.

I think that actually is deeply appealing, especially for tax compliance. That's another thing that seems to yell at that the rich need to pay their fair share. The only way you can do that is to bring all of wealth into the light. A lot of it was in the dark, you never know what the tax paid was or how high the tax rate was. So in the cryptocurrency space, it's much easier to actually have a real conversation about what is taxed, what isn’t taxed, and guarantee that people have paid their fair share.

All of that said, even sometimes there are problems and difficulties because, again, these systems are intrinsically free and open, and if you have an authoritarian view or a top-down view or very structured view of how the world should be, it is difficult to accept that maybe somebody can be successfully their own bank. It is difficult to accept that sometimes trusting people with their own money means they're going to make poor financial decisions, and sometimes give their money to scammers, or buy a bad asset, or something like that. And if you have a mentality that every time that occurs, the government has to step in and use a heavy hand to sort that out and figure it out. That doesn't work so well in some cases with this technology. So you have to basically figure it out; it's a political debate and you know the real solutions are probably somewhere in the middle.

The right has a lot of problems with this technology. Because the bad kinds of things that you can use this technology for that they don’t like too much. So it’s bipartisan in that respect, but I think education is really the key.

Telpner: I think we're going to see a natural progression of complicated technology, people are wanting to learn slowly over time, and understand that more and more, they will start to appreciate that this is not the problem. But this technology offers a way for them to actually achieve a lot of their political objectives and goals. And so, I do think you're absolutely right. We meet somewhere in the middle, because we'll go beyond this stage and just simply assume that blockchain and crypto does nothing but empower criminals.

One of the actual main incentives or the justifications behind recent regulatory crackdowns like in China, for example, is the idea that the usage of sort of decentralized or non government run currencies is the way that people sort of skirt regulations or get around existing government regulations around money they hold. What is the response to the argument that crypto is in fact used for crime?

Telpner: China is a different case. When we talk about all the wonderful things we can do by taking a central bank digital currency and adding identity into it, and the ability to create data to track transactions. The dark side of that is if you have a government that bans any other type of financial activities and forces everybody to use their digital currency, and then uses that as a tool to monitor all of your financial transactions and you can see where that could go and how that is now allowing the government to start to look at everything you're doing to restrict what you're doing, to engage in the type of surveillance and oversight to the least those of us I think in this country don't really see happening. China is a different case and that does concern me.

Hoskinson: Let me be very clear about China. Authoritarian, totalitarian regimes that hate freedom, hate cryptocurrencies. It's just that simple. These technologies are fundamentally incompatible with each other. The regime of Xi [Jinping] is absolutely obsessed with total domination of every aspect of the Chinese citizen's life: from how your permission flows to how value flows to how good of a citizen you are with the social credit program. When a technology comes in, that says you have control over your own life, your identity, your commercial reality, and this can surpass the Great Firewall, this is a technology that is just simply incompatible with the goals of the regime. In the same way an underground newspaper is incompatible with the KGB and the Soviet Union. I don't see any contradiction here. I think has nothing to do with criminality.

It's incredibly disingenuous to say all cryptocurrencies have been used for criminal activity. But so have cars and suitcases with cash! Every single technology mankind has ever invented in some way, shape, or fashion has been used, probably somewhere for something negative.

Authoritarian, totalitarian regimes that hate freedom, hate cryptocurrencies. It's just that simple. These technologies are fundamentally incompatible with each other.

But just because the internet can be used to cause problems for people, doesn’t mean it’s not one the greatest pieces of technology ever invented. Similarly, just because cryptocurrencies could be used to finance some actors somewhere like ransomware for example is the latest one doesn’t invalidate the entire class of technology. We’re adults, we’re thinking people; we have the ability to have nuanced conversations. And nuanced conversations mean that you accept the yin and the yang and the good or the bad, you accept that, by embracing something, you are overall increasing the solution space and capabilities. Every time you do that, you are increasing the potential for both good and bad.

So, you have to figure out how to use nuance and you moderate these types of things. And the very fact that authoritarian regimes are having difficult times embracing cryptocurrency is an indication that we're moving in the right direction as the human race, by embracing these things. If these things work, they are going to get rid of dictators, they're going to get rid of totalitarianism, they're going to get rid of problems.

And, another caveat to this, another, another point that I think perhaps is not being considered, is we live in an age where the existing institutions we have, their moral credibility and authority is decaying at a rapid rate. You can pick your favorite institution, it could be the academic institutions, it could be the media, it could be the Center for Disease Control, whatever, for whatever reason. People just don't trust what they see and hear anymore. This is going to be further exacerbated by the rise of deep fakes, further exacerbated by increased globalization. So right now, there's a marketplace to rebuild our institutions.

Would you rather build your institutions, with the same old building materials that we got all the other human institutions with, that gave us all the bad things we have? What cryptocurrencies and blockchain technology do is creates a system that can't lie to you, that you also have inclusive accountability with, where you can check the results. For example, look at the voting system; we just had a very contentious election. There was a sore loser who decided to challenge the integrity of the entire US election system, and the end result of that was that a big percentage of the US population now has doubts about the credibility of US elections. That institution is damaged, as a consequence of this election. Now, you can call half the country crazy and stupid and they get angrier. Or, you could build a system where you can verify that your vote was accurately counted, and you build it on a technology that the government itself can’t manipulate. Then, people will see the technology as beyond reproach just like we see gravity beyond reproach. So if you can build institutions based on absolutes, you can rebuild credibility and trust, which we need. Society is too complicated to lack credibility and trust…The only way we're all going to survive and get along and not blow each other up is by having institutions to help us deal with complexity. And the only way you can build institutions that people believe in is to build institutions that can't lie by design.

That's what our industry is effectively doing. Authoritarian regimes hate this with an unrelenting passion. Because then those institutions cannot benefit the dictator…I'm just very glad to be in an industry that's on the other side of the aisle that's fighting for truth, fighting for legitimacy, and the inclusive accountability of solid institutions. And we're fighting for that every single day.

This interview has been edited for length and clarity. Apostolicas owns small quantities of various cryptocurrencies, including ADA.

Click here to read Part 1, where Hoskinson discusses the aspirations of Cardano and cryptocurrency adoption in the developing world. Click here to read Part Two, where Hoskinson discusses El Salvador’s decision to adopt bitcoin as legal tender and the promise of Central Bank Digital Currencies.

Paul Apostolicas

Paul Apostolicas is Editor-in-Chief of the HIR. He is particularly interested in political economy, national security, and human rights.