Two Cultures of Blockchain: Computation and Speculation

Blockchain technology has triggered two completely different cultural tendencies. One sees blockchain as a technological means to build a new type of network, which can be referred to as computer culture. This culture believes that blockchain is driving a new computing revolution. The other mainly focuses on the possibilities of speculation and wealth accumulation, viewing blockchain merely as a tool for creating new trading tokens. This tendency can be referred to as casino culture, which is essentially a form of gambling.

Media reports often exacerbate the confusion between these two cultures. Stories of making and losing money are always more dramatic, easier to understand, and eye-catching. In contrast, stories of technological advancements are often more subtle and gradual, requiring some historical context to understand their significance.

The casino culture has many problems. An extreme example is a certain offshore exchange that has already closed down, and its impact is catastrophic. It removed tokens from context, packaged them in marketing language, and encouraged speculation. Responsible exchanges provide useful services such as custody, staking, and market liquidity, while reckless exchanges encourage bad behavior and arbitrarily handle user assets. In the worst cases, they may even be outright Ponzi schemes.

Fortunately, the fundamental goals of regulators and blockchain builders are aligned. Securities laws attempt to eliminate information asymmetry related to publicly traded securities, thereby minimizing market participants' reliance on management teams for trust. Similarly, blockchain builders aim to eliminate the centralization of economic and governance power, reducing users' reliance on trust in other network participants.

Currently, the primary regulatory body for the U.S. securities market, the SEC, last provided substantive guidance on this topic in 2019. Since then, the agency has initiated multiple enforcement actions against certain token trades, claiming that these trades are subject to securities laws, but has not further clarified its decision-making criteria.

The practice of applying legal precedents from before the internet to the modern web has left many gray areas while providing significant advantages to bad actors and non-U.S. companies that do not comply with U.S. rules. The current situation is so complex that even the regulators themselves cannot agree on demarcation. For example, the SEC considers the tokens of a certain cryptocurrency to be a security, while the CFTC, the main commodities regulator in the U.S., considers it a commodity.

The Inseparability of Ownership and Market

Some policymakers have proposed rules that would effectively ban tokens, which means that all their practical uses would also be prohibited, potentially even affecting the Blockchain itself. If tokens are purely for speculation, these proposals may be reasonable. However, speculation is merely a secondary function of the true purpose of tokens; their essence is to serve as a necessary tool for the community to own the network.

Because tokens can be traded like any owned item, it is easy to view them merely as financial assets. However, well-designed tokens have specific purposes, including serving as native tokens to incentivize network development and drive the virtual economy. Tokens are not accessories to the Blockchain network, nor are they burdens that can be stripped away and discarded; rather, they are a necessary and core feature. Without a way for people to possess ownership of the community and network, the ownership of the community and network cannot be discussed.

Sometimes people ask whether it is possible to make tokens non-tradable through legal or technical means, thereby gaining the benefits of blockchain while eliminating any implications of gambling. But if you remove the ability to buy or sell something, you are effectively removing ownership. Even intangible assets, such as copyrights and intellectual property, can be bought and sold at the discretion of their owners. No trading means no ownership, and the two are inseparable.

A question worth discussing is whether there exists a hybrid method that can tame casino culture while still allowing for the development of computer culture. One proposal is to ban the resale of tokens for a certain fixed period or until a designated milestone is reached after the launch of a new Blockchain network. Tokens can still serve as incentives for developing the network, but token holders may need to wait for several years or until the network reaches a certain threshold before trading restrictions are lifted.

Time constraints can be an effective way to align people's incentives with broader social interests. Recall the hype cycles experienced by many technologies in the past, where after the early hype phase came the crash, followed by "productivity stagnation." In contrast, long-term constraints force token holders to withstand the hype and its consequences, and achieve value by promoting productive growth.

This industry does require further regulation, but the regulation should focus on achieving policy goals, such as punishing bad actors, protecting consumers, providing a stable market, and encouraging responsible innovation. This is crucial because Blockchain networks are currently the only known technology that can reconstruct an open, democratic internet.

Limited Liability Company: Successful Cases of Regulation

History shows that wise regulation can accelerate innovation. Until the mid-19th century, the dominant company structure was still the partnership. In a partnership, all shareholders are partners and bear full responsibility for the actions of the business. If the company incurs financial losses or causes non-financial damages, the liability breaks through the corporate veil and falls on each shareholder. Imagine if the shareholders of a large publicly traded company were personally liable for the mistakes made by the company in addition to their financial investments; very few would buy their stocks, making it even more difficult for the company to raise funds.

Limited liability companies have existed since the early nineteenth century, but they are rare. Establishing a limited liability company requires special legislative action. Therefore, almost all partners in business enterprises are close partnerships, such as trusted family members or close friends.

This situation changed during the railway boom of the 1830s and the subsequent period of industrialization. Railways and other heavy industries required significant upfront capital, which exceeded the funding capabilities of small teams, and even very wealthy teams found it difficult to provide independently. Therefore, new and broader sources of capital were needed to finance the transformation of the world economy.

As expected, this reform has sparked controversy. Legislators are under pressure to make limited liability the new corporate standard. Meanwhile, skeptics argue that expanding limited liability will encourage reckless behavior, effectively transferring risk from shareholders to customers and society as a whole.

Ultimately, different viewpoints found a balanced and consistent way forward, with the industry and legislators crafting wise compromise solutions, establishing a legal framework, and making limited liability the new norm. This also gave rise to public capital markets for stocks and bonds, as well as all the wealth and wonders generated by these innovations since then. Therefore, technological innovation drove regulatory changes, which is a manifestation of pragmatism.

The Future Development of Blockchain

The history of economic participation is a process of gradual compatibility developed through the interaction of technological and legal advances. Partnerships typically have a small number of owners, around ten. The limited liability structure has greatly expanded ownership, and today's listed companies can even have millions of shareholders. Blockchain networks, through mechanisms such as airdrops, grants, and contributor rewards, have once again expanded their scale. Future networks may have billions of owners.

Just as companies in the industrial era had new organizational needs, today's companies in the digital age do as well. Imposing old legal structures like joint-stock companies and limited liability companies onto new network structures, ( this mismatch is the root cause of many problems in enterprise networks, for example, they have to inevitably switch from highly attractive models to extraction models, excluding a large number of contributors from the network. The world needs new, digitally native ways for people to coordinate, cooperate, collaborate, and compete.

Blockchain provides a reasonable organizational structure for the network, while tokens are a natural asset class. Policymakers and industry leaders can work together to find appropriate guardrails for blockchain networks, just as their predecessors did for limited liability companies. These rules should allow and encourage decentralization, rather than defaulting to centralization like corporate entities. There are many things that can be done to control the casino culture while encouraging the development of computer culture. Hopefully, wise regulators can encourage innovation and allow founders to do what they do best: build the future.