October 28, 2022

Crypto, DAOs & DeFi: Why They’re Relevant to “The Rest of Us”

I had been collecting various cryptocurrency-related updates for this blog, but then Bloomberg’s Matt Levine wrote a 40,000-word essay for the latest issue of Businessweek that says it all – and then some. This is only the second time in Businessweek’s 93-year history that a single author has written the entire issue, so kudos to Matt, who is one of my favorite opinion columnists and lunch valuation analysts.

Matt’s article pretty much nails why – even if you’re not a “crypto enthusiast” – you’ll still learn a lot by keeping up with the happenings. And for capital markets lawyers, much of it will even be useful! Here’s an excerpt that explains why:

I don’t have strong feelings either way about the value of crypto. I like finance. I think it’s interesting. And if you like finance—if you like understanding the structures that people build to organize economic reality—crypto is amazing. It’s a laboratory for financial intuitions. In the past 14 years, crypto has built a whole financial system from scratch. Crypto constantly reinvented or rediscovered things that finance had been doing for centuries. Sometimes it found new and better ways to do things.

Often it found worse ways, heading down dead ends that traditional finance tried decades ago, with hilarious results.

Often it hit on more or less the same solutions that traditional finance figured out, but with new names and new explanations. You can look at some crypto thing and figure out which traditional finance thing it replicates. If you do that, you can learn something about the crypto financial system—you can, for instance, make an informed guess about how the crypto thing might go wrong—but you can also learn something about the traditional financial system: The crypto replication gives you a new insight into the financial original.

Matt walks through how this asset class came about, the similarities & differences from traditional finance, and shares predictions about where it could be going. He shares an important reminder on DAOs that the members will be treated like general partners if the entity isn’t incorporated – i.e., liable for its debts.

The essay doesn’t delve too far into securities regulation issues – if you’re practicing in this area, that’s what our “Crypto Financings” & “Blockchain” Practice Areas are for. Another Bloomberg article reported this week that SEC enforcement activity is making both retail and professional investors feel more likely to “invest” in cryptocurrency, so there could be more work coming for securities lawyers on all sides of this:

Almost 60% of the 564 respondents to the latest MLIV Pulse survey indicated they viewed the recent spate of legal action in crypto as a positive sign for the asset class, whose trademark volatility has all but dissipated in recent months. Major interventions include the US regulatory investigations of bankrupt crypto firms Three Arrows Capital and Celsius Network, as well as an SEC probe into Yuga Labs, the creators of the Bored Ape collection of nonfungible tokens, or NFTs.

Like Matt, I don’t have strong feelings about the value of crypto. I find it puzzling in many ways, but also fascinating and informative from several angles: finance, securities regulation, and sociologically. And if people are going to be out there using this ecosystem, I do think there have to be some rules and guidance around it. Thankfully, there are very bright securities lawyers out there who are navigating this – a few of them just spoke on our recent webcast.

In full disclosure, I own a nominal amount of crypto. Because I’m writing about it, I wanted to see how it worked to get into the system and to buy a web3 domain name. I found it confusing and complicated, I don’t even know if I accomplished my goal, and I don’t expect to ever see that money in dollar form again. But if the target audience right now is gamers and people who enjoy internet hype, financial engineering and gambling, that’s…not me. I’m just a 40-something professional who needs a type of currency that can buy snacks for my kids.

Liz Dunshee