America is Losing its Lead as the Innovation Capital of the World

The tech world is changing thanks to crypto, and if America wants to keep up and remain the innovation capital of the world and the go-to destination for the world’s greatest entrepreneurs, it needs to change with it. Due to a lack of clarity from regulators and not being publicly open and supportive of the innovation happening in the crypto world (especially DeFi), the US is already missing the opportunity to remain the epicenter of technological innovation and risks allowing another country to assume the throne.

In today’s day and age, people can live, work, and build companies anywhere in the world. This new paradigm shift presents opportunities and threats to either attract or drive out the next generation of builders from America. Those that call for more regulation in this space don’t understand this new world we find ourselves in. Thanks to the internet, the world is flat, and now, thanks to the crypto economy, the financial system is becoming flat and open as well. The more we regulate, the more investors and builders in the crypto space will leave to live in countries that are more crypto-friendly causing America to miss out on all of the economic benefits.  

Right now, we’re doing the latter and driving out the innovators.

Being in Hong Kong unlocked something that I’d wanted to do for a while but I’ve always been missing a key piece of, which was to start an exchange… Another important piece of it was that it needed a non-U.S. base of operations. So the most important part for us — and I think for a lot of the industry as a whole — is derivatives. The question is, well, what’s the regulatory framework for crypto derivatives? Most countries have taken the position, some implicitly, some explicitly, that they’re going to wait and see and that they will police things if there are things that seem bad or egregious or predatory. In the United States, the Commodity Futures Trading Commission has mostly taken the position that this is a regulated financial activity. But there isn’t a crypto derivatives exchange license.

Sam Bankman-Fried, Founder and CEO of FTX Exchange to the NY Times

To give you an idea of how fluid and quickly things can change in this space, Sam recently moved the FTX headquarters from Hong Kong to the Bahamas because, “The Bahamas is one of the few places to set up a comprehensive framework for crypto.” This only further supports the point that we’re in a new age where countries can either attract or drive out innovators with their policies.

While America firmly sits at the top of the mountain in regards to driving innovation and economic value in the current web2 tech world, we’re quickly falling behind in the future of technology, web3, and the crypto economy.

As of Nov 5, 2021, 68% of the top 25 publicly traded tech companies by market capitalization are headquartered in the United States compared to just 32% of the top 25 crypto projects by market capitalization.

So why is America falling behind?

Famed Angel Investor Naval Ravikant summed it up best in his recent interview with Chris Dixon on the Tim Ferriss Show.

“We’re trying to apply laws that are almost a hundred years old, to try and regulate this incredible explosion in internet commerce, and market making in digital, private property… and we recently have a very aggressive SEC and CFTC that are now fighting to extend their domain and I think we ended up in an upside down situation, where innovation, the space gets driven overseas, underground. And out into the internet where it will still succeed. Because the natural endpoint of crypto is maximum decentralization and maximum privacy. It’s going to just make it happen a lot faster. It’s going to make it happen outside of the United States.”

Naval Ravikant

In other words, US tax and regulatory bodies weren’t designed to handle decentralized companies and open protocols but are still trying to apply those laws and regulations to the crypto world. They are trying to bash a round peg into a square hole and haven’t yet realized that it won’t fit.

What can we do about it?

In farming, there is a saying that you can keep your cattle from leaving the farm in two different ways. The first focuses on restricting, while the second focuses on attracting and retaining.

Strategy 1: build a big fence surrounding the cattle and keep them within the boundaries of the fence.

Strategy 2: build a well that supports and provides for the cattle so they have no desire to go anywhere else.

Let’s focus on building a well so big in America that innovators from around the world can’t resist coming to it as they work on, build, and invest in the future of digital assets.

To that end, Coinbase and Andreezen Horowitz have made great suggestions and put forward open proposals on how to move forward and create a better environment. They both have specific suggestions we should take note of. Here are some of the highlights from both: 

  • Creating new frameworks to treat digital assets as a new type of asset so as to promote innovation and not deter progress by trying to apply policies that were not created with this completely new type of asset in mind.
  • Designating specific regulators that focus solely on digital assets so as to avoid inconsistent governance and enforcement, as well as provide more specialized knowledge of the space.
  • Protecting and including consumers and providing regulatory clarity by standardizing the existing disclosures projects must provide to investors. 
  • Using existing laws related to unincorporated associations and tax reporting status as a way to create a lightweight framework for the legal status of Decentralized Autonomous Organizations. 
  • Promote and encourage interoperability and fair competition across the crypto ecosystem by supporting competition, communication, and cross-pollination among protocols, applications, and market places for digital assets.

As policymakers and regulators begin to regulate and form policy in the space, let’s hope they do so with the goal to attract talent and harbor innovation. It’s the only way America will remain the epicenter of technological innovation as we enter the new era of Crypto, Defi, digital assets, and Web 3.0.

“Any regulator that stops the next generation of artists and musicians and gamers and game developers from owning their platforms and their work is going to go into the wastebasket of history as a villain. It’s that simple.”

Naval Ravikant

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