Blockchain — and the world — explained- POLITICO

The speed of change and innovation in the blockchain space can be disorienting. New cryptocurrencies, new kinds of assets, even whole new organizational ideas like DAOs are constantly popping up around the world — and constantly flaming out.

It’s a culture not just comfortable with change and disruption, but obsessed with it.

That’s one part of what we cover in this newsletter. The other part is the rulemakers in Washington and Brussels, the people who have to worry about this stuff – and who constantly frustrate blockchain businesses with the much slower pace of government.

Innovators in the crypto world want more regulatory clarity on things like what sort of digital assets count as securities—that was a big theme at last week’s D.C. Blockchain Summit. They want answers quickly, or want the old institutions to just get out of their way.

These two cultures might seem almost totally incompatible – the challengers and the old guard; the future and the past.

But for people on both sides of this divide, there’s a useful theory to keep in mind. The theory says that this tension isn’t just OK, but a virtue—they’re supposed to move at different speeds, and that’s a sign that the bigger system is working overall.

The theory is pace layering, an idea from Stewart Brand, the writer and thinker best known as the publisher of the Whole Earth Catalog, who has dedicated much of his life to thinking about how big, complex systems thrive, or don’t. 

Brand is fascinated by cryptocurrencies, but his theory isn’t about the blockchain per se – he has explored it in a book and again in a paper published a few years ago. He suggests that durable civilizations change through the interplay of six different layers that each move at their own pace, from the most dynamic and fleeting layer (which he calls “Fashion/Art”) to the slowest and most durable (Nature).

It’s reasonable to see Bitcoin as living mostly in the upper layers of Brand’s scheme — somewhere between fashion and the next-fastest layer, “Commerce” — while regulators live two layers down, in the slower-moving realm of “Governance.”

Brand argues that change happens quickly in the higher layers, but much of the system’s power – and strength – resides in the slow layers beneath. “In a durable society, each level is allowed to operate at its own pace,” he writes, “safely sustained by the slower levels below and kept invigorated by the livelier levels above.”

It’s possible to see all six layers as being highly relevant to the crypto conversation. There’s Art/Fashion (think NFT mania), Commerce, and then Infrastructure, which in this case includes both telecommunications networks and the whole financial system that the blockchain might – or might not – profoundly disrupt.

Below those live Governance, and then Culture, and finally Nature – which might seem immune from these lighter human concerns, but is affected by the blockchain’s appetite for energy, and may eventually respond with some disruptions of its own.

So, all of our readers, whatever layer they inhabit, should learn to enjoy living with each other. Despite the dizzying pace of blockchain news, it’s going to be a long, and somewhat slower ride.

Fortunately, Brand himself has no shortage of ideas about how to resolve the big dilemmas blockchain poses to the different layers. Last month he offered up this cure-all in a tweet:

Apparently, with the right mental framework, managing complex civilizational change can be done in 280 characters or less.

One of crypto promoters’ primary arguments is that the energy use required to mine it will actually help the fight against climate change, by driving the industry to add additional renewable capacity.

In New York state, it’s time for them to put their money where their mouth is.

Early this morning the New York state legislature passed a two-year moratorium on new proof-of-work crypto mining powered by fossil fuel plants, becoming the first state in the nation to put formal limits on crypto’s energy use. It’s a blow to the nascent crypto lobby, which spent serious amounts of cash to fight the bill, and a big win for environmentalists who have been lobbying against the proliferation of a technology they see as providing little social benefit to justify its thirst for electricity.

They share that view with someone who’s going to be an important player in crypto clashes to come: Rostin Behnam, the chairman of the Commodity Futures Trading Commission, who said at POLITICO’s sustainability summit last month that there’s a “clear dislocation between the usage and generation that’s needed to mine these coins and the sort of economic output that we’re seeing from digital assets themselves.”

Crypto-world, of course, disagrees: In a statement after the moratorium was passed, Kristin Smith, executive director of major pro-crypto policy group the Blockchain Association, said that it would have a “chilling effect on crypto mining in the state, and threatens to send hundreds of good paying jobs to neighboring states.” The claim’s not without merit: Crypto mining has resurrected energy jobs from Montanato Kentucky. New York’s moratorium won’t require the shuttering of any plants, but their sprouting up is ostensibly the exact kind of tech-industry retrofitting of post-industrial, down-on-their-luck towns championed by New York’s Buffalo-native Gov. Kathy Hochul.

Which brings up another tension the moratorium raises: the growing partisan gap on crypto policy. Far from banning new crypto mining, Kentucky has offered major tax breaks and energy credits to miners; Wyoming has enacted a slew of crypto-friendly regulations to promote the industry.

To view the growing partisan divide as one not about crypto per se, but the energy that powers it, that split makes a lot of sense.

But it’s never quite that simple when it comes to new tech, and all the economic and social concerns that come with it: some Democratic lawmakers have promoted the technology as providing valuable services to traditionally un-banked minority communities, and even New York’s own Democratic Sen. Kirsten Gillibrand appeared on a POLITICO panel in March to promote a bill, forthcoming next week, clarifying the crypto regulatory environment — cosponsored with Wyoming’s Sen. Cynthia Lummis. — Derek Robertson

Who says Congress can’t get anything done? A bipartisan draft privacy bill is finally on the horizon, and POLITICO’s Rebecca Kern has the report:

Congress has tried and failed for decades to pass a law to protect Americans’ data privacy. A bipartisan draft bill released today by key Congressional leaders suggests lawmakers are finally close to making it happen.

If it becomes law, the “American Data Privacy and Protection Act,” as the bill is called, would provide a national standard on what data companies can gather from individuals and how they can use it.

The bill released Friday includes agreement between Republicans and Democrats — for the first time — on two areas that have blocked previous efforts: whether a federal privacy law can pre-empt state laws and whether individuals should have the right to sue companies that illegally share their data or use it in ways the law prohibits.

POLITICO’s Global Insider newsletter is all tech today, with Ryan Heath and Mark Scott bringing the global perspective on everything from privacy policy, to smartphone production and sales, to the Chinese box office. As European tech regulation goes, America very well may follow tomorrow — the U.S. might be taking decisive action on this policy now, but only in response to the far more proactive digital framework put into place by the EU. Read below from their preview of President Biden’s forthcoming executive order on the transatlantic Privacy Shield, and check out the rest of the newsletter here:

Expect specific details on the “necessary and proportionate” limits for how U.S. national security agencies can access both European and American data… it’s easier to agree to the principle than to codify the practice of limiting intelligence agency data collection. 

The final result will not be the win that many privacy campaigners want — but it will be an admission that Edward Snowden revealed data-gathering excesses that still plague many of these agencies.

Crucially, that result will put in place the kind of concrete language the EU needs to defend its protections in court. As Scott writes, “it will be harder for Europe’s highest court to determine that the new pact falls foul of the 27-country bloc’s fundamental right to privacy” — creating yet another instance of the ongoing European precedent for how American regulators deal with our own nascent, world-changing technologies. — Derek Robertson

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]);  and Heidi Vogt ([email protected]).

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Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.