Don’t Blame Crypto Industry for Bad Actors, Says MIT Professor

We could be decades away from settling on the ideal regulatory approach to crypto, believes MIT professor and general partner of Shima Capital, Yida Gao. In an exclusive BeInCrypto interview, Gao, who succeeded current SEC chair Gary Gensler as the teacher of crypto finance at the prestigious university, said that we may only be halfway there.

Reflecting on his current role at MIT, Gao said he appreciates that his views differ from that of his predecessor. “Where we do align is with the idea that some things need to change. Exactly what things need to change, and how, and by whom, that’s where we differ.”

US Regulators Aren’t Listening to the Industry, Says Yida Gao

According to Gao, the United States is making unique mistakes with regard to its crypto industry. It’s blaming a whole industry for what some bad actors do. And failing to listen to its constituents, unlike competing jurisdictions poised to benefit from the country’s exodus of crypto firms.

“It seems US regulators see mainly the negatives of the technology and have alternative agendas that are not fully aligned [with] their main goals of protecting consumers,” said Gao.

Developing new regulations for new technologies like crypto should be a two-way process, he said. “I’ve always thought regulation and crypto could co-exist – I am the founder of a web3 venture capital fund – but I believe it’s a matter of respecting the other side’s point of view while at the same time not minimizing your own.”

However, despite the aggressive anti-crypto stance taken by the SEC, sentiment in America is far from universally negative. Presidential candidates for the upcoming 2024 race have been fighting for the attention of crypto voters.

Although, some applicants for the position of Leader of the Free World seem more at ease endorsing Bitcoin than other cryptocurrencies.

The US Fight for Crypto Voters

At the time of writing, several candidates in the Republican primary have expressed positive views about Bitcoin. Earlier this month, Miami mayor Francis Suarez became possibly the most strident Bitcoin advocate in the race for the White House, saying its next occupant should be pro-Bitcoin.

During his six-year tenure as Miami’s mayor, Suarez has also championed a number of pro-crypto policies. Including launching a troubled MiamiCoin initiative to help boost the city’s economy.

Other candidates like Senator Ted Cruz, and GOP second-favorite Ron DeSantis, have argued for more crypto-friendly regulations.

“Right now in US politics, we’re seeing Bitcoin, or the idea of Bitcoin, used to bridge people together in the presidential campaign,” Gao acknowledged. “This was almost unfathomable just two years ago, but here we are. Whether or not Bitcoin is just being used as a tactic or if we’ll see major strides towards the positive remains to be seen.”

Despite being a global leader, 2023 has been the year of the Great Crypto Exodus for the United States. However, Gao is skeptical about whether short-to-medium-term concerns about the regulatory environment will be born out over time.

“There’s an old saying about the grass being greener, and the reality is that it’s not always the case,” he said. “I think more US-based companies will move offshore or at least consider domiciling off-shore, which has higher costs and takes time/resources away from building product.”

What About the Next Crisis?

Almost all economies, including crypto, swing between growth and stagnation, boom and bust. Reflecting on the inevitable next crisis in the crypto industry and how we avoid it, Gao waxed poetic.

“When the crypto world does good, when it brings good into the world, even that brightly shining spotlight brings darker clouds of scrutiny,” he said. “The truth is, even if we do avoid that fiasco, a brand new one will present itself at a later date. When we cure one disease, another one pops up shortly after.”

Looking at the potential causes of the next crisis, Gao stressed the dangers of collective guilt. All too often, those looking for a scapegoat fall into this trap. They demonize an entire sector or industry. And it is no different for crypto.

“When our luggage gets lost, it’s always the airline’s fault. Not the one individual who inadvertently dropped your bag on the wrong conveyor belt,” he said. “That’s the reality. Maybe the process that resulted in your bag being lost needs to be fixed. But it’s not an entire industry at fault.”

Gao admits that there will always be bad actors in crypto, as in other industries. However, he points out that crypto is under an unprecedented level of scrutiny.

Especially since the collapse of Terraform Lab’s stablecoin TerraUSD and the catastrophic implosion of FTX. People should not blame an industry for the missteps of a few managers.

“One thing we’ve learned in the recent high-profile implosions is that those organizations were poorly run from top to bottom [and] in just about every conceivable way,” Gao said. 

The Trend is Upwards, Says Gao

Like many observers, Gao emphasizes that there is still a lot of cleaning up to do. But, there are grounds for hope. Companies staying in compliance is good for the long-term health of the industry as a whole.

“Simply following some generally accepted practices, which can be done while still maintaining a core crypto mindset, will likely result not only in your company doing well financially but also legally,” he added.

For one thing, companies and exchanges need to hone certain protocols. Especially when it comes to know-your customer (KYC) and anti-money laundering (AML) rules and practices.

“We can avoid future fiascos by taking a page out of the web2 playbook when it comes to KYC/AML, having correct checks and balances [like] having a board, and focus on reasonable valuations, [and] milestone-based financing.”

Despite the notes of pessimism, the MIT professor believes the markets are trending upward. Before long, we could return to a more comfortable and familiar place.

“There will be down days and up days along the way, but we’re trending up after a year of down. Towards the end of this year, we’ll likely be closer to early 2022 stability than late 2022 carnage.”