Decentralized public blockchains continue to be the gold standard for regulatory compliance in the realm of product development, according to Jake Chervinsky, the chief legal officer at Variant Fund. He asserts that despite the recent rise of corporate-controlled layer-1 (L1) networks, the decentralized nature of public blockchains remains crucial for regulatory adherence.
Chervinsky expressed his skepticism towards the proliferation of new L1 networks created by companies for specific product-related reasons. He believes that many of these networks are unnecessary and unhelpful from a regulatory standpoint. He pointed out that US regulators have not mandated permissioned validator sets or compliance tools built into blockchain networks, nor has there been any serious legislative effort proposing such requirements.
In response to Chervinsky’s perspective, venture capitalist Revaz Shmertz offered a contrasting viewpoint, arguing that corporate L1 networks represent a form of regulatory arbitrage. Shmertz believes that regulatory agencies have the power to enforce compliance measures through enforcement actions and guidance letters, irrespective of congressional inaction. He views corporate L1 networks as a preemptive solution to satisfy compliance requirements and avoid the need to push for crypto-friendly legislation at the protocol level.
Shmertz suggests that this approach leads to a dual adoption model, where compliant corporate chains cater to institutional needs, while neutral protocols serve retail and decentralized finance (DeFi) applications. He posits that by aligning with familiar regulatory frameworks, traditional financial institutions can sidestep the need to lobby for crypto-friendly laws.
The ongoing launch of corporate blockchain networks will serve as a litmus test to determine whether regulatory compliance concerns or commercial control will drive institutional adoption of blockchain technology. Lobbyist groups are also advocating for a flexible approach to decentralization with the Securities and Exchange Commission (SEC).
In a bid to support decentralized finance initiatives, the DeFi Education Fund (DEF) proposed five core principles for establishing a “token safe harbor” framework to the SEC. DEF emphasized the importance of adopting technology-agnostic approaches that focus on mitigating activity risks rather than imposing rigid rules on specific blockchain models. They also advocated for inclusive eligibility criteria that consider decentralization goals beyond the genesis stage of tokens.
Chervinsky’s stance underscores the importance of upholding neutrality principles at the base layer of blockchain technology and resisting compromises on decentralization for perceived regulatory benefits that regulators have not explicitly demanded. The evolving landscape of corporate blockchain launches and regulatory advocacy efforts will shape the future of institutional blockchain adoption.