a16z: How to prevent financial risks like FTX from happening again?

Written by: miles jennings, General Counsel of a16z Crypto

Compiled by: Deep Tide TechFlow

This week's events will further lead many to view Web3 as the "Wild West." In fact, these events, much like previous real-life examples of crises arising from excessive financial risk-taking, are preventable misbehaviors. We must stop this from happening again.

Ironically, honest participants in the U.S. are likely to face the regulatory backlash resulting from this, while others continue to evade scrutiny by operating in the shadows of crypto—comparing Coinbase to their overseas competitors.

It is time to flip this tired script.

The best start is to refocus regulatory efforts on the most obvious targets:

• Those fraudsters and criminals who collaborate with technology for selfish purposes,

• Those who wish to build a world casino rather than a world computer.

Many dubious practices of businesses are well-known, including to U.S. regulators, yet no preventive measures have been taken.

The U.S. government has many bills to prevent these situations, including anti-fraud, anti-money laundering, securities, and commodities laws. However, the domestic focus on and pursuit of regulation through enforcement remains too narrow, too slow, and too inconsistent to be effective.

Regulation through enforcement has failed, and our approach must change. Good builders need constructive public guidance that will help better distinguish between good and bad, making enforcement more effective. We also continue to advocate for new rules and regulations that constrain centralized actors while safeguarding decentralization. This will foster a vibrant Web3 ecosystem, protect users, and provide a fair competitive environment for entrepreneurs.

These outcomes can be achieved by giving Web3 the same protections as Web1, which enabled the U.S. to dominate global internet policy and development.

In other words, we need to regulate the applications of Web3, not the protocols.

Protocols are simply software, while Web3 applications operated by centralized profit-driven enterprises can comply with regulatory requirements across various jurisdictions and should be subject to appropriate regulation. Just as we do not regulate the email protocol SMTP in Web1, we regulate applications like Gmail.

This approach can achieve every major policy goal for the U.S., including addressing national security concerns, reversing the trend of entrepreneurs moving to less regulated markets, and giving the U.S. greater influence to improve, nurture, and oversee the Web3 industry.

But if Web3 is treated as a monolith, none of this will be possible.

The risks of CeFi and DeFi are different, and attempting to regulate software will only lead to further offshoring of Web3 developers.

It is undeniable that this week's events have been extremely disruptive and frustrating.

However, this moment also presents an opportunity for the U.S. to finally become a leader in Web3. We can no longer afford to wait.