In Gary Genslor’s mind, every crypto currency, besides Bitcoin, is a security. Maybe in his dream, Bitcoin is also a security. The SEC launched wars against crypto quite a few years ago, and it has become tougher in the recent couple of years. Even after they lost a law suit against Ripple, they insisted on rejecting applications from various entities for setting up BTC&ETH ETFs, and expanded their eyes on an area that has normally been viewed as a ‘safe haven’, the NFT market.

The CFTC also wants to play a role here, in the name of AML and long-arm jurisdiction of sanctions. Along side with the DOJ, they sued the founders of Tornado Cash, a crypto currency mixer, for their code being used by hackers and sanctioned entities.

The regulation issue has become the Sword of Damocles, hanging over the head of the whole crypto community.

This has led us to a fundamental question: what are the governments really wanting?

Investor protection? Maybe. Anti-money laundering and attack on other malicious behaviors against the laws? Probably. Conquer and set rules on behavior in their own best interests? Obviously.

There were not so many tensions between the governments and the crypto communities before 2017. At that time, in the government’s eyes, crypto was still off the map. After the ICO bubble burst, governments started to place an eye on crypto. The tensions became harder and harder after the latest bull market started in 2020, along side the global governments’ QE policy and DeFi Summer emerged. More and more money flows into the crypto industry and attracts millions of people to this area.

You can’t imagine that the Golden Rush would happen without the discovery of gold on the West Coast. So, the motivations of governments chasing after crypto are either that they want to protect some interests that they already have, or some fresh meat that they are eager to have.

But here is the thing, do governments really have the right to set rules on on-chain behaviors?

Let’s take a look at where the government’s authority comes from. Fundamentally, the government is an entity which sets up rules to protect people’s rights and interests from being hurt, and it is guaranteed by force. Let’s say that Alice owes Bob $100 and doesn’t want to pay it back anymore. Bob could sue Alice for her contract violation behavior. If Alice still didn’t pay back, the court could freeze Alice’s bank account and play an enforcement act to protect Bob’s interests. Basically, the government is authorized by people to build up a social consensus that is backed by force.

Back to the on-chain activities, who plays the role that prevents people from contract violations and malicious behaviors? Actually, it is the protocols, the consensus algorithms and the smart contracts that play a role, as the governments’ role in the real world. User activities are executed automatically by code, which doesn’t need any third-party to prevent someone from breaking the rules and violating others' interests. The code is law.

From the legal perspective, the governments actually don’t have any jurisdiction in regulating blockchain networks, especially those that have reached a solidly social consensus and widely adopted blockchain, like Bitcoin & Ethereum.

OK, let’s be a little genial to the governments. They really want to protect their tax payer from being hurt in a dark forest. What can, or should they do?

The best, if not the only, legitimate path of government is to build and set your regulation rules on an execution layer above an existing blockchain. Yes, build a government-specific rollup.

In the past 12 months, a major Ethereum scaling solution - Rollup, has gained tremendous adoption among the crypto community. Daily active users of Arbitrum, a major rollup network built upon Ethereum, surpassed the Ethereum mainnet months ago. It has been proven that Rollup is quite a balanced solution, which can provide high level security and scalability to the users, as well as relatively flexible sovereignty for the rollup network ecosystem.

Governments can build digital ID systems and KYC policies. Make sure that only legal residents have the rights to access the rollup network and interact with promised protocols. Since the governments can play an important role in the self-ruling network and provide protection for their residents, they will have legal jurisdiction over the network. Protocol developers will need to provide legal applications to get access to your rollup network, just like any global company setting up business in your country.

Am I a little bit naive to call for governments to become a junior partner of blockchain networks? Yeah, I don’t think any government, especially those who have dominant powers, would love to give up its power and compromise with one of the most important incoming technologies. But, if we really view blockchain technology as the future, and code is law, then why shouldn’t we insist on blockchain as a global public good, and state regulations should just build upon it?

As a matter of fact, the jurisdictions of current nation state governments are basically built upon their own lands and territories. To some extent, the nation states can be viewed as rollups that are building upon our planet earth as their base layer. The governments don’t have jurisdiction over ruling how our planet earth moves, even if they could. All they should do is leverage their natural resources and service their residents.

To be realistic, the governments won’t give up their power without a fight. If the fight between the crypto communities and state governments is inevitable and a Government Rollup will be the end game, here are some of my thoughts on how to achieve it.

• Build alignments with a group of pro-crypto countries and setting up real use cases. Not every country views crypto and blockchain as a threat. There are many crypto-friendly countries, like the U.A.E., which can be allied and start to build a sovereign rollup network. With the help of existing tech stacks, like OP Stack etc., it is not quite hard to achieve that.

  Building a government-rollup can help the government expand its influence and attractiveness. In the real world, the sovereignty of a government is deeply bundled with its territory. But in a government-rollup, the government can issue digital non-resident ID to attract talent, without any welfare costs. To some extent, a government building a rollup network on the Ethereum can also be viewed as building settlements on Mars.

• Keep walking on the path of truly decentralization, especially in the consensus layer. From a government perspective, even if it has the willingness to build a sovereign rollup on a blockchain, let’s say Ethereum, it is hard to convince the regulator to set up a rollup upon a base layer that might be monopolized by any other entity. No regulator would like to take the risk of losing reputations.

With the mega trend of ‘the monolithic blockchain model turning into the modular blockchain model’ in the crypto industry, we can see that the core value of Ethereum has evolved to provide a security guarantee to the public. In just recent months, there are many so-called ‘Ethereum Killer’ L1 blockchain(Celo, Canto, etc.), have chosen to turn their network from an independent L1 network, to a L2 rollup that base on Ethereum. Governments should really view blockchain, like Ethereum, as a global public good, instead of as a threat. What a government should do is just how to use blockchain technology and infrastructures to serve its residents’ best interests.

In Gary Genslor’s mind, every crypto currency, besides Bitcoin, is a security. Maybe in his dream, Bitcoin is also a security. The SEC launched wars against crypto quite a few years ago, and it has become tougher in the recent couple of years. Even after they lost a law suit against Ripple, they insisted on rejecting applications from various entities for setting up BTC&ETH ETFs, and expanded their eyes on an area that has normally been viewed as a ‘safe haven’, the NFT market.

The CFTC also wants to play a role here, in the name of AML and long-arm jurisdiction of sanctions. Along side with the DOJ, they sued the founders of Tornado Cash, a crypto currency mixer, for their code being used by hackers and sanctioned entities.

The regulation issue has become the Sword of Damocles, hanging over the head of the whole crypto community.

This has led us to a fundamental question: what are the governments really wanting?

Investor protection? Maybe. Anti-money laundering and attack on other malicious behaviors against the laws? Probably. Conquer and set rules on behavior in their own best interests? Obviously.

There were not so many tensions between the governments and the crypto communities before 2017. At that time, in the government’s eyes, crypto was still off the map. After the ICO bubble burst, governments started to place an eye on crypto. The tensions became harder and harder after the latest bull market started in 2020, along side the global governments’ QE policy and DeFi Summer emerged. More and more money flows into the crypto industry and attracts millions of people to this area.

You can’t imagine that the Golden Rush would happen without the discovery of gold on the West Coast. So, the motivations of governments chasing after crypto are either that they want to protect some interests that they already have, or some fresh meat that they are eager to have.

But here is the thing, do governments really have the right to set rules on on-chain behaviors?

Let’s take a look at where the government’s authority comes from. Fundamentally, the government is an entity which sets up rules to protect people’s rights and interests from being hurt, and it is guaranteed by force. Let’s say that Alice owes Bob $100 and doesn’t want to pay it back anymore. Bob could sue Alice for her contract violation behavior. If Alice still didn’t pay back, the court could freeze Alice’s bank account and play an enforcement act to protect Bob’s interests. Basically, the government is authorized by people to build up a social consensus that is backed by force.

Back to the on-chain activities, who plays the role that prevents people from contract violations and malicious behaviors? Actually, it is the protocols, the consensus algorithms and the smart contracts that play a role, as the governments’ role in the real world. User activities are executed automatically by code, which doesn’t need any third-party to prevent someone from breaking the rules and violating others' interests. The code is law.

From the legal perspective, the governments actually don’t have any jurisdiction in regulating blockchain networks, especially those that have reached a solidly social consensus and widely adopted blockchain, like Bitcoin & Ethereum.

OK, let’s be a little genial to the governments. They really want to protect their tax payer from being hurt in a dark forest. What can, or should they do?

The best, if not the only, legitimate path of government is to build and set your regulation rules on an execution layer above an existing blockchain. Yes, build a government-specific rollup.

In the past 12 months, a major Ethereum scaling solution - Rollup, has gained tremendous adoption among the crypto community. Daily active users of Arbitrum, a major rollup network built upon Ethereum, surpassed the Ethereum mainnet months ago. It has been proven that Rollup is quite a balanced solution, which can provide high level security and scalability to the users, as well as relatively flexible sovereignty for the rollup network ecosystem.

Governments can build digital ID systems and KYC policies. Make sure that only legal residents have the rights to access the rollup network and interact with promised protocols. Since the governments can play an important role in the self-ruling network and provide protection for their residents, they will have legal jurisdiction over the network. Protocol developers will need to provide legal applications to get access to your rollup network, just like any global company setting up business in your country.

Am I a little bit naive to call for governments to become a junior partner of blockchain networks? Yeah, I don’t think any government, especially those who have dominant powers, would love to give up its power and compromise with one of the most important incoming technologies. But, if we really view blockchain technology as the future, and code is law, then why shouldn’t we insist on blockchain as a global public good, and state regulations should just build upon it?

As a matter of fact, the jurisdictions of current nation state governments are basically built upon their own lands and territories. To some extent, the nation states can be viewed as rollups that are building upon our planet earth as their base layer. The governments don’t have jurisdiction over ruling how our planet earth moves, even if they could. All they should do is leverage their natural resources and service their residents.

To be realistic, the governments won’t give up their power without a fight. If the fight between the crypto communities and state governments is inevitable and a Government Rollup will be the end game, here are some of my thoughts on how to achieve it.

• Build alignments with a group of pro-crypto countries and setting up real use cases. Not every country views crypto and blockchain as a threat. There are many crypto-friendly countries, like the U.A.E., which can be allied and start to build a sovereign rollup network. With the help of existing tech stacks, like OP Stack etc., it is not quite hard to achieve that.

  Building a government-rollup can help the government expand its influence and attractiveness. In the real world, the sovereignty of a government is deeply bundled with its territory. But in a government-rollup, the government can issue digital non-resident ID to attract talent, without any welfare costs. To some extent, a government building a rollup network on the Ethereum can also be viewed as building settlements on Mars.

• Keep walking on the path of truly decentralization, especially in the consensus layer. From a government perspective, even if it has the willingness to build a sovereign rollup on a blockchain, let’s say Ethereum, it is hard to convince the regulator to set up a rollup upon a base layer that might be monopolized by any other entity. No regulator would like to take the risk of losing reputations.

With the mega trend of ‘the monolithic blockchain model turning into the modular blockchain model’ in the crypto industry, we can see that the core value of Ethereum has evolved to provide a security guarantee to the public. In just recent months, there are many so-called ‘Ethereum Killer’ L1 blockchain(Celo, Canto, etc.), have chosen to turn their network from an independent L1 network, to a L2 rollup that base on Ethereum. Governments should really view blockchain, like Ethereum, as a global public good, instead of as a threat. What a government should do is just how to use blockchain technology and infrastructures to serve its residents’ best interests.