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.

If you haven’t heard about ‘ChatGPT’ in the past couple of months, either you are living in the stone age, or you are too rich and bored, having no interest in anything other than beaches and sunshine. ChatGPT, an AI powered chat-bot that was developed by the OpenAI team, reached 100M monthly active users, which makes it become the fastest growth application in the history of the internet.

Elon Musk recently posted a tweet saying, “I used to be in crypto, but now I got interested in AI”.

https://twitter.com/elonmusk/status/1631720134636367872

Considering that he actually used a quotation mark in this tweet. It is not quite clear whether this is just a quote from someone else, or he is again acting as this…

Whatever. He is one of the world's richest men, and maybe even become the most powerful man after 2024. He can almost do anything he wants.

I sent what Musk has said above to ChatGPT and asked for their comments, and here is the reply.

As an AI language model, I do not have the ability to read beyond the lines or interpret the intended meaning behind someone's statement. However, based on the quote you provided, it seems that Elon Musk has shifted his focus from cryptocurrency to AI. This could be due to a variety of reasons, such as his belief that AI has more potential for societal impact and innovation, or that he sees AI as a better investment opportunity than crypto. Ultimately, the exact reason for his statement would require further context or clarification from Elon Musk himself.

Considering that the monthly active users in crypto is roughly a couple of millions, the potential social impact of AI is truly more foreseeable.

Actually, you can’t argue that Elon Musk pivoted to his new sweetheart. Even some of the builders in the crypto communities showed their anger at the ugly behavior that happened in the industry last year.

Here is a video recorded at the opening ceremony of ETHDenver 2023, one of the most important gathering events among the Ethereum dev community. They even placed the F-word on the founders of centralized entities that brought enormous damage to the crypto industry.

https://twitter.com/lebed2045/status/1631474168922517505

If you have placed an eye on how the U.S. regulators treated the crypto industry in the past year, then you might have better understanding on Elon Musk’s betrayal.

In the last month, Kraken, a crypto exchange, shut down its Ethereum staking services and paid a $30M fine due to a lawsuit by the SEC. Further more, Brian Armstrong, the founder of Coinbase, also raised his concern about the potential of regulators closing the path of crypto staking services for U.S. retail customers.

https://twitter.com/brian_armstrong/status/1623459203150131201

At almost the same period of time, the SEC issued a Wells Notice to Paxos, the entity behind the Binance USD($BUSD), alleging that $BUSD was an unregistered security.

While I asked ChatGPT the reason why U.S. regulators played tough on crypto, here is the reply.

There are several reasons why U.S. regulators have taken a tough stance on the crypto industry:

1. Lack of regulation: The crypto industry is relatively new and largely unregulated, which has created an environment that is ripe for fraudulent activity, market manipulation, and other abuses. In the absence of clear regulations, U.S. regulators have taken a more aggressive approach to protect investors and the financial system.

2. Money laundering and terrorism financing: The decentralized nature of cryptocurrencies makes it easy for criminals to use them for money laundering and financing terrorism. U.S. regulators have been concerned about the potential for cryptocurrencies to be used for illicit purposes and have been cracking down on exchanges and other service providers that facilitate these activities.

3. Investor protection: Many cryptocurrencies are highly speculative and volatile, which puts investors at risk of losing their money. U.S. regulators have taken a tough stance on the crypto industry to protect investors and ensure that they are not taken advantage of.

4. Tax evasion: Cryptocurrencies can be used to evade taxes, which is a major concern for U.S. regulators. The IRS has been ramping up its efforts to track and tax crypto transactions, and has been pressuring exchanges to provide information about their users.

Overall, the U.S. regulators' tough stance on the crypto industry is driven by a desire to protect investors, prevent criminal activity, and ensure that the financial system remains stable and secure.

It seems that they have built up alignment with each other. Correct me if I am wrong.

Facing all these challenges, do we, the crypto/web3 community, have other choices than surrender? Sure, we can try to make good relationships and collaborate with each of them.

Actually, there already have some use cases in web3 on adopting AI technology. Since AI has its power on creating various type of contents, some web3 builders have somehow started to embedded AIGC(AI generative content) in their projects.

In the past two years, NFT is one of the fastest growth sectors in the web3 space. Some NFT projects, especially art collections like Fidenza and Lost Poets, use AI in the process of generative content. Chromie Squiggle is an AI generated art collection launched in Oct 2021, and reached 62K $ETH trading volume in less than one and a half years.

In a recent report, Crypto.com also drew a framework on how AI technology can be used in web3.

Jon Radoff also wrote an article about his frames on how AI would empower the blockchain gaming industry in various ways. Interestingly, he used inspiration from the “5-level schema of autonomous cars” and detailed four types of creators’ evolutionary process.

The most attracting part for me is the ‘Player as Creator’ sector.

Level 0: Limited Creativity. Just the tactics and strategy you use to master the game.

Level 1: Player-as-content. The player alters a game by affecting social systems & economy, but doesn’t meaningfully impact the rest of the built-in content.

Level 2: Worldbuilding. The player impacts the shape of the world itself, such as how maps and structures live in a persistent world.

Level 3: Emergent Narrative. The player’s actions affect persistent content of the world, like living narratives and content — such as we’ve seen in most MMORPGs, and especially Eve Online.

Level 4: Integrated Generativity. Things formerly the domain of modding become part of the game loop, along with in-loop generative AI.

Level 5: Direct-from-Imagination. If players can dream of it, they speak it into existence; game system fits it to rules in an appropriate manner.

Obviously, we are still on the path from ‘Level 3’ to ‘Level 4’. One day, when we reach ‘Level 5’, basically we can act like god in the virtual world, if we are rich enough.

Beyond the AIGC and coding&debugging applications, there are also other ways that can bridge these two cutting-edge technologies together.

DID is one of the most important sub-segments is the web3 landscape. The ENS domain service has reached roughly 2.8M active addresses. DID connecting with an AI platform can generate various use cases. You can train an AI assistant with your ENS address. It can improve its understanding of your demand consistently, and you don’t need to worry about its service being shut down by accidents or internal collapse.

It is obvious that the money will always follow the hottest girl in the room. So we don’t need to worry too much about AI becoming the new sweetheart of venture capitals. Although AI may have more supremacy in attracting main-stream audiences, web3 technology also has its own advantages. Building upon blockchain technology, web3 projects have their unique monetized methods with a highly engaged community. They do not rely on a massive fundraising from a giant, or a heavy-pocketed venture. Not to say that, these two technologies can also be compatible with each other in one product as I have mentioned.

I will leave the fight with regulators part in the next article. It will be much more hard to fight against…