Crypto innovators of color restricted by the rules aimed to protect them

Historically, Black and Brown communities have had restricted access to opportunities for generational-wealth building. Crypto offers a chance to redress that balance… but an opaque mess of laws and regulations around crypto services and a prohibition on certain wealth-generation opportunities are standing in the way of that happening. 

Controversial language in the United States’ recently enacted infrastructure bill may have unintentionally contributed to that cycle. The document contains broad tax-reporting language directed at “brokers.” The ambiguity of the term means it could apply to those who have nothing to do with brokerage, like miners and developers, and could also have an inequitable effect on blockchain innovators of color.

According to Cleve Mesidor, founder of The National Policy Network of Women of Color in Blockchain, “The assumption was that these miners were privileged white kids in their mansions. No, we’re mining and staking. We’re developing wallets, hardware and software. This burden will not hurt Binance or Kraken. The only people you hurt are the little people.” Karen Hsu, a cybersecurity expert and crypto entrepreneur, further believes that the language in the legislation “could unintentionally block innovators of color out of the market.”

Mesidor, also an author and former Barack Obama appointee, hopes to dispel the notion that blockchain innovators are predominately white men with limitless access to capital and power. She leads an annual congressional delegation to Washington of over 60 blockchain entrepreneurs and primarily meets with the Tri-Caucus (the Congressional Black Caucus, Congressional Hispanic Caucus and Congressional Asian Pacific American Caucus). Mesidor initiated the effort because she wanted these legislators to see “people who looked like them.”

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It’s not just founders of color who are potentially blocked out of the market. Federal regulations, or a lack thereof, restrict access to a litany of innovative retail investment products. With very few exceptions, leveraged tokens, crypto lending tools and all Bitcoin spot market ETFs are not permitted in the United States.

Proficient retail investors from all communities could benefit from these products, and they could be wealth-generating game changers for families and communities who have been locked out of the traditional system. Cryptocurrency legal and regulatory adviser Christine Trent Parker is uncertain what the right regulatory structure for those products would look like, but she believes that underserved communities deserve access to them and that those products should be offered in a regulated manner.

“Why would you not let people [have access] who don’t have access to investment products, who don’t have a portfolio of securities that they can borrow against? It’s a great product.”

Manasi Vora, vice president of Skynet Labs and founder of Women in Blockchain and Komorebi DAO, believes that underrepresented retail investors “are usually left out of amazing opportunities due to arcane laws,” like the accredited investor law.

The Securities and Exchange Commission defines a retail investor as “accredited” if the individual has a gross income exceeding $200,000 or has joint income with a spouse or partner exceeding $300,000 during the past two years. Although the law was amended by Congress in 2020 to include investors with certain professional credentials, it may still be too restrictive when applied to the crypto space.

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Komorebi DAO invests in crypto founders from underrepresented communities. Prospective members of the collective who don’t meet accredited investor requirements can’t participate. Vora says: “With Komorebi DAO, if the law restricts us from having accredited investors as members, then that leaves them out from all the potential value of investing in crypto companies.”

Back to businesses

When Hsu first entered the space in 2016, she felt that there was a lot of idealism about how cryptocurrency and blockchain could be used to serve the unbanked. She and other members of Blockchain by Women, an organization she founded, were optimistic. Many came into the space with grand visions. They hoped to build profitable companies, and Hsu wanted to help protect crypto entrepreneurs. She started the firm BlockchainIntel to provide affordable cybersecurity services to innovators in the space, including those creating products and services for underserved communities.

According to Hsu, large institutional investment firms like JPMorgan Chase entered the ecosystem a few years ago and began gobbling up the lion’s share of the wealth. Smaller firms like Hsu’s struggled to compete. She couldn’t charge sustainable rates that were comparable to those paid by the big companies. Even more challenging, her customers struggled to effectively navigate complex regulatory systems concocted by state regimes and uncertain federal regulatory agencies.

Hsu soon determined that many of the guidelines currently on the books had been built around the needs of the larger, well-established cryptocurrency exchanges and deep-pocketed investment firms flooding the space. With some exceptions, these rules are exactly the same or similar to those antiquated statutes that have kept the underbanked and unbanked locked out of the system and discouraged financial innovation in communities of color. Some critics of the infrastructure bill argue that the current rules help sustain a non-level playing field where entrenched wealth and power is recirculated among those who already have it.

According to Parker, every state in the U.S. has a different set of rules for businesses identified as money transmitters, a subcategory of money service businesses that cryptocurrency exchanges are categorized as. Parker says, “When you’re dealing with spot market transactions, it’s a state-by-state analysis of money transmitter licenses. [..] It’s not even one regime. It’s 50 different interpretations of what it means to be a money generator.” For example, Parker believes that setting up an appropriate LLC isn’t that hard. An innovative entrepreneur can do that. “Evaluating 50 money transmitter licenses… that’s really hard.”

Mesidor believes that these multistate regulatory requirements and roadblocks at the federal level are “burdens that Black and Latinx innovators cannot comply with that will force them out of the space.” Mesidor, also an adviser to the Blockchain Association, has actively been lobbying members of Congress to embrace common-sense regulatory legislation for cryptocurrency. She believes that federal regulatory clarity will help level the playing field for entrepreneurs from underserved communities and those providing crypto services to members of those communities.

What’s not being done?

If the nebulous federal regulatory effort is the primary obstacle to full inclusion, why aren’t the politicians who represent underserved communities doing anything about it? Why aren’t those legislators drafting bills, introducing legislation and lobbying for change?

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Although Mesidor believes that her delegatory efforts on The Hill have made an impact, she still feels that some caucus members don’t quite get it. Most are more focused on consumer protection than inclusion and education. An advocate for financial literacy, Mesidor believes that it would be more effective for legislators to find ways to teach their communities about the opportunities that digital assets offer:

“If they were more focused on financial literacy and skills training and workforce training, that would be acceptable, but they are mostly focused on consumer protectionism.”

During a hearing in December 2021 with cryptocurrency CEOs, several Democratic members of the House Financial Services Committee hammered the panel with questions about risks to retail cryptocurrency investors. Mesidor compares this hyperfocus on consumer protection to “patriarchy” and says: “Some members of Congress are so hellbent on protecting us that they simply make sure we have no options.”

And the solution is…

Mesidor believes that voting is the ultimate solution to the problem. She’s working to recruit crypto-friendly candidates who also support unrelated political priorities in their communities. “There is a new generation of political leaders who prioritize crypto, as well as equity and justice. My interest is in fielding new candidates of color whose agendas align with those issues.” Mesidor adds further: “Data shows that Black and Latinx communities are leading mainstream adoption, so crypto is already a growing priority issue for our communities.”

Hsu believes that it’s just a matter of time — a process of political and technical evolution. She doesn’t think that unbanked and underserved communities are the primary focus of the crypto marketplace in the United States. “The United States is a wealthy country, and most cryptocurrency stakeholders are focused on acquisition, the accumulation of wealth by those with access.” Hsu believes that the process has to run its course and that, over time, the market will shift priorities.

“It’s just probably going to be after what we see now, which is focusing on the acquisition use case. It’s an evolution here in the U.S. moreso — technologies are adopted by the wealthier people first […] and then onto others.”

In other parts of the world, crypto’s use cases are less about acquisition and more about payments — buying everyday goods and services. Once the U.S. market shifts to the needs of its average citizens, Hsu expects comparable laws and regulations to follow.