Impact of Restrictive Regulations on Blockchain

High Compliance Costs

Unlike the industries above, blockchain projects face a notably stringent regulatory environment, primarily under the oversight of bodies like the SEC. Blockchain companies that wish to tokenize real-world assets (RWAs) are often required to adhere to securities laws, which involve costly compliance steps such as obtaining licenses for Broker-Dealer, Transfer Agent, and Alternative Trading System roles. This regulatory barrier creates a significant financial burden, with estimated costs between $500,000 and $2 million, as well as a time frame of 12 to 18 months, which many blockchain startups cannot afford. This stands in contrast to the relatively free environment in which internet, ride-sharing, and AI companies initially operated.

Regulation by Enforcement

The SEC’s approach to crypto has been highly enforcement-driven, often initiating legal actions against established blockchain entities like Coinbase, Uniswap, and OpenSea. This aggressive stance has cast uncertainty over the blockchain space, creating fear and hesitation among developers and investors. Instead of promoting growth by creating clear guidelines, the government has focused on prosecuting companies that operate in good faith, making it seem as if it aims to dismantle the entire crypto sector. This approach stands in stark contrast to the leniency that allowed companies like Uber and Airbnb to flourish while working around traditional industry regulations.

Barriers to Collaboration

The lack of regulatory flexibility in the blockchain space discourages traditional financial institutions from collaborating with blockchain startups. In many cases, blockchain projects aiming to build on RWAs encounter resistance from traditional solution providers. For example, when DoDAO approached financial institutions for discussions on integrating traditional and on-chain systems, these institutions focused primarily on raised capital rather than the compliance and innovative potential. This results in significant setbacks for blockchain projects, as they are unable to leverage traditional finance networks without massive upfront investments and established reputations, which contrasts with the support and acceptance that traditional fintech startups enjoy.