There’s no reason that innovation and regulation must be mutually exclusive.

This is my favorite statement from the Consensus2023 conference this year. The comment was made by Chris Zuehlke the global head at Cumberland DRW who is the crypto market maker.

The first is innovation, which represents what has not yet been discovered. It can be efficiencies, revenues, growth etc. Second, regulation can either help innovation thrive in a legal way or can completely hinder it.

When their relationship is tense, it can be a problem for everyone. Recent events have me concerned. Let me explain.

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Blockchain developers build, maintain and design applications for crypto ecosystems. As developers, they make an effort to dedicate their time, intelligence, talent, and resources towards building things that have value.

The number of developers who flock to or leave a certain ecosystem is a good indicator of its efficacy. Developer activity is also a good indicator of crypto-focused projects that are growing and generating value for their users.

A physical analogy is useful: The most dynamic cities often have the highest construction rates. In blockchain development, the same philosophy applies. If developers are developing there, it may be worth exploring a protocol.

Recently, I found in a report which showed two different developments. One was positive, and the other, not so.

First, blockchain development is expanding. According to the report, there are around 21,700 developers who work on crypto projects every month. The top five by ranking are:

  1. Ethereum: 1,975
  2. Polkadot: 675
  3. Cosmos: 530
  4. Solana: 344
  5. Bitcoin: 328

The total number of transactions has increased by 110% in the last three years, and 43% over the past two. However, it is down by 17% from November when the collapse of the FTX exchange caused such turmoil.

The fact that the crypto market has grown over time, even during a crypto-winter, is a testament to its innovation and expansion of technology. Cryptocurrencies do not exist solely to be speculative coins or tokens. These technologies are also being used to develop potentially valuable applications.

Developers are now more willing to create useful things on different ecosystems. This should be beneficial for the public. This is a positive.

I am concerned about the second development. The number of developers in the U.S. is decreasing, even though the total has increased. The percentage of developers in the U.S. dropped from 40% to 29% in 2017.

After a period of relative stability, the U.S. has now tied Europe at 29%. Asia and Africa, however, are on the rise. It’s not unreasonable to believe that the U.S. could lose its top spot.

What is the cause of America’s decline? Recent exchanges between U.S. policymakers and the crypto community have become excessively abrasive. Individuals within the crypto space are concerned about the lack of clarity, and whether their actions in the name innovation will be at odds with yet-to-be-implemented regulations.

In this case, the easiest fruit to pick is Securities and Exchange Commission Chairman Gary Gensler’s comments about cryptocurrencies and his apparent (at least at first glance) hostile attitude towards it.

Many of these complaints have been attributed to the perceived contradictions in what Gensler says now as the head of the SEC and what he said in the past. In 2018, he made statements that seem to contradict what he currently states.

It’s true: positions change. Someone can change their mind about an issue. If you don’t have clarity, people may not believe what’s being said or think that the change is driven by outside factors.

It’s not just developers. Coinbase is reportedly looking at moving part of its operation outside the U.S. It appears that the primary reason for a move would be to diversify regulatory risks.

It seems that the U.S. will be more inclined to seek out countries where there is greater regulatory clarity.

On both sides of politics, we must move away from party-centric talking point regurgitation and toward sensible regulation.

A draft of the U.S. stablecoin legislation that is receiving bipartisan support is an example of how to move forward. The bill includes provisions such as ensuring adequate liquid reserves, a ban on algorithmic stablecoins, and licensing requirements for stablecoin issues.

The two main political parties appear to be working together.

Crypto innovation will move to other places if they don’t manage this more frequently.

Here’s some interesting news from CoinDesk’s Deputy Editor in Chief Nick Baker:

  • THE OPTIMALISM: As a first-time attendee of CoinDesk’s Consensus2023 event held last week, I was amazed by the size and impact of the event. It was surprising to see such a high level of optimism, given the current regulatory climate. It’s possible that this is partly a self-selection effect: people who spend a lot to attend an event like this tend to be more bullish. I was struck by the juxtaposition between big questions about the future of crypto and optimistic outlooks.
  • MILLIONAIRE FROG: Another way to express people’s optimism about crypto is the market cap of Pepe meme coin, which has risen by 2,100% since its debut in April. BitMEX offers derivatives contracts linked to PEPE that have enormous leverage. Of course, caveat emptor is abounding. This seems to be the type of speculation that ends in tears, with no obvious there there and just day traders and degens moving the price up or down.
  • CRYPTO LEGALITY: U.S. Rep. Patrick McHenry made an announcement at Consensus that caught the attention of many. He said that a key committee in Congress will be presenting a proposal on crypto legislation soon. But it’s difficult to be optimistic about this. This is not the first time we’ve tried to get the U.S. to bring legislative clarity to our industry, but the results have been disappointing. It’s difficult to imagine that much bipartisan progress will be made in the lead-up to the presidential election of 2024.
  • KILLER App: Traditional Financial (TradFi), firms have been talking about blockchains and cryptocurrency for years. But the intersection between these two realms hasn’t really happened. JPMorgan believes that the move towards tokenizing real-world asset is a “killer application” for TradFi. The bank is pushing forward in this area, “largely undisturbed by the crypto bear markets and regulatory uncertainty,” CoinDesk’s Ian Allison reports.

Click here to listen to more analysis.

Nick Baker is the editor.