Ethereum co-founder Vitalik Buterin weighed in Sunday on the regulatory debate surrounding crypto, providing his thoughts on what industry rules should—and should not—include.

Regulation could make crypto more palatable to mainstream financial institutions and legitimize cryptocurrencies as an asset class. But new rules and policies could also alter the industry’s DNA, particularly as it relates to principles like censorship resistance and decentralization.

Buterin said he believes preserving the latter should be the priority. 

“I don't think we should be enthusiastically pursuing large institutional capital at full speed,” he said. “Regulation that leaves the crypto space free to act internally but makes it harder for crypto projects to reach the mainstream is much less bad than regulation that intrudes on how crypto works internally.”

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Buterin’s Twitter thread comes ten days after a controversial blog post by Sam Bankman-Fried, the founder and chief executive of cryptocurrency exchange FTX, in which he outlined his regulatory vision for the industry.

Bankman-Fried subsequently capitulated to Crypto Twitter after receiving pushback on potential rules related to DeFi, such as requiring autonomous programs to comply with U.S. sanctions and making crypto websites register as a broker-dealer. He revised the post and said he will continue to do so.

Regulatory uncertainty is seen as a barrier to institutional crypto investing, according to a new Fidelity Investments survey. The Institutional Investor Digital Assets Study found that out of more than 1,000 institutional investors, 16% said a lack of clarity around regulation was an obstacle to investing in digital assets. 

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On the other hand, more than 8 in 10 (81%) of the institutional investors surveyed view digital assets as having a role in investment portfolios. In addition, 43% of institutional investors said they would be interested in a Bitcoin ETF.

Segments of the crypto industry have been pursuing institutional capital for almost a decade, ever since the Winklevoss twins’ initial filing for a Bitcoin ETF-like trust in 2013. While futures-based products trade on the Chicago Mercantile Exchange, the Securities and Exchange Commission has dragged its feet on approving a spot-based Bitcoin ETF.

That’s not a bad thing, according to Buterin.

“I'm actually kinda happy a lot of the ETFs are getting delayed,” he said. “The ecosystem needs time to mature before we get even more attention.”

Buterin divided the policy goals he envisions for the crypto industry into two categories: providing better protection to consumers who navigate the nascent industry, and stemming the illicit flow of cryptocurrency—which he said are not exclusive to the DeFi space.

To address the latter, Buterin is skeptical of requiring DeFi protocol front-ends to abide by Know Your Customer (KYC) standards. While such standards are used by financial institutions to prevent money laundering, fraud, and corruption, “hackers write custom code to interact with contracts,” circumventing the usual KYC barriers.

“It would annoy users but do nothing against hackers,” he said.

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There are DeFi regulations that Buterin thinks could be more helpful, such as limits on the amount of leverage a user can trade with, transparency in code audits, and requiring “knowledge-based tests” as opposed to “plutocratic net-worth minimum rules.”

Buterin said he’s also in favor of crafting regulation in a way that allows for the further use of zero-knowledge proofs, a cryptographic principle that preserves privacy.

The response to the response

SBF responded to Buterin’s points, stating he thinks they “are pretty reasonable” and expressed an openness to bringing the ethereum co-founder to Washington DC in order to give nuanced input on regulation.

“I think that policymakers/regulators would find it pretty interesting to hear from @VitalikButerin,” SBF stated. “he's very different from the average person in DC, but in a kinda refreshing way—calmly and thoughtfully saying what he thinks.”

Buterin’s comments also appeared to receive an endorsement from Changpeng Zhao, founder and chief executive of Binance, another leading cryptocurrency exchange. The CEO responded to the thread with a thumbs up emoji.

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Crypto investor Ryan Sean Adams gave a nod to Buterin’s entry into the debate as well, stating Buterin is welcome to share his thoughts at Bankless, a DAO and crypto media project.

Adams had delivered pointed criticism to SBF’s initial blog post, tweeting, “This absolutely sucks.”

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