DePIN needs thoughtful regulation — not lawsuits

Opinion by: Kai Wawrzinek, co-founder of Impossible Cloud Network

It seemed like the punitive US Securities Exchange Commission crypto enforcement era was over, but former Chair Gary Gensler left us some truffles to unearth. Even after his departure, Gensler’s “regulation by enforcement” approach continues reverberating.

We may be living under the first pro-crypto administration in US history, but there’s still a mountain of work to be done in clearing up the mess that’s been created by opaque, contradictory or absent regulations. One crypto sector, in particular, needs clarity on how it’s meant to operate without incurring the wrath of regulators: decentralized physical infrastructure networks (DePIN).

DePIN projects, from decentralized cloud services to telecommunications and shared sensor grids, rely on real-world deployments and robust tokenomics. When regulators fail to articulate how these tokens and their governance structures should be categorized, projects are left guessing — and, occasionally, end up in court.

Let DePIN do its thing

While most crypto sectors are wholly digital and never intersect with the physical world, DePIN differs. The clue is in the “physical” in DePIN. One of the most well-known DePIN projects incentivizes users to deploy wireless hotspots that create a decentralized Internet of Things network. Other DePIN projects include building decentralized cloud services, crowdsourcing environmental data, decentralized energy grids and more.

This intersection of blockchain, hardware and real-world services presents a unique set of regulatory challenges that require tailored solutions — solutions that are nowhere to be found in the SEC’s current approach. The unique interplay between the physical and digital worlds demands a regulatory framework that is both clear and forward-looking. Companies are left guessing at what constitutes compliance without clear rules governing token issuance, data privacy and infrastructure deployment.

This regulatory haze hampers investment and risks stunting the technological innovation that DePIN promises. Regulatory agencies must prioritize clear and transparent guidelines for crypto — with some real consideration given to DePIN. If we have explicit rules in place, DePIN startups will be free to build innovative infrastructure that solves critical, real-world problems, rather than frittering away resources on lawyers and litigation.

Recent: Crypto VCs are ‘especially bullish’ on DePIN, RWAs

Some will argue that operating in an industry with few rules is better than one burdened by too many. Yet history shows us that well-crafted regulation often paves the way for sustained growth, just as building codes enable skyscrapers to reach impressive heights while respecting the history and provenance of the cities they are located in. Thoughtful regulation doesn’t quash creativity. It anchors it and provides a stable foundation upon which original ideas can flourish.

Where DePIN deserves clarity

As for how to regulate a crypto vertical that is evolving fast and spans multiple industries, from AI to telecommunications, there are three primary areas where greater clarity would benefit all participants.

Securities vs. utility: Clear rules around DePIN tokens’ issuance, distribution and utilization are vital. This clarity will protect investors and allow for predictable planning and scaling. Without it, projects are forced to tiptoe around vague guidelines, channeling their resources toward legal compliance instead of innovation.

Data privacy: DePIN platforms gather and process real-world data, from location signals to environmental information. Failing to address privacy concerns through well-defined laws risks a regulatory backlash and a loss of consumer trust. A forward-looking regulatory framework should detail how data can be collected, stored and monetized, and it should balance user privacy with the operational needs of these networks.

Global infrastructure deployment: Many DePIN solutions physically deploy devices or networks that cross national and regional borders and compliance regimes. A patchwork of state, federal and international rules can stifle the very essence of DePIN’s global promise. Policymakers must align these frameworks so that hardware deployment, spectrum usage and other logistical considerations don’t transform into prohibitively complex legal labyrinths.

A better deal for everyone

While the primary beneficiaries of more precise guidelines will be DePIN projects, it will also help regulators — at least in their public image. The receipts are public when it comes to how much the SEC has made in fines by penalizing crypto projects retrospectively. This has, however, led to a mass exodus of the industry from the US. The new SEC leadership has a unique opportunity to set a precedent through sensible crypto regulation emphasizing guidance over punishment.

A long to-do list awaits the SEC chair, both for crypto and the broader financial markets Realistically, DePIN will not be at the top of that list. Yet, this remains the perfect time for the SEC to demonstrate how it intends to treat innovative industries like DePIN. This crypto enclave has clearly defined user groups, precise work being done and easily measurable outcomes. 

If the new SEC regime wants to signal to the crypto industry the treatment it can expect over the next four years, it could do much worse than start with DePIN.

DePIN is more than just another crypto trend. It’s a gateway to bridging our digital and physical worlds in ways we’re only beginning to envision. With thoughtful, proactive regulation, DePIN can fulfill its immense potential: solving vital, real-world infrastructure challenges that, with precise regulation, break no rules and improve our everyday lives.

Opinion by: Kai Wawrzinek, co-founder of Impossible Cloud Network.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.