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Is the future of crypto regulation on tribal land?

July 6, 2022, 12:42 PM UTC

Imagine if you owned a little bit of Delaware.

That’s the pitch that Joseph McKinney is trying to sell to investors. McKinney is raising up to $5 million from angels, VCs, and family offices for a rather unusual venture: a special economic zone for crypto companies that sits on two acres of land on the Catawba Nation’s reservation in North and South Carolina. Its purpose? To start developing a meaningful regulatory framework for crypto and Web3 companies.

If all goes as planned, those two acres of land will become the worldwide registration hub for crypto companies, and will generate millions of dollars as well as new jobs for the Catawba Tribe—a small Native American Tribe of around 3,300 members and the only federally recognized Tribe in South Carolina.

“Lawmakers, because it’s such a new thing, haven’t created exact definitions for how this is regulated, nor do they have regulators who are extremely familiar with that,” says McKinney, who was hired by the Tribe as the CEO of the Catawba Digital Economic Zone, or CDEZ, and also runs a non-profit think tank focused on special economic zones. “That provides a huge opportunity for relatively low hanging fruit—to create jurisdiction with people that understand these types of things and know how… to classify them.” The crypto industry needs regulators that “actually understand the industry” and don’t move at a “glacial place,” he says.

One of the Zone’s regulatory body’s first initiatives was to add KYC, or know your customer, procedures and anti-money laundering protections for all companies that register within the zone—the aim being to attract companies that want regulatory clarity and focus on consumer safeguards.

The public-private partnership is three years in the making: The Catawba Nation, which only recently regained its federal recognition in the 1990s, has been setting up the Zone with McKinney as well as a series of operating partners, including venture capitalist Bradley Tusk’s short-term advisory firm Pericles, attorneys, architects, developers, and financial services partners, to build the zone. (All the initial operating partners have received equity in the Zone, set up as a Catawba Nation-majority owned corporation, in exchange for their efforts). Earlier this year, McKinney and members of the Tribe’s Economic Development Board had been going door-to-door to sit with tribal members and explain the project, and the Zone was formally approved by the Catawba Nation’s government in February. The Tribe is setting up a digital registration platform for crypto companies, and it is planning to use the first round of funding to hire policy and regulatory experts on staff and build out the Zone’s tech stack.

As a special economic zone, CDEZ will develop its own policies and regulations that are unique to surrounding areas: Companies that domicile here will be subject to the Zone’s specific commercial code, rather than state rules, though they will still be subject to U.S. federal regulation. It’s currently accepting comments for impending regulation on DAOs, or decentralized autonomous organizations, which are community-led entities in the Web3 industry.

It’s worth mentioning that the Tribe, which considers environmental stewardship a core tenet of its mission, has considered the titanic carbon footprint that the crypto industry has. The Catawba Nation eventually wants to play a role in making crypto cleaner—pushing companies to use renewable energy for mining or to utilize proof of stake networks that demand less energy, according to Thom Trimnal, a tribal member and former vice president of Catawba Corporations, who has helped bring the project to fruition. Already the Tribe is fielding inquiries about the project—particularly from other Native American groups around the U.S., he says.

“There’s a lot of excitement around this,” he tells me. “In Indian country, I’m fielding a lot of calls from other Tribes that are excited to see how we do, and maybe even offer to team up with us down the road or fall under our special economic zone.”

Of course, there’s still a lot of questions as to whether companies will register, and the debate over special economic zones and whether they even work has been going on for years. Not to mention—the Tribe is launching its economic zone at one of crypto’s most troubling moments: Bitcoin is trading below $21,000 and crypto lending companies have spiraled into chaos

“Anybody who says the market turning down doesn’t affect them is crazy,” Trimnal says, but he adds that there are always sways in the markets and that, once the Zone has a few successes under its belt, “things will take off quite well.”

Indeed, perhaps amid the TerraUSD scandal and Three Arrows Capital going defunct, regulation is exactly what companies—and consumers—are looking for.

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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VENTURE DEALS

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EXITS

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