Is Crypto Regulation a Necessary Evil?
Is Crypto Regulation a Necessary Evil?
Today we can all observe, albeit gradual, but quite consistent and stable “crackdown” in relation to cryptocurrencies. Regulators almost all over the world are striving to establish the greatest possible control over the blockchain space (albeit in slightly different ways). Of course, all this is explained primarily by the need to protect participants in the crypto market. But how true are these slogans and is crypto regulation so useful?
Evolution of Cryptocurrency Regulation
In the first years after bitcoin apperance the cryptocurrency market was ruled by the complete anarchy. This period is not called as the “era of the Wild West” for nothing by the “old-timers”. And even when serious money appeared in the blockchain industry crypto was still perceived as a “toy for geeks”.
Thus, the American Financial Crimes Enforcement Network first noticed cryptocurrencies in 2013. And it quite unequivocally stated that the crypt is not a legal means of payment and therefore does not require regulation similar to the ForEx market.
Japan was the first country to introduce real measures to regulate cryptocurrencies in 2016. The trigger was the theft of 850,000 BTC from the Mt.Gox exchange. Roughly speaking the government decided that if thefts and break-ins reached such extent something had to be done about it. To begin with, at least to decide what cryptocurrencies are from a legal point of view.
Around the same time Bitcoin and other cryptocurrencies have gained a reputation as the “currency of the underworld” due to their active use on the well-known marketplace SilkRoad. Of course, all kinds of criminals use fiat money much more but this does not prevent opponents of free crypto from using the “currency for terrorists” narrative.
However, for quite a long time governments have not made any special efforts to introduce crypto regulation. Exactly before the “crypto boom” of 2017 when everyone started talking about Bitcoin, including politicians who did not understand what it was all about.
A wave of regulation began with mandatory KYC/AML procedures for clients of crypto exchanges working with fiat and requirements for exchanges to collect and provide authorities with data on the beneficiaries of crypto transactions on their platforms. And by 2018-2019 state machines overcame inertia and began to introduce restrictions and rules for cryptocurrencies and blockchain business around the world.
Despite significant differences in the rules in force in different countries one common feature of the actions of regulators is everywhere: the desire to establish the most complete control over the blockchain space. Collect maximum data about each user and transaction. All other considerations are clearly secondary.
Does Crypto Regulation Work?
The goals declared by governments are purely noble: protecting cryptocurrency market players from fraud and arbitrariness of companies, combating crime, preventing money laundering, terrorist financing and the like. And no one will argue that the “Wild West” in the crypt is not acceptable and mechanisms are needed to fight criminals. In practice, however, regulation fails to achieve these noble goals.
Do the adopted laws help us fight against scam? Scam projects are still being created and doing quite well. And the recent scandals with the collapse of the SiliconValley bank and the FTX exchange speak of the ineffectiveness of the existing control systems. Do not forget that banks and exchanges are the most regulated participants in the crypto market.
The fight against money laundering, the financing of crime and terrorism? Against the backdrop of fiat flows, talking about the importance of cryptocurrencies is frankly ridiculous.
But if the declared goals are just a screen why all these measures then? There are two main reasons:
- A system built on the control is forced to deal with a phenomenon that is beyond its control. So the fight against cryptocurrencies is largely a “reflex” caused simply by the fact that cryptocurrencies do not fit into established norms.
- Taxes. A large sector has appeared in the economy that is not fully covered by the tax system. And there is nothing that any state hates more than revenues floating by. The main goal of all KYC\AML standards and rules for the cryptocurrencies circulation is the collection of taxes. And “noble goals” are just throwing dust in the eyes.
A Bit of Ugly Truth
It would seem that the governments’ attempts to take control of the cryptocurrency space should meet with active resistance. And not only from the community but also from the most visible companies and people in the industry. After all, regulation obviously contradicts the original idea of Bitcoin as a self-regulating financial system. But we don’t see it.
On the contrary, the leaders of the crypto-currency market including most cryptoexchanges and a number of large projects and start-ups are the locomotives for strengthening government control and cryptocurrencies regulation. What is it connected with?
The vast majority of companies, entrepreneurs and just players in the cryptocurrency market are completely uninterested in the original ideas and values of Satoshi Nakamoto. Although, of course, they talk a lot about these ideas. Blockchain for them is nothing more than a tool for earning the usual dollars and euros. And who controls fiat? Financial regulators, so you need to be friends with them.
Without a doubt, regulators are completely uninterested in protecting the interests of users and the crypto community − this is clearly evident from their actions. However, can we blame them when the leaders of the crypto market themselves shout “rule us!”?
Is There a Reasonable Compromise?
The desire of regulators to control the cryptocurrency space in the foreseeable future will not come to naught − after all, states will not go anywhere either. However, the experience of different countries already shows that there are very different approaches to the problem of regulating cryptocurrencies, dramatically differing from each other both in the degree of intervention in the industry and in the impact on its development and in the balance between user protection and control.
This is what we will talk about in our upcoming articles: we will compare the norms and laws in different countries and show what aftermath has the application of different approaches. And even try to find the most optimal compromise between freedom and control.
Believe me crypto regulation is not only a vast and important topic but also extremely interesting.
What cryptoexperts think
Lado Okhotnikov, CEO of Meta-force.space, (former CEO of Forsage.io)*
Absolutely all spheres should be transferred to the crypt as soon as there is readiness for it in each sphere. I do not see a single area in which for some reason we need government officials. How can the state help for the development of the country? The best thing the authorities can do is not to interfere and not to interrupt. I do not like the very word “power” in relation to officials. These are managers hired by society who are obliged to report to us and their power should be minimal.
Lado Okhotnikov’s full interview fragment.
John Garvey, Global Financial Services & Digital Assets Leader PwC LLP*
For traditional financial institutions, digital assets regulation gives the long needed clarity and certainty to enter the space and start building their digital assets offerings. For crypto native firms, regulatory clarity may mean having to quickly expand their regulatory expertise and compliance oversight, in line with global financial services regulatory requirements.
Trust in the space may be broken right now. While regulation alone cannot solve that, clarity across terminology and application of regulation, along with firms’ enhancements to their risk management capabilities and procedures, is a good starting point.
Kurt Woock, Lead Writer at NerdWallet*
However, many people interact with cryptocurrency through institutions, not peer to peer. Crypto-specific exchanges that provide custodial services or crypto payment services are the types of centralized institutions Bitcoin was designed to circumvent, but consumers have gravitated toward this convenient on-ramp to crypto ownership. Traditional financial companies are increasingly moving into crypto, too. That intersection of cryptocurrency and financial services companies is where much of the regulatory attention is focused.
The appropriate role of government is an ongoing philosophical debate within the cryptocurrency community. For an investor, however, the question is what to do because crypto is regulated to some degree.