Crypto Regulation: Parental Concern Or Paternalistic Intervention?
Crypto regulation issue seems to arouse strong passions these days. Many see this initiative as an undesirable intervention, others (like Brad Garlinghouse, Ripple CEO) think that proper regulation will contribute to the wider use and better reputation of crypto.
It is quite natural that the word ‘regulation’ makes libertarians shudder — they are afraid The Big Brother is about to destroy the technology or pervert its very nature. They would prefer crypto space to remain the Wild West zone, with all people made equal by Mr. Blockchain.
For others, the ‘regulation threat’ means that crypto will not be as safe and private as it was meant to be — thus losing a part of its anti-establishment appeal and user-friendliness.
Will the invention created to disrupt the imperfect financial system end up fitting into it? Is regulation going against the basic set of beliefs, upon which the crypto community culture was built?
Do we really need the governments to step in and coordinate our peer-to-peer interactions? And should limits be set to the use of technology created to transcend the limits?
Let’s try to see the both sides of this crypto coin here.
What ‘regulation’ refers to
In the cryptocurrency context “regulation” mainly refers to 2 main issues — KYC (Know Your Customer) principle and AMP (Anti Money Laundering) measures. It also deals with the problem of issuance and trading securities — the regulators seek to protect investors from illegal or scam projects.
KYC and AML rules are applied by most banks to verify their customers’ identities and detect illegal practices on their side. All clients provide basic personal info which is checked by a bank against the blacklist of people involved in criminal activity. Banks also keep track of their clients’ transactional behaviour to see if it indicates to money laundering. It is supposed that all the cryptocurrency exchanges should do the same.
Some crypto enthusiasts are against imposing these measures: they argue that the crypto market should be self-regulatory, and no third party is needed to bring order. In their opinion, crypto exchanges are to decide for themselves what rules they adhere to: for example, in June 2018 Coindesk removed Monero, Zcash and Dash from its listings in order to comply with Japan’s Financial Services Agency policy related to ‘privacy coins’.
Actually, this ‘self-regulatory’ view is consistent with Satoshi’s objective to create an independent financial ecosystem with no ‘parental control’ by governments or central banks. But since Satoshi has withdrawn from the project, It is changing a lot. What used to be a platform for libertarian tech-savvies has turned into a big media hype and a market with multi-billion cap. To gain mainstream adoption it probably should be regulated — at least, at an early stage.
Can it be done without stifling the innovation in the first place? That is the question.
Pros: Less frauds, more protection
The first thing crypto regulators seek is reducing scams. While the crypto market made a lot of people rich, many investors have lost millions to scams and ICOs. The scheme is well-known — scammers start an ICO for a promising project and, once enough money is collected, disappear. The investors are left with tokens having zero worth, and can do nothing to take their funds back. Regulation might help improving the situation — say, if every new coin on the market meets some established criteria, investing money in crypto will be safer. Therefore, more people will do it.
Another potential benefit of regulating cryptocurrency might be attracting institutional investors to this market. At the moment they are rather cautious, and it is understandable. If you are an angel investor you can always risk some of your own money to support the idea you love. But as a financial manager of a huge pension fund, you are very unlikely to put millions of dollars in crypto. It seems too risky and barely legal, too. If something happens and all your money disappear in week, you might end up in jail, leaving a lot of people ruined.
Proper regulation will encourage massive institutional investments in the blockchain industry. Some prominent experts like Michael Novogratz believe it is the key factor to the global cryptocurrency adoption.
Apart from it, regulation may help improving the public image of cryptos. If you ask a person in the street about Bitcoin, they will probably say it’s mainly used for drug trading, money laundering, tax evasion or, at best, for stock market speculations. When something has a vague legal status, in the public mind it is normally matched with criminal activity or shadow economy. Besides, high volatility of crypto makes the whole thing look like gambling — and it does not add any respectability. No wonder, Bitcoin and crypto in general is often seen as a Ponzi scheme, and banned in some countries. Global regulation framework could change this negative stance, making crypto a legal alternative investment.
To summarize, the regulation pros would be reducing uncertainty and increasing awareness, ensuring customer protection, eliminating frauds and creating better climate for massive investments.
Cons: Loss of interest, capital outflow, stifling startups
Apart from raising a lot of questions of ideological nature, regulation is fraught with potential problems.
The biggest danger here is capital flight from the market. It is explicable. A lot of people are involved with crypto just because this financial innovation gives them a long-awaited opportunity to be in charge of their own lives and stay away from centralized systems.
If you think it’s a pure speculation, there is already some evidence behind this concern. When Far East countries started talking about the necessity of regulation, the market responded with Bitcoin price falling dramatically. If all the world does the same thing, it might kill the crypto altogether or turn it into a shadow of what it used to be.
Another concern is that compulsory introduction of KYC/AGL might easily kill or leave behind a lot of startups and smaller companies. Many of them will not be able to afford KYC/AGL measures in the first place, and all the rest will have to spend a big portion of their funds on costly ‘surveillance apparatus’ instead of investing in their own development. As a result, the banking system will reduce competition and get rid of many potential threats.
There are also some doubts that regulation is capable of making the global crypto market less complicated. Yes, many governments today claim they are in favor of regulation, but the rules will be formulated on the basis of national interests, which are rather diverse. According to Timothy Enneking, the founder of Digital Capital Management, ‘all regulation is country-specific’, therefore a lot of international communication and reconciliation will be needed to make the regulatory framework function well.
Finally, it should be noted that the experts who say regulation is potentially beneficial for the crypto market, assume that the interests of the regulators coincide with the interests of the business community, and both will be acting like partners. But as we know, it is not always the case.
Therefore, Marshall Swatt, a prominent entrepreneur suggests that the attitude of regulators is to be carefully revised — it should be cooperative and healthy rather than hostile or skeptical.
In conclusion, creating an effective regulatory framework will require a lot of healthy collaboration between all the major participants. The good example to follow might be Japan, the first nation to recognize Bitcoin as money. The infamous case of Mt. Gox hack made the Japanese government face the challenge and develop measures against such accidents.
Luckily, the government didn’t opt for banning approach — instead, they decided to foster and carefully regulate the innovation. As a result, Japan is now the recognized crypto leader both in terms of Bitcoin trading activity and its real-world usage. According to the Japanese Financial Services Agency (FSA) recent report, over 3.5 million citizens are currently involved in crypto trading. And buying anything with crypto if not a problem — more than 260,000 stores all over the country accept payments in BTC.
Hopefully, this inspiring experience is scalable.
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