Blockchain technology has great potential for better equalization of financial opportunities, opening funding and investment to a much wider audience than traditional patterns of accredited investment currently allow. But openness can have a dark side. One person might be singing the glorious praises of the freedom of blockchain, while another might be instigated into launching into a tirade about black markets, drug money, terrorists, and money laundering.
Bitcoin has managed to make a lot of rich folks richer and a lot of poor folks poorer. There have been crypto millionaires, and crypto paupers. There have also been plenty of scams. The Ethereum blockchain in particular has seen myriad debates about the relative merits of immutability and unassailable privacy versus using an approach where every transaction is kept honest by subjecting it to 3rd party official oversight. Is it possible to find just the right amount of regulation? The latest divider in the Crypto world has been the need for regulatory action.
As time goes on, people gravitate towards one of the three places on the spectrum:
Full regulation
No regulation
Moderate regulation
What’s less clear is why each perspective has its individual merits and detriments. Here’s a brief primer of pros and cons.
Full Regulation
The proponents of full regulation come in all shapes, sizes, and origins, running from consumer protection watchdogs to crypto-haters to rationalists. The basic premise backing this goal tends to be, on some level, societal — un-or-softly-regulated crypto presents a bona fide threat to the stability of the world as we know it. Broadly speaking, this threat can present along two fronts: financial stability and consumer protection from fraud and theft.
Crypto has tremendous implications for traditional finance. The technology offers a completely new way to allocate capital to all types of recipients. Historically, these activities have been limited to certain funds/individuals and countries. Crypto breaks all these limitations.
This openness has drawbacks. Traditional financial institutions are still our sole gateway to financial resources. If the metaphorical Wall Street were to collapse tonight, many key companies would tumble along with it — and crypto still can’t build cars, innovate technological hardware, or even do things like offer safe mortgages.
Our economy isn’t made up of discrete nodes so much as it’s an interconnected web. We can’t risk one pillar falling and taking everything else out on its way out.
These implications are not necessarily intuitive, which is perhaps a decent illustration of why regulation with an eye towards consumer protection is not unreasonable. Greed causes humans to do inexplicable, irrational things, and this is especially true when the upside is as high as what we’ve seen with crypto. People will do things that are bad for them, act against all reason, and sacrifice the long term for the short term. It’s possible that the vast majority of those buying cryptocurrencies are uninformed about the consequences of their actions, or, if they are informed, may be willing to take disproportionate risks (to themselves and to the system) to turn a quick profit. Perhaps more saliently, they may be willing to risk their own financial ruin for the chance at making a few bucks, and this is infinitely more concerning.
Aside from the individual investors’ risks, there are people out there who will act unethically to ensure that they’re the ones who end up with the wealth. We’ve seen this in the cryptosphere in the form of Ponzi schemes, empty ICOs, and outright scams. Perhaps the most famous of these is BitConnect, a coin that peaked with around a 3 billion dollar (USD) market cap before collapsing completely. In the months leading up to their demise, many individuals were calling it out as a shady project, but people were still buying in — either out of ignorance or in the hopes of riding the wave up and finding a bigger fool before the crash.
Throughout all of this, one lesson has become clear: consumers often don’t know what’s good for them. Whether we’re risking the global financial system or our own life savings, greed can blind us to the rational course of action. Sturdy guardrails are sometimes necessary to protect us from ourselves.
No Regulation
In contraposition to the push for full regulation is the argument that crypto ought to be left to fend for itself, entirely unregulated. This argument is most in keeping with the philosophical underpinnings of crypto: an anonymous, global, almost anarchist movement.
The potential for no regulation is there — coins are global, decentralized, and at least quasi-anonymous. Blockchain immutability would be, in crypto, the de facto government. This built-in will for no control presents a huge headache for regulators, who find themselves having to either coordinate (notoriously difficult on a global scale) or fight the metaphorical battle against nature.
There are some good reasons to let things shake out naturally, chief among these being the survival of the fittest argument.
Unquestionably, crypto is new technology, and it still has some maturing to do. There will be some mistakes and losses, sometimes on the scale of billions of dollars. But, in a way, these mistakes force evolution. Safety nets in various forms have been proposed, and while myriad arguments on both sides surround the issue, the conversation invariably ends up circling around to these very concerns. If crypto is regulated, aren’t we just somewhat arbitrarily closing the gap between “good” projects and “bad” projects? Aren’t we imposing a localized, government-derived ‘seal of approval’ on some projects over others? Even more worrisome, isn’t it likely that the coins that are even able to be regulated skew towards the centralized, the mutable, or the non-anonymous?
Further bolstering this position is the reasonable fear of crypto bubbles. Unquestionably, blockchain-based currency as an asset class has had one of the most meteoric rises in recent memory. This has fueled speculations of a bubble, which some say has popped — but nobody knows for sure.
There are reasons to avoid putting some cryptos in a “safe” class and some in an “unsafe” class, because realistically, none are truly safe. Whether or not a government intends for regulation to be seen this way, this is how some people will interpret it. The end result of this could be people buying in who haven’t done sufficient research, or are perhaps not familiar enough with the technology to keep their coins safe.
Who has the foresight to see into the future, or to see into and judge the virtues of particular projects? Governments are unlikely to limit their regulation at just barring or restricting some coins. Any regulation is likely to come along with a whole slew of other legislation. If regulating some cryptos causes citizens to purchase these unsafe assets, we will quite possibly see government bailouts and even more hands-on regulation. While the slippery slope argument usually doesn’t hold much water, those against regulation in any form have a good point in this case — history suggests that government involvement will only increase as more people lose their money. Patterns of crypto regulation will likely mirror our securities framework, and this is not an environment in which crypto can survive. If this is a true possibility, perhaps regulations writ large are undesirable.
Quasi-Regulation
There is a middle ground between traditional regulation and anarchy: clearly-defined quasi-regulation. The kind of regulation that is not susceptible to an increased “creeping forward” of guidelines, but still provides some safety to consumers.
One possibility is to adopt an information mechanism, and regulate information rather than practices. For example, consider any well-known “scam coin”, perhaps one that is essentially a ponzi scheme. Regulating the actual practices would require a government saying something such as, “tokens whose governance model resembles these structures aren’t allowed to be bought or sold in our jurisdiction” — or worse, “only coins that closely follow such-and-such model are allowed”.
This likely stifles innovation, and moves away from the (arguable) philosophy of crypto, while also not letting such winnowing mechanisms as ‘survival of the fittest’ operate. Meanwhile, this entails boxing in a potentially world-changing technology, and not allowing the free market to organically value companies and practices.
Consider instead, that governments allow these companies to operate and innovate, but mandate specific flows of information.
A huge majority of scams can be avoided given the appropriate signals provided right at the point of decision. A real-world analogy may be the Food and Drug Administration (FDA). Broadly speaking, the FDA works diligently to remove indisputably harmful elements from the food chain, such as salmonella. Other substances, such as sugar, saturated fats, alcohol are allowed but with clear disclosure/warning The FDA doesn’t want to overstep their bounds, but they do want to ensure that if an adult chooses to buy, say, a pack of cigarettes, the adult has an easy way to inform themselves about their decisions. The adult can ignore the surgeon general’s warning, and overlook the fact that this product contains tobacco and nicotine, but they can’t claim that the information was never accessible to them. It may not be advisable to buy a token with a completely anonymous team, with no product, a whitepaper riddled with spelling errors, an unlimited token supply — but some adults will buy in if they can see the dollar signs.
Perhaps the government doesn’t need to ban such shady enterprises altogether… perhaps they just need to make sure the consumer has easy access to clear trusted signals that would reveal if something is amiss.
Another possibility is just an attempt at softer regulations — this is somewhat of an uphill battle, as it will probably take the coordination of many governments to build a fully effective system. The tough question, then, is how much regulation is acceptable? Too little, and we build a haven for scammers who will be able to take advantage of the the unfounded trust in the system. Too much, and we chilled innovation, potentially either killing the movement on a global scale or possibly allowing for a small number of loosely-regulated countries to pull ahead of the rest. Where to set this bar?
Conclusion
There are a few different approaches to crypto regulation, ranging from the minimal to the extreme. Most have their merits drawbacks, and all suffer from the uncertain future of blockchain technology as a whole. What seems true, however, is the tremendous potential for these innovations to have a significant impact on humanity. This is not an opportunity to be squandered — rather, it’s an opportunity to come together, think critically, and build something amazing.
-VEVA
http://www.veva.one
t.me/vevaone
@vevaone