At this point regulation of crypto is inevitable, and while we still have many regulation deniers saying it will kill the industry, there have also been many people in the space who have made great arguments for regulation.
While it’s hard to clearly break down the pros and cons due to the nuances of the topic of regulation – especially in crypto – it is more fitting that we raise the questions and process the potential pro and con scenarios, in regards to the regulation of the world of blockchain and digital assets.
The categories of regulation
As we’ve mentioned in previous articles, the regulation of the crypto sector is highly nuanced due to the various technologies and applications. So, we first need to have a general understanding of the regulatory landscape so we can process potential positive and negative outcomes.
Know your customer(KYC): regulation that sets standard due diligence practices for financial firms to verify customer identities.
Anti money laundering (AML): laws related to the detection and reporting of suspicious financial activity, to prevent money laundering and terrorist funding as well as securities fraud and market manipulation.
Securities regulation: federal law that requires securities sold to the public to be registered with the SEC and that all information about the seller and the security be available for investors.
Consumer protection: laws implemented to protect consumers from fraudulent business practices, and dangerous or defective products and services.
Pros
Tokens/Consumer Protection
Regulation of tokens will create a scenario where investors will have you more legal clarity of what they’re really owning when buying a crypto asset whether that be ownership, voting rights, or various other perks.
At some level ICO regulation will disincentivize fraudulent actors from using crypto as a means of taking advantage of people, which will ultimately decrease the amount of random scam tokens and pump-and-dump schemes.
Information and disclosure laws are important because if the people writing the code aren’t disclosing all of the information then that puts investors, traders, and consumers at a much higher risk due to unknown or undisclosed factors. In terms of regulation of ICOs and tokens, the most critical and most reasonable regulation is disclosure. Free market and clear disclosure regulation will create an ideal environment because as long as consumers and investors have access to all of the information then from there they can use or invest at their own risk.
Stablecoins
Regulation of stablecoins and the recognition of them as legitimate money transfer software will result in millions of dollars saved by consumers and financial institutions making cross-border transactions. The other side to the regulation of stablecoins will be stablecoin backing. Full disclosure of the assets backing a stablecoin will ensure safety and efficiency for consumers and businesses using the software.
The Institutional Floodgates
The largest overarching pro for regulation is that it will provide institutions with the legal clarity they need to responsibly invest in the digital assets sector, along with providing more opportunities for average workers to allocate a percentage of their retirement portfolio to this developing asset class so they don’t get left behind.
This will ultimately bring potentially 100s of billions if not trillions of dollars in institutional capital into the industry, which will obviously be good for growth and investors, but the other benefit is that it could also make prices more stable over time which will make the asset class even more attractive.
Cons
The Slippery Slope of Government Over-reach
Like it or not, Governments are like a cancer – based on the objective definition of the word – in the sense that historically the goal of governments over time and certainly today is to grow and usurp as much power as possible. This is directly opposed to crypto and the phenomenon of decentralization. Furthermore, there’s a slippery slope that comes into play when governments get involved in anything, there are a few reasons for this:
1. It creates a new avenue for corruption and future overregulation
2. More regulation often increases the barrier to entry, and in crypto particularly it could make it harder and more expensive to start a business/raise capital, invest, or even be an independent developer.
3. It makes the overall industry less efficient.
A potential fear – depending on to what extent crypto gets regulated – is that over-regulation can disincentivize and/or constrict innovation, which would be detrimental to this industry in particular.
ICO/Consumer Protection
There are significant positives to ICO regulations – as mentioned earlier – however, on the other side of the coin, ICO regulations will also add barriers to entry which increase difficulty when raising capital through ICOs, potentially driving legitimate projects into seeking capital from other means such as private equity and accredited investors. This would defeat a significant purpose and draw for the crypto space, which is that it has given average people access to invest in groundbreaking technologies on the ground level, which in the past hasn’t been the case due to private funding and angel investing laws.
The Issue With Regulating Code
many aspects of crypto are just open source code, so two huge questions are:
1. How can the government regulate code and should it be allowed to?
2. Does the regulation of open source code fall under the first amendment of the constitution?
One current example of this is the U.S. government’s recent sanctioning of the Tornado Cash protocol, which has created a lot of issues for average law-abiding users.
Further Globalization of Government
The inherent global nature of crypto forces us to raise the question of how various governments will regulate it. It seems that there will almost have to be some sort of collaboration between governments to create consistent cross border regulation, furthering the issue of government globalization.
With many things, the more sovereign and decentralized they are, the better. This is because sovereignty isolates corruption inside the sovereign entity that it has infiltrated, for example, you’d much rather have cancer in your finger because it’s relatively isolated as opposed to your heart which is essential to the function of the rest of your body.
In crypto, the more centralized an ecosystem is, the easier it is for corruption to control that entire ecosystem, which creates numerous issues. This is the security-convenience tradeoff phenomenon: more security decreases convenience and more convenience decreases security, which also applies to government and regulation.
Crypto could add to the collusion between governments, furthering the globalization initiative, which may increase efficiency and convenience, but on the other hand, will inevitably decrease security and sovereignty. This is bad because globalization ultimately benefits the few people who hold all of the power.
Our Conclusion
There is no shortage of positives and negatives to explore on the topic of regulation, for the most part, it’s positive, however, there are definitely some potential pitfalls that could prove detrimental to the space if regulators chose to take the wrong path or try to overstep their ground. One thing that’s for sure, is regulation will inevitably open the floodgates of capital into digital assets, likely creating a prolonged bull market environment in the next economic cycle.
