Integrating Sanctions into Smart Contracts
Regulation is one word that tends to evoke negative sentiments in the crypto community. This is largely due to the fact that it often feels as though it is the opposite of the belief system people have built based on the idea behind Bitcoin and Satoshi’s vision. Then couple this with the way and manner in which governments and their agents have been pursuing its implementation, it is no wonder that many people in cryptocurrency world find the word distasteful.
But regulations remain a recurring topic in crypto-related conversations and some of the many narratives surrounding the push for regulations has included money laundering, the use of crypto to fund illegal activities and the numerous cases of fraud (rug-pulls and other scams).
For centuries, we have been living in societies that have become increasingly more regulated and monitored. Unfortunately, despite the positives cited in favour of these regulations we have seen that the system tilts in favour of the rich and those in positions of control. But humans, and even animals, crave freedom. The freedom to come, go and do as they please without any restrictions, therefore any form of restrictions imposed upon these freedoms is, generally, seen as a form of oppression. A recent example can be seen in people’s reactions to the Covid-19 lockdown. Hence, words like regulations, rules and law can leave a bitter feeling in the minds of those who hear them. And this is why Satoshi’s vision of financial freedom has been seen by many as an avenue to break free from financial regulations and take back some control of their financial destinies
But are regulations really evil?
Let’s imagine a society devoid of regulations and law, no police agency is required since there are no laws to enforce and everyone is free to act as they please. Lots of people in that society will be after fun, peace, quiet and the freedom to control and enjoy their lives. But some in that society will want to kill, steal and destroy. These bad eggs will strike but without laws and police, there will be nothing to stop them or checkmate their evil actions.
By exercising our freedom without proper regulations and laws, we may actually end up losing it as we hurdle and hide in fear from the anarchists terrorizing the community. But if regulations are put in place and a law enforcement agency is setup to enforce these regulations, sanity gets instilled and freedom actually returns to that society.
Let’s bring this home to the crypto community. There’s no question that crypto has provided us with a means to express and experience our financial freedoms with little or no centralized control or reliance on third parties. But it is currently highly unregulated and as in an unregulated society, that freedom is available to not just the good and well-meaning persons but also the villains and those with not-so-good intentions.
And we have seen it play out time and time again, the rug pulls, the scams, the hacks and the sponsorship of illegal activities. All capitalizing on the unregulated nature of the crypto space. And millions worth of money have been stolen and lost as a result.
Looking at it, I think it’s time that the crypto community take an active role in controlling the “evil” in the crypto space. Real accountability needs to be introduced as part of the crypto narrative else we may end up in a messy state of anarchy.
So what can we do?
Many don’t want regulations because regulations usually comes with a centralized body that controls and heads things and goes against the founding principles of crypto. But my proposal is this; why don’t we try self-regulation working on the framework of a DAO (Decentralized Autonomous Organization). Why not create our own crypto police. We already have various DAOs that are working somewhat effectively in their various niches. Maybe it’s time to create a regulatory DAO that polices the crypto world encompassing the blockchain, exchange, dApp and user. This DAO will enforces rules and sanctions that have been agreed upon by consensus.
How would this work?
To make the regulations viable and effective, each approved regulation and rule can be coded into smart contract libraries that will be made available in the programming environments. Every web3 project (be it DeFi, Socialfi, Wallet, etc) will then be required to integrate these smart contract libraries in their code in order to be considered a valid web3 project. Projects that refuse to integrate these regulatory contracts will then be blacklisted.
By virtue of this approach, anytime the regulatory smart contract integrated in a dApp detects a violation, it can immediately trigger the appropriate built-in sanctions without requiring human intervention.
What kind of regulations should be encoded?
In my opinion, everything needed to bring sanity to the crypto space. We could implement wallet freezes whereby any transaction from a frozen wallet will automatically be rejected by miners/validators, AML (Anti money laundering) triggers could be put in place for transactions originating from suspicious sources, alerts and alarms for funds transfer that are above a certain limit and suspension of transactions if any suspicious activities seem to be linked to it. These are some of the possible regulations and sanctions that could be put in a smart contract. Will this move be popular? Probably not. But is it necessary? Definitely yes. Many of us don’t like the police but without them we can’t really enjoy the freedom that we claim to have.
What challenges and solutions are there?
While coding these rules into smart contracts may not be an issue, there is the problem of the additional overhead the integration of these regulatory smart contracts could bring, largely in the area of network fees. Smart contracts need money in the form of network or transaction fees in order for them to be executed. In certain blockchains where fees are already high, these could lead to excessive fees being charged on blockchain operations.
Fortunately, the Solana blockchain provides a viable platform with its very low fees and fast transaction speeds. Hence, using Solana, these regulatory smart contracts can be integrated into dApps without little or no negative effects in terms of network fees or transaction speed. Adding these regulatory features to Solana will not only put it in the forefront of innovation but also make it one of the safest blockchains in terms of user protection from illicit activities. And as a bonus, it may ease the negative narratives made about crypto by various governments.
In conclusion
Peering through my crystal ball, I see law-enforcing smart contracts with built-in sanctions becoming an integral part of cryptocurrency and blockchain usage in the future. With a blockchain like Solana, this is a very feasible idea. In what time frame this will happen, I can’t say but one thing is certain and that is the fact that crypto needs to be regulated to restrict the bad eggs else we will descend into a space of organized madness and crime. And crime is not a part of the vision that was presented by Satoshi Nakamoto.