As the outsiders were working hard to push automobiles on to the streets, the horse-carriage industry was busy lobbying the regulators in an effort to stifle innovation. They wanted to hype up the conjectured dangers of automobiles and bring the progress down to a level they were comfortable with.
One such case was that of the Red Flag laws. These were enacted in the late 19th century, requiring drivers of early automobiles to follow certain draconian restrictions. This included the need for a person walking in front of the locomotive and waving a red flag as a warning. Excerpt of some of the requirements:
Firstly, at least three persons shall be employed to drive or conduct such locomotive, and if more than two waggons or carriages he attached thereto, an additional person shall be employed, who shall take charge of such waggons or carriages;
Secondly, one of such persons, while any locomotive is in motion, shall precede such locomotive on foot by not less than sixty yards, and shall carry a red flag constantly displayed, and shall warn the riders and drivers of horses of the approach of such locomotives, and shall signal the driver thereof when it shall be necessary to stop, and shall assist horses, and carriages drawn by horses, passing the same.
Fast forward to 2019 and the Crypto industry. The recent FATF recommendations on “Virtual Assets” and “Virtual Asset Service Providers (VASP)” feels like the Red Flag act all over again. They are all about what restrictions should be put to reduce the ‘potential’ dangerous of crypto. (You can read the full report here)
To be fair to them, the intentions may be good like was the case when the locomotive authorities enacted the aforementioned and now infamous act. There certainly are a lot of scams in this area and many possibilities where people may lose their wealth. Especially when they rely on third parties and so there may be a need to regulate business. But not the Blockchain Technology itself. That is the key.
One of the recommendations — the Travel Rule, which is currently followed by all the banks, is something that the exchanges and VASPs have to start following as per the report.
Illustrating the challenge, Global Digital Finance (GDF), a trade group based in London, noted in an April comment letter to the FATF that unlike a wire transfer, which by design requires bank, branch and account numbers for the recipient, a crypto transaction requires only an address. Hence, an exchange sending crypto on a customer’s behalf “does not know with any certainty who the destination address is owned by, as there is no register of such addresses and new addresses can be created at any time.” Indeed, the sending exchange can’t be sure whether the recipient address belongs to another business, regulated or otherwise, or to an individual.
There are also hints of how it can be applied to the Blockchain Technology as a whole and not just the businesses (VASPs). A layer on top of the base blockchain layer is suggested, which will keep track of all the participants and the transactions. Making them no longer censorship-resistant or private or immutable. This, in my view, is very regressive and reminiscent of the man carrying the red flag.
Regulate businesses, not technology.