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The implications of emerging crypto regulation

In early March, the Biden administration published its long-awaited Executive Order (EO) on cryptocurrencies and digital assets. As we’ll see below, the order itself wasn’t exactly brimming with detail. Nevertheless, its implications were wide-ranging. It offered some important indications about the Biden administration’s approach to crypto, but just as telling was the simple fact that it was issued in the first place.

That the sitting US President found it necessary to acknowledge the “explosive growth” of digital assets is a testament to how quickly and decisively the crypto space has taken on global significance. As one commentator put it, the very existence of Biden’s EO shows that crypto may now be “too big to fail”. For governments, this means making peace with the inevitable spread of blockchain-based digital assets and deciding how to respond.

Unsurprisingly, the US isn’t the only nation looking to establish a clear outlook on crypto regulation. The UK and EU have also taken steps recently to set out a more well-defined and consistent approach to the space, albeit with divergent attitudes. But for proponents of crypto’s revolutionary potential, these accelerating movements toward government oversight are a double-edged sword. While greater regulatory oversight has the potential to bring stability to the industry and attract a broader, more risk-averse user base, it also threatens a core value of the crypto space: decentralisation.

In this post, we’ll look at Biden’s EO in the context of the broader steps toward regulating the industry, drawing out some implications for how the space might develop in the coming years.

Biden’s Executive Order: More symbol than plan

While these plans seemed innocuous enough, there was some reason for caution. The infrastructure bill signed into law in November introduced regulation for digital assets that, according to critics in the crypto space, threatened to undermine key values of the space, including its focus on privacy. What is more, the newly appointed chief of the Security and Exchange Commission (SEC), Gary Gensler, indicated his hawkish approach to the crypto market by describing it as “rife with fraud, scams and abuse” and “like the Wild West.”

As would be expected, these troubling indications generated a great deal of fear, uncertainty and doubt (FUD) among investors and enthusiasts. This may explain why the EO, when it was finally issued on March 9th, was largely met with relief. While the order was light on detail, it indicated a far steadier and more measured approach than might have been expected. It was undoubtedly a significant improvement from the Trump administration’s abortive attempt to rush through onerous crypto regulations in weeks in late 2020. (This attempt was, of course, in keeping with Trump’s general attitude to crypto, which included offhand tweets in which he described himself as “not a fan” of Bitcoin and other cryptocurrencies.)

In essence, Biden’s EO simply directs several government agencies to study and report on the implications of crypto from a range of different economic and social standpoints, including national security, consumer protection, and global financial stability. It does not explicitly commit the administration to any particular approach. Instead, it indicates a laudable intention to develop a clear and integrated understanding of the complex and fast-changing space before taking any steps to intervene.

What is most significant about the EO, however, is its wider symbolic value. As the economist Aaron Klein puts it, “the executive order should be thought of more as a call to action than as a specific game plan.” It takes pains to acknowledge the growing adoption of digital assets, noting that around 16% of adult Americans have had some involvement with the space — approximately 40 million people. Rather than considering this a short-term fad, the EO suggests that crypto is set to have a significant and ongoing impact on global economies and broader social trends. What’s more, instead of seeking to act as a brake or a restraining force, the Biden administration signals that it sees the “rise in digital assets” as an “opportunity to reinforce American leadership in the global financial system and at the technological frontier.”

In this sense, the EO is a major victory for those who have championed the revolutionary potential of the crypto space. While critics have continued to predict its imminent demise, the steps by the US to come to terms with its impact suggest the opposite — that crypto can no longer be ignored and that its social influence will only grow.

The broader context of emerging regulation

Notoriously, crypto regulation has been an inconsistent, patchwork process in most jurisdictions. Over the past few years, however, a wide spectrum has been established between the extremes of a total ban at one end and full legal support at the other. Broadly speaking, the former approach is epitomised by China, which banned all cryptocurrency transactions last September, while the latter is represented by El Salvador, which declared Bitcoin legal tender the same month.

Most of the emerging regulatory frameworks fall somewhere between these extremes. The US’s cautious but broadly encouraging approach has been echoed by the UK, which recently announced its intention to become a “global cryptoasset technology hub”. Certainly, both the US and UK take pains to acknowledge various potential risks of cryptocurrencies, including the well-worn trope about their role in illicit activities. However, this is counterbalanced by the underlying commitment to support growth in the space and a sensitivity to the risk of stifling innovation.

The situation in the EU is more complex. On the one hand, the still-developing Markets in Crypto-Assets (MiCA) Regulation will likely help simplify the growth of crypto businesses throughout the 27-nation bloc. Rather than needing to jump through different regulatory hoops across multiple jurisdictions, companies will only need to follow a single set of rules to operate across much of Europe. As the bill has passed through the various stages, legislators have also generally been amenable to pushback from the industry over specific issues. For instance, a draft of the bill that would have outlawed Proof-of-Work (PoW) cryptocurrencies such as Bitcoin was recently revised to remove this stipulation.

On the other hand, some of the specifics of the EU’s approach have potentially disastrous implications. For example, at the end of March, EU lawmakers voted to extend various anti-money-laundering (AML) and know your customer (KYC) requirements to the crypto sector. Significantly, these rules would apply to all transactions, regardless of size. This would mean that even the smallest crypto transactions would require both parties to be identified. In practical terms, this would make unhosted wallets effectively illegal.

The benefits and risks of government oversight

In the first instance, regulation has apparent benefits for supporting the mainstream adoption of crypto. It’s clear that, at present, the space poses risks for the uninformed or those who aren’t sufficiently cautious. And while it is common to hear the refrain “do your own research”, it’s unlikely that this will be sufficient to ensure the continued growth of the market. The number of people willing to bet their financial security on how well they’ve understood a complex and fast-changing space will no doubt remain low.

Ultimately, the hopes that blockchain-based technology will underpin a radically different future for the web are reliant on large-scale adoption. Suppose Web3 has any chance of supplanting the dominant Web2 paradigm. In that case, it will need to offer sufficient safeguards to enable those without in-depth knowledge of the underlying technologies to take part with confidence. Clear and consistent government regulation will obviously help here.

Nevertheless, the core value proposition of crypto tech is that it offers an open, permissionless and decentralised alternative to the existing infrastructure of the web. It is this possibility that has resonated through diverse industries, from finance and the arts to gaming and sports. Any regulation that would significantly limit this by introducing strong centralised controls over the space would ultimately be counter-productive. At worst, it would leave crypto with little to recommend it over existing solutions.

Threading the needle on this delicate issue will be challenging, so it’s particularly heartening to see the US and UK governments taking a cautious approach. The UK’s focus on industry consultation is also promising, indicating a commitment to working closely with active participants in the space. The downside is that this means much of the concrete legislation will take many years to implement. The EU’s MiCA legislation, for instance, was initially introduced in 2020; it is not expected to take effect until 2025.

However, it’s not simply a question of waiting and seeing how regulations develop. While many within the crypto space are understandably wary of any centralised oversight, confronting government involvement will be an unavoidable step if crypto tech is actually to form the foundation for the future of the web.

That’s why it’s vital to support projects that can help to provide a stable, secure and — most importantly — truly decentralised infrastructure for Web3. Key jurisdictions such as the US and the UK have displayed a willingness to foster innovation and technological advancement within the crypto space. If such innovations demonstrate the practical utility of decentralised networks operating without extensive oversight or external control, this can be a powerful, persuasive force against heavy-handed interventions.

Cudos are helping to build a truly decentralised web

More generally, our decentralised cloud computing platform will also demonstrate the viability of blockchain-based technologies to provide efficient and effective solutions to complex problems. As the use-cases for blockchain continue to develop, the pressure on governments to preserve the industry’s independence will also grow.

If you’d like to support us with our ambitious goals, there are many ways you can get involved. The Cudos network continues to move toward its imminent mainnet launch, but there’s still time to help out with the fourth phase of our testnet, Project Artemis. Developers should take a look at our outstanding tasks and the available rewards.

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Cudos is powering the metaverse through cloud computing bringing together DeFi, NFTs, and gaming experiences to realise the vision of a decentralised Web 3.0, enabling all users to benefit from the growth of the network.

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