The Cons of Cryptocurrency Regulation
As new technologies move beyond beta tests and pilots and into the mainstream, they catch the attention of regulators as well as investors and consumers. It’s inevitable that, once an innovation begins attracting real money in the form of “a billion here, a billion there”, regulatory agencies will seek to keep new opportunities for abuse and fraud in check.
However, novel tech developments — cryptocurrencies and fintech, for example — can be hard for non-techies to understand. And this means regulators can sometimes end up focusing more on an innovation’s negative, rather than positive, potential. The risk can be regulatory overkill.
In today’s crypto environment, some entrepreneurs — even those who acknowledge the need for reasonable controls — worry that regulators might go too far and end up preventing the market from reaching its potential. That’s why self-regulatory efforts like the ICO Governance Foundation have emerged.
Regulators, too, recognise the balancing act that’s required. While seeking to limit bad actors, they usually want to avoid potential downsides like stifled innovation, poor understanding of the industry and oversight that’s inappropriate for the technology.
“As a sitting regulator recently warned, cryptocurrencies’ many novel features can lead policymakers to focus excessively on their potential harm rather than on their likely benefits,” policy analyst Diego Zuluaga observed in a recent Cato Institute briefing paper.
Credit Suisse raised similar concerns in a January 2018 research report: “Legal and regulatory definitions do not always align with the new realities.”
Because cryptocurrencies can be used in different ways, and for a range of different purposes, they often fall under the purview of multiple regulatory bodies, Credit Suisse noted. That can complicate oversight and its potential impacts.
There’s also the challenge of deciding how much regulation is right for a new technology.
“Government regulatory agencies may be quick to act in the form of blanket banning of ICOs as has happened in China and South Korea, or they may take a more nuanced approach that takes longer to implement,” Miko Matsumura — founder of the crypto exchange Evercoin and head of the ICO Governance Foundation — wrote in a draft whitepaper on ICO governance. “The more nuanced approaches are based on a significant history of legal precedent, and therefore may carry with it unintended consequences that may take legal action to sort out.”
Regulators can find it difficult to keep up with a technology market that changes as rapidly as cryptocurrency does. It’s also challenging to fit existing regulatory mechanisms to the new structures and systems enabled by cryptocurrencies.
One challenge, for example, stems from the fact that blockchain-based applications are inherently distributed and decentralised.
“Operationally, the main complicating factor is that permissionless cryptocurrencies do not fit easily into existing frameworks,” Credit Suisse noted in its report. “Cryptocurrencies live in their own digital, nationless realm and can largely function in isolation from existing institutional environments or other infrastructure. Their legal domicile — to the extent they have one — might be offshore, or impossible to establish clearly. As a result, they can be regulated only indirectly.”
That’s why some believe the solution lies with decentralised, self-regulating oversight.
“Centralised regulators have had historically great power with respect to enforcement of regulations including the ability to use force to arrest and incarcerate the most egregious offenders,” Matsumura wrote in the ICO Governance Foundation’s whitepaper. “Clearly decentralisation will have to use different mechanisms to ensure compliance.”
