As crypto has grown and developed, it has rapidly become a financial force to be reckoned with — one that authorities around the world have realized cannot be ignored.
And yet, regulation has come slow. Lawmakers often lack the technical knowledge to come together and form a cohesive response to technologies as disruptive as blockchain and crypto. Even for blockchain experts, predicting precisely where this path could lead to in 20 or even 10 years is tricky. These dynamics have kept regulation around the world in its infancy, only recently taking its first cautious steps in a few jurisdictions.
There is a growing consensus, however, regarding the need for regulation of crypto. While lawmakers, in particular, see the necessity of creating a framework around crypto to protect consumers, businesses and the authority of the state, and to prevent financial crime, those with a hand in the crypto game recognize the role regulation has to play in achieving the holy grail of mass adoption — bringing crypto into the mainstream as a common product used around the world.
The protection and assurances offered by responsible legislation would likely be a deciding factor for many potential users, investors and innovators who see the benefits of a blockchain future but balk without any sense of security or guarantee. Flexible regulation is also the perfect way to reign in the excesses of blockchain and the more fantastical dreams of developers in favor of creating products that are more attractive to novices while still keeping an innovative character.
But not everyone supports the concept of crypto regulation. Detractors often cite the loss of anonymity as a potential concern with the emergence of regulation. But anonymity isn’t what makes blockchain great, and it’s unlikely to stick around forever, regulation or no regulation. One of the core principles of blockchain is the ultimate level of transparency. In fact, its immutable nature and the ability to track cash flows around the world is one of the biggest benefits of the technology. The Financial Action Task Force (FATF), which recently granted significant legitimacy to blockchain and crypto by recognizing virtual assets as assets of real value, has stipulated that beginning in June 2020, transactions will include information on the sender, similar to how SWIFT transfers work with banks today.
While the global trend as a whole seems to be in favor of a regulated future, governmental reactions to the technology have been varied, with a mixed bag of implications for mass adoption. China, the world’s largest potential market of blockchain users, has remained cool toward crypto, and recently announced its state-sponsored digital currency, issued by its central bank. This move seems to follow China’s overall economic policy profile, granting it some of the benefits of utilizing a transformative technology-like digital currency while retaining control over its spread and use.
While running a crypto company from within China has its challenges, there are no restrictions against the population of China using crypto services offered from abroad, potentially leaving this massive market open to foreign crypto ventures.
China is not alone in having strict jurisdiction regarding crypto; Saudi Arabia has issued an outright ban on cryptocurrency. Elsewhere, it is a very different story. Regulation in the U.S. is progressing in fits and starts, as state and federal legislators both consider how best to move forward. In Europe, there is an appetite for crypto regulation and strong principles in place that could bring smart regulation into effect quickly, helping to promote mass adoption across the continent.
While each country within the EU has the right to draft its own regulations as it sees fit, the EU follows the principle of harmonization, creating common standards for regulators to follow in their individual jurisdictions. Pioneers in crypto regulation such as Gibraltar — and possibly France and Germany in the near future — are likely to create relevant legislation in their own domestic jurisdictions before the harmonization takes effect and makes it easier to set up regulations elsewhere. This onion-like layered regulation model will make it relatively easy for blockchain entrepreneurs to cross borders within Europe and tweak their operations as necessary in order to meet the requirements of domestic lawmakers.
For a large portion of the world, however, crypto regulation is likely to be on the backburner for years to come, particularly across Africa and south-east Asia. The benefits of crypto regulation that make it necessary elsewhere will not be a factor anytime soon, although this means that crypto is free to spread to the significant number of “unbanked” individuals in poor countries (i.e. those without access to banks or any other financial services). These populations are likely to be one of the greatest benefactors of crypto and blockchain technology, making it particularly important for entrepreneurs to have free rein in these markets.
Unfortunately, many jurisdictions are neither introducing good regulation or giving crypto the free opportunity to grow and develop. Instead, some lawmakers are trying to bring crypto under the umbrella of existing legislation written for traditional modes of finance. Much like trying to screw in a bolt with a hammer, this approach ignores the very nature of crypto and blockchain as a unique and innovative transformative power. While bridges can and certainly should be built between crypto and traditional finance, currently it seems that they are simply too dissimilar to share one regulatory roof.
On the whole, crypto regulation is gradually gaining traction around the world. Legislation that targets crypto — positively or negatively — is a force that inherently grants crypto legitimacy and recognition. Blockchain is a revolutionary technology that is sure to contribute to the building of a very different world from the one we live in today. Regulators have the difficult task of trying to decide how that world should look, and creating guidelines to lead us there. Yet no matter how difficult, this is the responsible thing to do — both to protect against the perceived dangers of crypto and blockchain and to bring more people into the fold to enjoy the benefits of these technologies.