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Regulating Crypto — what were we doing till now??

Photo by Ewan Kennedy on Unsplash

In a very commonly known party game (one we call Passing the Parcel), a package is passed from hand to hand across the room while the music plays. When the music suddenly stops, a layer of the parcel is peeled off by an unfortunate soul (who was left holding the parcel), and will now be penalized to perform an uncanny act of either proposing to someone, singing a weird song or doing some embarrassing act that men-in-high-standing may frown upon. Needless to say, all players will try to pass the parcel away from themselves as much as they can, until all the layers of the parcel have been peeled off and the final one reveals the grand prize. This could literally be anything from a gift voucher all the way to a snazzy electronic gadget.

Across the world, nation states are now seen playing a similar type of game, this time only with a bigger parcel — Cryptocurrency. In fact, key countries in the G20 such as US, UK, India, Brazil, Russia, etc .. are yet to put any rules in place with regards to how Crypto should be governed. Recently though, China banned Cryptocurrency and downed the shutters on a whole bunch of home-grown miners. This was not surprising at all considering the recent move of the PRC to ban anything that looks or even sounds like a remote threat to its legitimacy.

The US (at the time of writing this) is still dilly dallying over whether Cryptocurrency should come under the purview of the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). This argument has apparently been going on for some time. Meanwhile in India, a Bill on Crypto is scheduled to be passed in the Winter Session of the parliament, with rumors still rife in the air about the possibility of an all-out ban on private cryptocurrencies.

So much uncertainty for a technology that has been around for at least a decade. How is it that - just about now, governments are racing against time to put some kind of framework in place to regulate crypto? One reason could be that the existing frameworks to regulate regular finance can’t be applied de facto on crypto without major tweaks or maybe even a complete system overhaul.

Photo by Oren Elbaz on Unsplash

The causes of this delay could be anyone’s guess. For instance, did people really think that Crypto would ever get this far on its journey? The digital world is littered with promising technologies that made early headway only to crash into the oblivion of cyberspace. Cryptocurrency (for the record) never had a thunderous start, always seemed to be mired in some sort of controversy and occasionally lurking on the darknet.

However as time went by many people began to consider crypto as a must-have asset in their portfolio and that’s when things began to get really interesting. In mid 2017, Bitcoin broke a ceiling (see below) and began it’s unexpected meteoric rise. Soon afterwards, Ether and Solana joined the party tagging along a whole host of NFT’s into a big tsunami that is now headed steadily towards the Centrals banks.

However, the actual reason for the absence of any regulation could be more fundamental in nature. For the first time in their lifetimes though, Financial experts are dealing with a technology that is completely outside their game. Digitization has happened over the last 30 years or so to almost all financial institutions in some form or the other. Today almost all bankers/financial experts know how to use Excel, banking software, dashboards, charts and other software tools as well. These technologies available everywhere now are pretty straightforward: - A debit here, a credit there. Transaction flow of money can be traced easily through various tools such as SWIFT.

Crypto though — is a different kind of beast!!

They speak of blockchains, public-private key pairs, digital wallets, crypto exchanges, private blockchains, NFT’s that could for all you know represent the handkerchief of some actor getting sold for a ton of crypto, and then traded. Then comes the DAO, which almost sounds like a dark headless horseman riding through a mist with a hatchet.

Financial experts just scavenge through this glossary of terms in the fine print hoping to find a word that is at least known to them. They don’t find it, so what do they do? They pass the parcel to another player in the circle who is as clueless as they are: — another financial analyst / banker / accountant / economist — who then keeps passing it on. The technologists sitting in the circle are busy explaining the vagaries of the evolving system to those around them even as the Crypto space continuously adds newer jargon.

Transactions being traceable on the blockchain have been touted as one of the reasons why Blockchain is secure. Nevertheless, the number of cases of crypto wallet theft across multiple wallets and exchanges is growing and customer support at these agencies is normally poor. Once a transaction has been executed on the chain, it cannot be rolled back (no matter authentic or theft) and this is a sticky point for regulators. Moreover identifying the perpetrators of theft is no easy task if all you are left with is a nondescript scramble of numbers and characters they call a public key.

It does seem that the only form regulation could take here would be taxation. (if at all taxation is even considered to be a form of regulation). Regulation was introduced to reduce many types of risk — namely systemic risk, but systemic risk is neatly baked into Cryptocurrencies right from the word go. “Yes. We don’t want the government to help us (1984 — George Orwell) we can help ourselves out, thank you very much!!

For now, Crypto could be classified as an asset class in markets where they’re heavily traded with all the needed checks and balances. Users should be made well aware of the risks they undertake when they trade in crypto. By risks I don‘t only mean the depreciation of value but also the possible loss/theft of their coins/tokens due to hacking or ransomware. The Long arms of the Law will not come to their aid here, but they will finally be able to spread the tax net wide enough to net in their fair share of the spoils.

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Mario Rozario

Mario Rozario

Runner at Dawn: Trainer by Day: Reader by Night: Dreamer at Midnight..