Blockchain blocking and other centralised dreams…….
Another day, another central government meeting about Bitcoin and ICOs. But, as the G20 get ready to tackle cryptocurrencies, what’s the beef?
Our CEO, Paul Cliffe, looks at the futility of regulating a decentralised economy.
Speaking with some of our more esteemed clients yesterday, the burning topic was, again, the ever advancing spectre regulation of the crypto-economy.
Up until now, cryptocurrencies have had a relatively free run away from interventionist strategies. In my opinion, it’s been all the better for it. Regulation tends to show up a day late and dollar short (see the 2008 financial crisis, South East Asia crisis and every financial crisis since the dawn of bartering). It’s only really reactive to crises; it very rarely guides markets away from potential issues, instead it shuts gates after the horse has not only bolted, but found its way to the glue factory.
That’s not to say that the crypto-economy isn’t crying out for some rules.
Around 50% of 2017's ICOs have either failed completely or are ‘off grid’ – no longer communicating to their communities after taking their money to develop an idea.
Of this 50%, there are going to be many class action law suits levied at the founding teams. Raising money on the promise of building for tomorrow’s world is all well and good, but a lack of follow through when it arrives teeters on fraud.
I consider the SEC’s tactics for dealing with bad players in the ICO market to be spot on. They have closed down numerous attempts by bad actors to raise money through initial coin offerings and have no doubt scared many others from entering into such actions now there is a clear deterrent. Making rules for such a young market means that bad actors can find a way around them. Rules become the walls that regulators fence themselves in with whilst fraudsters find a way past without raising any worries.
But the real burning issue, however, is how do you regulate decentralised entities?
As we line up for another G20 summit with Cryptocurrency regulation set to be a burning topic, there needs to be some consideration as to what the strongmen of centralised governments hope to achieve, and furthermore, how they expect to achieve it.
Regulating bitcoin – the folly of the misinformed
That’s the way it is now. You can’t find the heart of anything to stick the knife.
In a scene from the 2008 crime epic, American Gangster, an ageing crime lord tells his understudy that there is no way to racketeer with the new economy that has grown around them. He can no longer threaten the local electronics store to pay him protection money because the owner is sat thousands of miles away.
Bitcoin is much the same. Part of its value exists because it isn’t controlled by one central authority. As there is no CEO or board to threaten with prison, Bitcoin becomes near impossible to censor for governments.
So what are the options for central governments around the world to stop cryptocurrencies and have them bend to their will?
- Ban mining – this would stop further production of mineable cryptocurrencies, but would not effect the coins already in circulation. If we take bitcoin as the case in point, such a move would potentially increase the value – people in countries which haven’t banned mining (or those not concerned about restrictive laws in their nations) would still keep the network running, but coins would become more scarce, meaning there would be less to meet demand and thus the price would go up for the coins left in circulation.
- Outlaw cryptocurrencies – this option is the most totalitarian move of all. The net effect of making formerly legal goods suddenly illicit tends to momentarily decrease demand. But then, due to the perceived devilment of breaking the law, both demand and price boom. Let’s take the example of mephedrone – the formerly ‘legal high’, banned in 2010 by the UK government and made a class-B narcotic overnight. According to the Guadian, reporting on survey research from Lancaster University:
…….in July 2010, three months after the drug was made illegal, which found the popularity of mephedrone had surpassed that of all other drugs, with 27% of people questioned…….the follow-up study, conducted (a year later), found mephedrone had become even more popular, (with) 41% of club-goers saying they had taken or intended to take mephedrone that night……..The popularity of mephedrone….has led to price increases. A gram of the synthetic drug costs around £25 now compared with around £20 a year ago. Prior to the ban it cost £10 a gram.
So, driving bitcoin underground will only lead to higher prices and greater demand. Trying to block access to cryptocurrencies online is futile, as anybody who has been to a nation with restricted access to the World Wide Web will know, simple IP spoofing software or use of a VPN render any restrictions useless.
- Regulate/ ban exchanges – how do governments ban exchanges when they’re decentralised? There is no way of shutting a ‘dex’ down or regulating it if it is ‘post-jurisdictional’. It cannot be governed as it has no ‘governor’. The only way this would be possible is through a homogeneous regulatory solution by every nation on earth. This may happen. But if we look at other attempts at global regulation for more pressing matters (Paris accord, Basel accords for responsible banking etc) we can see that these solutions are never really implemented. Furthermore, if only one nation resists such efforts, they become winners of a huge amount of new businesses through ‘regulatory arbitrage’.
This last point proves the case for any attempt at regulating any asset, especially one that is decentralised. Any rules governments make to outlaw cryptocurrencies mean other nations win, whilst a potentially huge chunk of GDP ups and leaves at the first implication of a government crackdown (see Huobi as an example).
So what can REALLY be done to regulate cryptocurrencies?
The majority of people in the crypto-space (myself included), see regulation as a form of legitimisation. No longer will ignorant politicians harp on about bitcoin only being used by organised criminals and black marketeers (only 5% of the EU’s laundered money was laundered through cryptocurrencies last year – if cryptocurrencies were an effective way to launder, the figure would have been closer to 100%) as Anti-Money Landering (AML) and Know Your Client (KYC) rules become commonplace across the whole crypto-economy.
So far as markets go, manipulation is rift at the moment. Rules to conquer such bad actors on exchanges would also go a long way to legitimacy.
So what does all this mean for the crypto-market?
Well, in my opinion there is little to fear. Many people seem to be spooked that regulators will squeeze the life out of bitcoin and co. The reality is something very different however. If nations are too harsh with their regulations, they stand to lose out.
The best way forward is a considered approach with engagement of the crypto-community to develop a regulatory framework fit for purpose.
The very nature of decentralisation is censorship-resistance and non-jurisdictional. To try and treat cryptocurrencies in a centralised manner does not work and leaves nations looking powerless.
Don’t forget to clap and share with others who may have an interest in cryptocurrency and the onset of regulation in the market.
Paul Cliffe is CEO of Block Venture Project and an MBA candidate from the University of Liverpool (in the Economist’s ‘Which MBA?’ top 100 business schools internationally).
Paul has a background in investment management, financial services management, compliance, consulting and operations.
Block Venture Project’s maiden fund – the BVP 5 fund – is available now.
