Regulation in Blockchain [Blockchain Basics Part 8]

Why is regulation needed?
Ever since the dawn of cryptocurrencies and blockchain, regulatory action within this industry has been lacking. The extraordinary revolution that Satoshi Nakamoto set off with his idea of a peer-to-peer digital cash has taken off, and for a while, this field has been filled with innovation. But as cryptocurrency projects, Initial Coin Offerings (ICOs) and blockchain-based organizations generally grew in size, many malicious parties have gotten involved in projects due to their lucrative nature. As the hype around what blockchain can do propels forward at an increasing speed, these malicious parties look for ways to profit off the greed and excitement of others. While blockchain has brought a sea of innovations, within that sea lurks those who are more than willing to take a bite from unwary cryptocurrency investors swimming around looking for profits.

A History of Accidents and Fraud
The DAO
The Decentralized Autonomous Organization (DAO) was supposed to function like an investment fund for cryptocurrency and blockchain projects in a decentralized manner. Unlike a traditional venture capital fund, there was to be no central authority and each member of the organization would cast votes to decide on what projects they would invest in. The idea of a DAO was first announced on May 2016, and it would, by the end of its crowdfunding period, gained over $250 million in ether at the trading price of $20. The idea behind DAO was certainly an ambitious one, and the technology behind its ecosystem was to be centered around smart contract technology that was run on ethereum. However, an error in the smart contract that stored the $250 million ether created an exploit that allowed one to withdraw unlimited amounts of ether from the contract. On June 17, 2016, a hacker did just that and drained the contract of nearly $70 million worth of ether at the time of the hack. In response to this, ethereum founder Vitalik Buterin launched a hard fork that allowed the blockchain to be rolled back in time, essentially returning the funds within the DAO to everyone who had invested in it.
Bitconnect
The Bitconnect platform was first introduced to the cryptocurrency community in 2016 as an exchange and lending platform for cryptocurrencies. According to the developers, bitconnect is a peer-to-peer lending platform that allowed users to lend out their bitcoin to the platform and gain interest while doing so. To lend tokens, users were required to purchase the platform’s native currency Bitconnect (BCC). The platform guaranteed 1% interest to borrowers per day, which added up to around 120% interest in a year and claimed that they had a proprietary trading bot to trade with the borrowed money. This seemingly lucrative investment attracted investors alike and, in turn, pumped up the price of BCC. However, many within the cryptocurrency community have been skeptical about the operations of the platform, who decided to keep the specifics of their trading operations a secret so as to prevent other platforms from copying their strategy. Another element of the BCC platform that made it suspiciously similar to a pyramid scheme was the use of multi-level marketing techniques, where investors were encouraged to bring in new members under a referral code. The older investors would then make a percentage off the new investor’s deposits. This revenue model was predicted to be unsustainable by many critics and on January 16th, 2018, the BCC platform announced its shutdown without allowing investors to withdraw their money.

Benefits and Drawbacks of Regulation
As one can see, a lack of regulation within the industry has resulted in various members of the community getting hurt by malicious parties or careless programming errors. As seen from the above examples, there certainly needs to be some sort of regulatory advancement, whether it is the community that self-regulates or an external authority setting rules for projects to follow, it is clear that as more money is involved, the current unregulated environment cannot persist. Benefits of regulatory advancement can potentially clear the way for the cryptocurrencies to advance further and allow for the financial giants of the world to enter the market, bringing unprecedented growth. On the other hand, too much regulation, especially from those who don’t understand the technology, could stifle and seriously hinder the paradigm shift brought on by cryptocurrencies and decentralized application. A delicate regulatory balance must be achieved for the industry to thrive and become the digital revolution it is meant to be.
