Nowadays, regulation is one of the most divisive topics in the cryptocurrency space. The most vehement free market advocates and cypherpunk digital currency OGs often argue that Bitcoin and other digital assets should remain unregulated and that the market itself will punish bad ideas and dubious projects, as well as those choosing to invest in them, whilst also allowing great projects to flourish unhindered by red tape. Meanwhile, others state that the only way the bitcoin market can truly mature is through regulation.
Those arguing in favour of a regulated crypto asset market believe that previous and ongoing scandals could have been avoided through legislation and this would make the market more appealing to a more traditional class of investor.
Many jurisdictions have already come up with or applied existing legislation to police the cryptocurrency markets. There are also growing calls for much more strict regulation (bans) on Bitcoin and other digital currencies. However, these are isolated voices at the moment and this kind of knee jerk regulation would likely help cryptocurrency “mature” in a way that the powers that be are even more afraid of.
One of the issues surrounding cryptocurrency that comes up most frequently is the initial coin offering or ICO for short. For those who don’t know, an ICO is where a crypto asset company creates a token and a proposal for some application – usually “we’re going to decentralize X to achieve Y and Z”.
The company will sell those tokens to investors who buy them in the hope that the application, developed by the company, will become so popular that the tokens themselves would be in great demand and thus there the value would rise.
The problem with this is that many regulatory bodies around the world, including the all-important US Securities and Exchange Commission, are starting to question whether the crypto tokens created on smart contract platforms like Ethereum, NEO, and EOS can be considered security investment instruments. Therefore, by not being registered with the appropriate regulatory body, those running the ICO are in violation of existing security laws.
The current way the SEC judges whether something is a security is known as the Howey Test. It basically asks whether the thing in question involved the investment of money into a common enterprise with the aim of making profits from the work of others. Now, if you know anything about ICOs, you’re probably thinking that most would indeed fall under that category.
Interestingly, the SEC is currently suing the social messaging company Kik for selling unlicensed security to US investors via ICO. Kik is challenging this, which is the first example of such since most other companies have simply settled to the SEC demands. Assuming that Kik wins, which is anything but a given, the hope is that the case will force a new Howey Test to determine whether a crypto token is secure.
The SEC’s stance towards ICOs is already having a dramatic impact on cleaning up space. Now we see far less money thrown at every new idea with the word blockchain in it. There is also the registered crypto token offering, or STO (Security Token Offering) too. These functions are much like ICO, only they are only sold to accredited investors and have been fully licensed to do so by the relevant regulatory bodies.
Such regulation has certainly made the market appear a more mature place since there are far fewer ICOs run these days. This can only be a good thing as space was starting to look much more like an online craps table than the beginning of a new financial system.
Another area that is rife with corruption in the crypto industry is the exchange business. Over the years, there have been all kinds of dodgy goings on behind the closed doors of the often-mysterious crypto exchanges. In most cases, such scandals could be prevented if there was the same kind of regulation that surrounds traditional markets.
The Bitfinex/Tether scandal has been the cause of many debates in recent years. The company has been accused of running a fractional reserve system, which it transpires it has, and without adequate regulation, it took a long time to even build a case against the exchange.
Similarly, the recent QuadrigaCX imbroglio could have been prevented if there were mandatory crypto storage safeguards in place to protect investor funds. As it stands, many have been left out of pocket in one of the most bizarre stories of recent times. There were even allegations that the CEO faked his own death at one point!
However, there are those who argue that Bitcoin particularly should be a force of good in the world. It can be possible if most of the planet will store most of its financial value in this non-corruptible and non-partisan system of account. For this to come to fruition, Bitcoin needs avenues due to which regular people can buy it. It’s important that crypto does not become just for super-rich accredited investors to speculate on. If exchanges were regulated, it would likely be done to “protect investors”, and therefore the access to digital asset markets would be severely limited for everyday people.
As mentioned earlier, there have also been some recent calls to not only regulate the cryptocurrency markets but to somehow ban them altogether. The likes of Congressman Brad Sherman, Nobel Economist Joseph Stiglitz and even the Indian government have all mentioned some form of ban on technology in recent weeks.
However, the problem with this kind of knee jerk response is that it simply never works. If people want to do something passionately enough, they will do it whether there is a law in place or not. How many people smoke cannabis in parts of the world where it’s illegal? Hundreds of millions. If people continue to see the utility in Bitcoin and other digital assets, they will continue to use them too.
Faced with such a demand, Bitcoin developers will make its purchasing as easy as possible too. This will involve incorporating various privacy technologies, such as the recently deployed Mimble Wimble protocol. Ultimately, such a crackdown would transform Bitcoin into the perfect tool for global criminal networks and rogue states – precisely what the powers that be are afraid of.
Also, there is something very unsettling about living in a democratic nation in which competition – in this case competition for the national currency – is stifled in such a brutal fashion, particularly when the system in question is far more democratic than anything that has gone before it. The true motives of any government enforcing such a policy should be under serious scrutiny.
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