Decentralization is core to the nature of cryptocurrencies. It’s the principle behind blockchain technology, which offers crypto users security, freedom from censorship, and privacy. The technology, by contrast, also has some drawbacks, like being impossible for people to reverse wrong transactions and permanent loss of funds in case of forgotten private keys. Given that the benefits outweigh the drawbacks, decentralization in cryptocurrencies was preferred, also to give people an alternative to centralized financial services.
Decentralization has existed in other ways before cryptocurrencies. Anticipating its impact on money, however, is what is new to regulators. Centralized authorities such as central banks are structured to oversee monetary policy and flows in a country. Cryptocurrencies, by contrast, do not have a central authority, jurisdiction, or uniform policy. How can a singular government oversee all decentralized cryptocurrencies?
Given the cost it takes to implement regulatory requirements, it’s easier to appreciate the potential cost of regulating cryptocurrencies. This is how different countries end up banning cryptocurrency use. Bans also result from numerous scams that dent investor trust. Regulators try to act in the greater interest of their citizens as both investor and capital protection are key goals for them.
Today’s rules may not have existed decades ago; a lot of collaboration brought forward workable frameworks for companies and regulators. The same endeavor toward collaboration is what will make the complexity of crypto simpler for regulators to navigate.
Protocol and Governance Diversity
Different cryptocurrencies have different rules, protocols, and governance systems. Bitcoin
Contrast this with centralized structures, where there are clear responsibilities. It’s easier to follow through with established regulatory requirements such as compliance and reporting. How do crypto companies comply with financial reporting? Who bears responsibility for financial losses in a bear market? Who tracks suspicious or fraudulent activities? Where can they report these activities? Introducing decentralized governance to finance has, therefore, been complex considering some of these aspects.
The differences in protocols and governance mechanisms have basic principles about them. Appreciating these basic principles will make a great starting point to building a better understanding of crypto governance.
Many crypto companies move to countries with friendly regulations. A ban in one country prompts a move to another so that business can go on for companies keen on growing in the crypto industry. There is an ironic existence of the need for enabling regulation, yet the cryptocurrencies, by design, were never to be formally regulated. Cryptocurrencies were made for peer-to-peer use, ideally valued and used by individuals.
If people individually understood the use and risks of cryptocurrencies, perhaps this would reduce the need for regulation. However, many people are yet to understand how crypto works. Others don’t see a need to use it at all. Cryptocurrencies’ value is highly subjective at this point in time. These aspects come to the fore for regulators. Why should they dedicate resources to something barely a third of their citizens use daily?
The precedent set by El Salvador in 2021 and the Central African Republic in 2022 to accept Bitcoin as a legal tender is yet to prove significant value for other countries to do the same. It’s also still too early to tell the impact of making bitcoin legal tender when its design is a peer-to-peer payment system. What’s to appreciate in this is that people, companies, and regulators are having ongoing discussions about the potential value and impact of crypto in their nations. It’s perfectly alright for any country at this point not to have all the answers to how to regulate this dynamic industry. What would be worrisome would be sweeping issues under the proverbial rug.
One way of bridging the gap between crypto governance and regulation is creating forums for regulators to collaborate with crypto industry players. It will rely on the strength of the relationship between regulators and industry players. Consequently, short courses, sandboxes, and small wins make up three points of progress for this complex area. A better understanding of the potential of these tools and this dynamic ecosystem is the bottom line. That it’s presently difficult doesn’t always mean it’ll be impossible to regulate. Patience with the process will yield good results in the years to come.
Disclosure: I hold bitcoin and other cryptocurrencies.