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Will regulation adapt to crypto, or crypto to regulation? Experts answer

Max Yakubowski
JUN 23, 2021
Will regulation adapt to crypto, or crypto to regulation? Experts answer

Cointelegraph

1.

Introduction

Blockchain technology promises to provide humanity and freedom with the rise of Web 3.0, a truly decentralized internet. Some even argue that the significant rise of the decentralized finance (DeFi) sector has become an important symptom of the conceptual shift from centralized services to decentralized ones, with Web 3.0 being its cornerstone. 

Moreover, some even compare the invention of blockchain technology to the revolution brought by the advent of the internet itself. Symbolically, the original source code for the World Wide Web, developed by British computer scientist Tim Berners-Lee, is set to be auctioned off at Sotheby’s on June 23 as a nonfungible token, or NFT. All three of them — NFTs, DeFi and Web 3.0 — are intertwined. But with that internet-blockchain comparison comes a crucial notion: Without proper regulation in the crypto and blockchain space, there will not be the same success in technological innovation as what we saw over the past 25 years, which changed the world as we know it. 

It is now becoming obvious that a lack of regulation would harm crypto innovations. As the decentralized technology sector has grown significantly, the space has started to attract increasing attention from regulators globally, which are targeting stablecoins, DeFi, NFTs, crypto assets, smart contracts, unhosted wallets, central bank digital currencies and so on. Meanwhile, some experts such as Caitlin Long, the founder and CEO of Avanti Financial, for example, see the started “crypto regulatory crackdown” as a positive trend, which will only benefit innovators. And others propose “a right way to regulate crypto.”

On the other hand, the current regulation is not suitable for crypto, and adjusting newly emerged decentralized technologies to it might ruin the core values of decentralization, bringing us back to where we started: with the centralized parties in control over the space. Is that the price we are willing to pay in order to become a regulated industry? 

Related: Decentralization vs. centralization: Where does the future lie? Experts answer

In order to find the right balance, the crypto space requires a much deeper and closer working relationship that would include both regulators and innovators. Only in a dialogue between crypto businesses and regulators, authorities and industry representatives, will it be possible to find the right way to regulate the emerging tech industry — through smart regulation — and the space that is promising to change our lives — a promise that was fulfilled by proper regulations for the internet at the turn of the last century.

To find out what crypto and blockchain industry representatives think about this regulatory dilemma, Cointelegraph reached out to a number of them to ask for their opinions on the following question: Will crypto lose its core values on the way to being regulated, or will the regulation adapt to decentralized tech and its benefits for society?

2.

Agata Ferreira, law professor and expert at the EU Blockchain Observatory and Forum:

“Regulators are on a learning curve when it comes to blockchain in general. Legal and regulatory frameworks are developed incrementally and have been built to govern centralized and intermediated societal design within well-defined jurisdictional boundaries. Decentralized, disintermediated and borderless blockchain networks challenge regulators who have also been taken by surprise by some blockchain innovations — for example, stablecoins.

Regulatory awareness and approaches to blockchain innovation have evolved. Recently, there has been increasing regulatory activity and scrutiny, and we can expect that this trend will continue. Regulators still largely seek to apply existing regulatory principles to crypto, which is not always in sync with decentralized tech. 

The hope is that with time, regulators realize the value and acknowledge the benefits of decentralization and adapt their regulatory approaches accordingly. As the technology matures, so will the regulatory approaches to it. Hopefully not through trial and error, but through carefully considered and informed regulatory steps.”

3.

Alex Wilson, co-founder of The Giving Block:

“Crypto isn’t going anywhere, and I’m confident it will overcome any regulatory hurdles along the way. I’m sure there will be ups and downs and huge variations among different countries. The countries that embrace crypto now will have a huge leg up on countries that try to stifle crypto because they will miss out on an entire generation of entrepreneurs building crypto companies. Some countries that have done a relatively good job attracting crypto entrepreneurs include Singapore, Switzerland and Portugal, in part fueled by low or no taxes on crypto. I’m surprised that more countries haven’t tried harder to attract this next generation of entrepreneurs.”

4.

Cristina Dolan, founder and CEO of InsideChains, vice-chair of MIT Enterprise Forum:

“The on-ramps and off-ramps for crypto are regulated by default because the exchanges that offer crypto-to-fiat conversions require Know Your Customer and Anti-Money Laundering processes. There is more visibility across crypto blockchain networks than there is across traditional siloed financial systems that prevent visibility throughout the entire transaction process. 

Regulatory acceptance of crypto will enable faster adoption of these valuable and transparent technologies for next-generation financial systems. The level of creativity shown by fintech entrepreneurs is growing exponentially; the recent success of DeFi is just the beginning. 

The central bank digital currencies (CDBCs) will offer programmable money. These CDBCs will enable visibility by governments and the ability to program fees and taxes into transactions. The launch of CDBCs will not eliminate nor compete with the entrepreneurial creativity that is fueling the growth of new crypto or DeFi products. While interest rates remain artificially low, the attraction to crypto-enabled investments will continue to grow especially as regulations become less ambiguous.”

5.

Denelle Dixon, CEO and executive director of Stellar Development Foundation:

“Clearly, there is debate on what crypto’s core values really are. Early uses of cryptocurrency attracted people who wanted access to the financial system to be redistributed, out of the hands of institutions and into the hands of people. While being inspired by those initial principles, we see a path to working with existing financial systems. 

In fact, linking to the world’s infrastructure is critical to have blockchain actually empower individuals with access. I see regulation as a necessary and iterative process. At Stellar, we have a crystal-clear vision of how our technology helps drive financial inclusion and positive economic growth in the developing world.

Plus, adapting to regulations in different countries and jurisdictions will continue to be necessary for any business that wants to operate globally. We see blockchain/crypto as an opportunity for more collaborative regulation — keeping its core values on the way to delivering a highly positive impact for society.”

6.

Diana Barrero Zalles, director of ESG and impact at Emergents @ Weild & Co.:

“Civilizations throughout history have been built on standards that everyone agreed to follow based on an underlying notion of morality and conscience, and justified by a universal recognition of the inherent dignity of each person. Promises should be kept and commitments should be met. Breaking promises is considered unjust while breaching contracts can cause harm to the other party.

Decentralization at the core of crypto presents a new and exciting form of governance that will back a new generation of community-driven innovations and business models. This does not mean decoupling crypto, just because it’s new, from the core principles of justice behind human civilization. Just like centralized decision-makers, communities can come to a consensus to arrive at the right outcome, often more accurately than individuals.

The ‘wisdom of the crowds’ concept suggests that collective intelligence can surpass that of individual experts when solving problems, making decisions, predicting answers and innovating. For a population that is at least 51% likely to be right, a collective estimate will be much closer to being right than any single person’s estimate (e.g., guessing the weight of a cow at a country fair). Most communities would disapprove of the use of decentralized structures for harm, as shown by the response to The DAO hack, where the Ethereum hard fork was placed to return stolen funds to their rightful owners.

Regulation, which has traditionally upheld society’s basic principles, is now met with a wave of decentralized governance. Regulators around the world are adapting accordingly to enable these structures to develop within existing core principles. We can take a step back from the decentralization vs. centralization debate to evaluate how both can be balanced for the ultimate benefit of the community.”

7.

Emin Gün Sirer, CEO of AvaLabs, professor at Cornell University, co-director of IC3:

“Crypto will always have a base that says traditional regulators have no say in operations on these networks. This ethic is absolutely vital for continuing to build and offer technologies that keep individuals around the world connected to a financial system. As we’ve seen in some authoritarian regimes, access to the legacy financial system can hinge on abandoning your beliefs and conforming to state-approved messaging.

 That said, service providers engaging with fiat will always have to answer regulators’ calls. The likeliest outcome is that there is a split in crypto between regulator-approved services and those that make business trade-offs in a commitment to the ideals of permissionless systems.”

8.

Marc Powers, law professor and former SEC attorney:

“Blockchain has the promise to provide the entire world with a technology that advances several worthy core values: financial independence and freedom, financial and political security for many sovereign populations, financial inclusion for billions of people, and allowing cost-effective and speedy peer-to-peer activities without intermediaries. Whether sovereigns will allow crypto to survive with reasonable regulation which promotes those values is a good question. As a former U.S. Securities and Exchange Commission staffer, I am doubtful but hopeful.

First and foremost, blockchain is the antithesis of a central government or authority, and by implementation, the technology marginalizes our traditional financial intermediaries. Second, groupthink unwilling to consider and develop a more efficient financial system that adapts the technology must change. I believe there is a chance for our customary laws on finance, banking and capital raising to do so. United States SEC Commissioner Hester Peirce and former acting comptroller of the currency of the U.S. Office of the Comptroller of the Currency Brian Brooks are on the right track here.

However, that is not what happened after the advancement of the last great technology, the internet and the dot-com bust through the passage of SOX, which required thousands of new regulations in the name of consumer and investor protection. 

However, calls for regulation this time will be primarily for the benefit of the sovereigns and banks, not truly for consumers or investors. As a result, I see a continuation of a dual system, one crypto-owned, used and managed by the people, the other — the traditional financial system, which will eventually offer central bank digital currencies to its population.”

9.

Mati Greenspan, founder of Quantum Economics:

“Many crypto assets are exceptionally resistant to regulation by design. One of Bitcoin’s main reasons for being invented was to have a currency that is independent of governments and banks, so it makes sense that regulators are having such a tough time overseeing this particular market. There’s no doubt that over time, they’ll manage to gentrify mainstream usage, but there will always be loopholes and workarounds available, especially for the more technically savvy.”

10.

Thibault Verbiest, chairman of the IOUR Foundation, expert at the World Bank and the EU Blockchain Observatory and Forum:

“As long as our societies live in a state system, with rule of law, regulators will always look for legally responsible entities in case of illegal or reprehensible acts, even if it means prosecuting the wrong person. We have seen this attitude since the beginning of the internet when access and hosting providers were prosecuted while they were not the actual perpetrators. The United States, and then Europe, had to legislate some 20 years ago to protect these intermediaries. Today, this ‘neutrality’ of intermediaries is being challenged in the name of the fight against terrorism or the protection of intellectual property.

A similar phenomenon is at work in the blockchain ecosystem, with the first lawsuits against miners (and certainly tomorrow against block producers in the case of proof-of-stake protocols). DeFi is a real challenge for regulators. In the current context, regulators naturally target stablecoins backed by national currencies (U.S. dollar, euro, etc.) because the link with a fiat currency necessarily subjects them to existing regulations (AML, KYC, etc.).

But if we talk about perfectly decentralized finance, in which there are no intermediaries, no stablecoins backed by a national currency, and where only non-professionals intervene anonymously, then this world is indeed a wild west for the regulator.

In the end, regulation will probably focus on digital identity, and the real democratic battle will be at this level. The temptation for regulators will be to impose a centralized identity, granted either by the state or by private entities that the state can requisition if necessary (this is already the case with Facebook, in particular). The challenge is, therefore, to promote decentralized identities, managed by users directly from their wallet.”

11.

Tim Draper, founder of Draper Associates and Draper Fisher Jurvetson:

“Good question. I believe that Bitcoin, as a flag-waver for trust and freedom, will continue to be global. I think that the best governments in their current form are trying to adapt to this new technology, knowing that it will be good long-term for their citizens. The bad governments that are trying to control their people with their own currencies will make this new, global, trusted and free world difficult and their people will suffer. Of course, the people can vote with their feet.”

12.

Wes Levitt, head of strategy at Theta Labs Inc.:

“Crypto and regulations seem to be meeting in the middle, which is the best outcome to hope for if you believe in crypto values. There was never a plausible scenario where Bitcoin replaces global finance without any input or pushback from government regulators.

Censorship resistance will remain intact because it would be nearly impossible for governments to prevent peer-to-peer crypto transactions. What they can do is enforce surveillance and restrictions on the fiat-to-crypto gateways, which could shut some crypto users out of access to traditional finance. 

With respect to CBDCs, they are largely contradictory to crypto’s original values. They are not decentralized, not censorship-resistant (quite the opposite, it will probably be trivial for a central bank to deny you usage of them) and they will be inflationary. I don’t see CBDCs replacing Bitcoin, Ether, etc., but they will coexist. But it is important to recognize that aside from both being digital currencies, CBDCs and Bitcoin have little in common and serve very different purposes.”

13.

Yoni Assia, founder and CEO of eToro:

“Breaking down barriers and increasing access to information, products and services will remain a core value for the crypto industry — this was the purpose it was developed for — and will enhance processes at every level across multiple sectors. 

With CBDCs being a big topic for both the industry and policymakers, regulation of crypto in the financial sector is likely to set the scene for regulation of decentralized tech and blockchain more generally. EToro fully supports regulatory measures designed to protect and educate investors and end-users. We hope that any guidelines put in place will balance the need to protect investors with a desire to support their participation in the crypto markets, and that increased regulation will help to facilitate greater use of a technology that can not only deliver real benefits to the financial services sector, but also facilitate greater financial inclusion globally.”

These quotes have been edited and condensed.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.