For governments, cryptocurrency is becoming too mainstream to ignore and too chaotic to neglect. Across the world, government agencies are targeting crypto investors not only with taxes but mandatory registration and full disclosure rules. This new wave of regulation poses a contradiction in that some of cryptocurrency’s strongest traits have always been privacy and autonomy.
State Regulation of Crypto Raises Questions
Australia’s registration of 246 cryptocurrency exchanges between April 2018 and January 2019, hailed by observers and the exchanges themselves as boosting the credibility of the industry, likely indicates the direction that virtual currencies are taking in relation to regulation throughout the world.
Some industry players speak approvingly of regulatory encroachment as a step towards respectability. State regulation increasingly appears to be the price the crypto community will have to pay for assimilation into the mainstream economy, raising existential questions about the direction of the industry.
Whereas early cryptocurrency visionaries sought to operate a skeptical remove away from authority, emphasizing freedom, autonomy and democracy, some new movers are welcoming regulation as a solution to the trust problems that have affected the industry.
Some of the regions that have weaponized the law books to meter aspects of virtual currencies include Malaysia, Australia, Japan, the EU and the U.S. As authorities across the world co-opt crypto’s “Escobar season” and drag it into the mainstream, it is interesting to observe just how much of what made crypto so appealing will remain.
“The root problem with conventional currency is all the trust that’s required to make it work,” Satoshi Nakamoto wrote in his revolutionary proposition ten years ago. “Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts,” whereas cryptocurrency “is based on crypto proof rather than trust.”
Regulation Rolls out With Benign Offers
Regulation is rolling out with the innocuous sounding promise of support for innovation, but it is not clear how heavily government whims will impose upon investors and exchanges going forward. Individuals looking to operate in an insular system, away from central bank and state oversight, are increasingly confronted with new top-down demands for the industry which include the closure of firms and freezing accounts.
Although Japan has traditionally been a liberal environment for crypto, it has been tightening regulation since the Coincheck hack early last year. The heist of $530 million sent Japan into regulatory overdrive, doubling down on the need for exchanges to be registered with the Financial Services Agency (FSA) as a condition of operation.
South Korea prohibits the use of anonymous accounts in cryptocurrency trading and requires banks to observe strict reporting obligations on accounts held by digital asset exchanges. The south east Asian country has also banned financial institutes from trading on bitcoin futures.
In March 2018, the U.S. Securities and Exchange Commission said that it considers many cryptocurrencies to be securities and that security laws will be comprehensively applied to wallets and exchanges where necessary.
Cryptocurrency regulation is usually themed around money laundering and funding of terrorism. A series of heists has not helped the cause of crypto, with victims clamoring for governments to wade into the chaos in messianic garb. Exchanges have cautiously welcomed the governmental embrace, showing a break from crypto pioneers who maintained cynic detachment from authority.
‘Cryptocurrency Industry Has Moved On’
Speaking to Australia’s public broadcaster ABC, CMC Markets’ chief market strategist Michael McCarthy said the industry has moved on from its pioneers’ autonomous fundamentalism and is now seeking regulation and safety. Independent Reserve, the Australian digital asset trading platform, has also cited regulation as a requisite for bringing cryptocurrency into the mainstream, according to its head, Adrian Przelozny.
Although virtual currency was conceived as an anti-authority invention where unmediated business is conducted peer-to-peer, lack of internal controls, requiring users to utilize their own discretion, has been exploited by those with criminal motives.
For example, in 2018, more than 6,000 crypto-related scams, totalling losses of more than $9.5 million, were reported to Australia’s competition regulator. Investment scams, particularly deceptive marketing of initial coin offerings, and hacks running into millions have made customers vulnerable.
Across the crypto universe, this all bundles into a disarming pretext for state control. The current direction of crypto mapped by government regulators is, however, a far cry from Satoshi Nakamoto’s whitepaper, which declared:
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
Third parties are now fully immersed in the crypto ecosystem, which some industry players are coolly rationalizing as a coming-of-age phase for digital asset economy. As cryptocurrency matures, it is becoming increasingly tangled in tax policies and institutional oversight that significantly cedes its envisioned autonomy.