Cryptocurrency regulations and the changing landscape

Are cryptocurrency regulations a good thing?

Go-to comparisons are like candy for writers covering cryptocurrencies, including here at the CryptoLab.

Explaining cryptocurrencies is hard. So these often overused lines are useful stepping stones through a thicket of otherwise dense information.

By now, you may already be familiar with some of the analogies: Cryptocurrencies and blockchain are like the early internet. Or, crypto is a lot like the dot-com boom and may lead to an equally spectacular bust. And the tulips, oh my goodness, the tulips.

And then this one: Cryptocurrency is a new digital frontier. It’s a space filled with bandits and rustlers, of shoddy deals and conflicting cultures, and it’s filled with heroes and visionaries — crypto land is a lot like the American Wild West.

cryptocurrency regulations are like barbed wire

Can cryptocurrency regulation and the freedom to innovate coexist?

If cryptocurrencies are currently the Wild West, then the coming regulations are like barbed wire.

Depending on your perspective, and which side of the fence you are on, that might be a good thing or a bad thing.

Prior to the invention of barbed wire in the later part of the 1800’s, settling the West was a struggle between farmers and ranchers. Farmers would build fences, only to have them trampled by free-roaming livestock.

The federal government issued a study saying that the West couldn’t be won without better fencing. Then, in 1871, a man from Ohio figure out a cheap and easy way to strengthen simple fencing wire by twisting it together and an integrating a barb, which was enough of a deterrent to stop livestock from plowing through it.

By the late 1800s, farmers, encouraged to move West by the federal government through land grants, were able to define their parcels and keep livestock out of crops, which changed everything and had far-reaching economic, ecological, and cultural impacts.

As an interesting side note, as the new wire fencing was unrolled across the West, it also served as a means to transmit early telephone signals. The wire conducted just enough electricity to carry a single before proper phone infrastructure was built, which allowed rural communities to connect. Telephones were adopted as quickly in small towns as they were in cities.

It’s important to keep this point in mind — that innovation has side effects. In some instances, maybe they are good, like connecting remote communities through the early adoption of telephones.

But, as a counterpoint, a landscape checkered by barbed wire also hasten the decimation of the West’s vast American bison and the indigenous cultures that subsisted on them.

Back to cryptocurrency regulations

Hard jump cut here, but it could be that regulation is one of the biggest threats to free-roaming cryptocurrency growth.

That’s one side of the fence.

But on the other side, are the advocates for smoothing out the crazy turbulence of crypto markets and to bring order and some sense to neat geometry and governance to the cryptocurrency space.

It’s an oversimplification, but in some respects, the cryptocurrency regulatory debate is about applying order to what could be described as a lawless, endless, range of possibility.

This is happening right now: At the beginning of the month, the Chinese government banned cryptocurrency exchanges from trading initial coin offerings (ICOs).

ICOs have boomed in 2017, leading to fears of crazy speculation and ballooning bubbles. (Only weeks earlier, in the United States, the Securities and Exchange Commission (SEC) also signaled that it was investigating ICOs.)

The Chinese government followed the ICO crackdown by announcing an outright ban on all cryptocurrency exchanges. The news inspired to massive market tumbles across all cryptocurrencies, striking tens of billions of value off the books.

Issuing a ban is an absolute form of regulation. Rather than letting people settle a new digital frontier behind government defined fences, the Chinese government has effectively said they would rather leave the new space barren and unutilized.

The other side of the cryptocurrency regulation spectrum

Except, of course, that’s not really how cryptocurrencies work, it would be hard, maybe impossible to really regulate decentralized cryptocurrency platforms without destroying part of the internet.

Even if governments, or maybe someday corporations, or warlords, or the powers-that-be decided not to recognize cryptocurrencies the would have to completely dismantle what are now growing global networks.

One of the core values of decentralized, permissionless cryptocurrencies is that they are controlled by the consensus of the people using them. By downloading and running the blockchain, anyone can become part of the network.

In theory, governments or powerful organizations like banks are no longer the gatekeepers.

A monopoly without a monopolist

On the opposite side of the spectrum of completely banning cryptocurrency exchanges, sits the idea that true permissionless cryptocurrencies, like bitcoin, cannot really be regulated.

Recently, researchers from the Bank of Finland wrote a paper about how bitcoin is a monopoly but without the normal central authority or figure in control.

While the paper does not reflect the official position of the Bank of Finland, it does say that cryptocurrencies represent an emerging economic system that should be studied and understood.

At the paper’s conclusion, the researchers write:

Bitcoin is a monopoly run by a protocol, not by a managing organization. Familiar monopolies are run by managing organizations with discretion to determine and then change prices, offerings and rules. Monopolies are often regulated to prevent or at least mitigate their abuse of power.
Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts.

What’s more likely is that governments and existing financial institutions will find ways to regulate the places where cryptocurrencies and fiat currencies interact, like exchanges, and eventually, cryptocurrency funds traded on traditional securities exchanges.

Will cryptocurrency regulations change the financial landscape?

This is no longer just a thought exercise — the figurative barbed wire is being rolled out right now.

And it’s not just happening in one place or with one government or one central bank. As cryptocurrencies are being to emerge as a viable economic and financial systems across the world, authorities are studying them and trying to figure out what to do next.

So far the responses have varied widely.

The biggest danger is that the coming cryptocurrency regulations hinder growth and destroy the utility of the underlying technology.

So what we really want to know: Will the free-range get fenced in? Will there still be freedom to move, build, and innovate? And what comes after the Wild West?

Subscribe to Daniel McGlynn

Sign up today to get regular updates delivered right to your inbox.