Cryptocurrencies and blockchains are here to stay, so now more than ever it’s important governments get ahead and regulate it correctly to create some control within and externally. However, many crypto enthusiasts feel this isn’t the goal when Bitcoin and blockchain was created. So, why fuss on regulations? Is this really necessary? What steps should be done?
Here’s what we have so far.
The Rise of Crypto
When Bitcoin was released to the world in 2009, it was a part of a noble cause. Bitcoin offered people a secure way to perform digital, financial transactions on the web in the form of cryptocurrency.
It decentralized money and made it possible for people to store their money outside of a centralized authority, aka a bank. It also allowed users to sidestep banks and perform financial transactions directly with one another with crypto.
After the Financial Crisis of 2008, Bitcoin presented a new money system that would not have the same shortcomings as regular currencies. This gave many people hope, and users of the currency began to pop up around the world.
Cryptocurrency has seen tremendous growth over the last 9 years. Fast forward to today and Bitcoin no longer remains the only one on the market. Nevertheless, while momentum for cryptocurrency has risen over time, it has not seen worldwide adoption. People have shown that while cryptocurrency is inherently a great idea, they do not automatically trust it.
It goes back to the old saying, “respect is earned, not given.” People want to know that their cryptocurrency investments will be secure and keep their personal data safe under this new currency system. This will build trust for the technology among users and respect from regulating entities.
Without these two objectives met, the worldwide adoption of a cryptocurrency system will continue to be scrutinized.
Slow Worldwide Adoption of Crypto
Cryptocurrency exchanges indeed have things to offer our current system of transactions and we can even see this sector becoming an integral part of global economies, but there is a lot of work that needs to be done.
They are scrutinized every day, but even running legitimate exchanges does not automatically guarantee that consumers will adopt their system. Exchanges must understand the issues they face with consumers and regulators and use this knowledge to their advantage.
With this understanding, they will be able to build into their exchanges the trust and respect consumers desperately want. This will create lasting financial relationships with consumers.
There has to be some control in any currency. However, digital currencies or cryptocurrencies are devoid of any intermediary control. So, is it possible to regulate cryptocurrencies. Should it even be done in the first place?
Cryptocurrencies and blockchains are here to stay, so now more than ever it’s important governments get ahead and regulate it correctly to protect consumers.
Here are six things the government can do to protect consumers while not stifling innovation:
Clear Up Tax Issues
Blockchains don’t work without a token, and tokens need to be traded in and out of fiat (government backed currencies like the US dollar). This means there will always be a chance to profit (in fiat terms, so this needs some clarifications.
In the US, the 2018 tax law clarified when you should pay capital gains on crypto. One big change: crypto-to-crypto transactions are now taxable events.
Regulate Crypto Exchanges
Almost all foreign exchange flows through banks or currency houses: what you do with it afterwards is your choice. It should be no different in the crypto-verse. Unless you are a professional trader – the sort of person who’d self-declare as option four on a list like this – all your transactions should run through an exchange that is regulated.
Once the flow of fiat to crypto and vice-versa is predominantly through exchanges, it will be easier to combat illicit behaviour and ensure tax is paid. However, for that the happen we first need banks to open accounts for exchanges.
From the banks point of view, this is understandable. Without tight regulation, they fear the funds could be used by criminals on the dark web or for money laundering. If they are part of that process, they could get fined or shut down. It simply isn’t worth it.
That’s why the solution is to regulate the exchanges. If that happens, then the big banks will open their doors, making life easier for exchanges and investors alike. The banks will win from this too, because they can stop customers drifting away to more daring competitors.
This arrangement would also be good for the US economically. Simply reducing the friction would go a long way to bringing this economic activity into the United States.
Design an ICO Framework
People are investing in ICOs just because of the hype and have no idea where their money is going – this won’t end well. ICOs have their place in the decentralized universe.
Imagine a new, less awful, Twitter was created and funded by pre-selling usernames – thanks to the blockchain, users would be able to vote on how it’s managed. But although an ICO can make sense, it won’t if there’s no product and the team behind it isn’t even real.
A clear set of rules on what is and isn’t acceptable should be set out. Also, who is responsible for the funds raised? What is the refund mechanism if they fail to deliver? What action can be taken in the event of governance issues?
Banks have to go through endless hoops to prove they can hold large stakes of customers’ money – how are new blockchains any different? But it would be very hard for the government to regulate every ICO out there.
Allow Exchanges to Manage ICO’s
This has two benefits:
- It’s a new business model for the exchanges and a central point of control for reducing illicit activity.
- Exchanges are staking their reputation on the projects so they’ll be incentivized to do their due diligence.
If an exchange wants to offer ICOs, the regulation should require them to ensure the ICO meets certain criteria. At the very least the tech and team should be audited and background checked. Maybe run the whitepaper through some plagiarism software, just in case.
On the customer side, anyone wanting to invest should go through Know-Your-Customer and Anti-Money Laundering processes. Taken together, these two steps should go a long way to reduce fraud on both sides.
Of course you can’t stop people behaving stupidly, but at least you can give them fair warning. So each ICO investment process should start with a quiz to check the person understands what might happen to their money. Equity crowdfunding sites do it – ICOs aren’t that different, so they should do the same.
Pool Together a Team of Experts on Blockchain, Security, Engineering, and Economies
It’s hard enough to find security experts and software engineers; finding blockchain protocol designers with proven track records is next to impossible. Blockchains are more than code – they combine engineering, economics/game-theory, philosophy and mathematics.
There is reason it took until 2009 for Satoshi Nakamoto to create Bitcoin – it’s hard to get it perfectly right and arguably they still didn’t. If the government wants to utilize Blockchains, it should look externally to find experts rather than promoting within.
Should we regulate cryptocurrencies? Is it necessary to build some control within and externally? Making crypto transactions taxable is one step and there are other ways to regulate crypto without spoiling its independent nature.