Is Crypto Regulation A Necessary Evil?

As the U.S. Treasury Department eyes stablecoins and EU targets terrorism financing, blockchain leaders discuss the costs of compliance - and of non-compliance. 

The only thing worse for blockchain projects than dealing with crypto regulations seems to be a lack of clarity from regulators.

In light of new regulations emerging in the U.S. and the EU, we took the time to speak with blockchain leaders to get a sense of what the industry is thinking. 

On Monday, the U.S. Treasury Department issued a statement that made it clear they had their eyes on stablecoins.

In part, the Treasury Department statement reads:

“...participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security.

The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” the Treasury Department said.

Secretary of the Treasury Janet L. Yellen convened the President’s Working Group on Financial Markets (PWG) with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

In the meeting, Yellen called on policy-makers to create regulations for stablecoins, echoing statements by Federal Reserve Chair Jerome Powell. 

In the same week, the European Union proposed regulating private cryptocurrency transactions to prevent the use of cryptocurrency in criminal activity. 

In its statement, the European Commission said:

“Today's amendments will ensure full traceability of crypto-asset transfers, such as Bitcoin, and will allow for prevention and detection of their possible use for money laundering or terrorism financing. In addition, anonymous crypto asset wallets will be prohibited, fully applying EU AML/CFT rules to the crypto sector.”

Anyone who has been in the crypto-space for a few years has probably noticed that attitudes among project leaders have softened toward regulators - ideas of truly 100% independent decentralized currencies are hypothetically admirable, but the reality is there will be no mainstreaming of crypto adoption unless the blockchain world learns to navigate and hopefully work positively with regulators.

The question is: How open to working with regulators are leaders in crypto and blockchain? We interviewed ten project leaders and analysts to get their opinion on the subject.

The Costs of Regulation

If you ascribe to the idea of unified consciousness, it would be fair to say that every time someone says, writes, or thinks the words “regulatory threat,” the price of Bitcoin will be minutely impacted, but government oversight is the price of reaching mainstream markets.

How bitter is this pill to blockchain projects?

David Packham is a 20-year veteran of traditional finance and now the CEO of Chintai, a platform that manages tokenization and compliance for traditional financial assets, which recently raised $7.5 million in seed funding with investors like B1 and Cryptology Asset Group.

Chintai is making its mark by managing regulation for tokenized assets, so Packham believes in the need for regulation but certainly sees a potential for short-sighted regulation that could be harmful to the industry. 

“The most present regulatory threat to crypto in the US at present is the misapplication of rules. That leaves the potential for draconian regulatory enforcement that applies a set of inappropriate rules upon what is the first new asset class in decades - digital assets.  This threatens to create an environment that makes the US uncompetitive and unwelcoming to digital assets, which would then stifle entrepreneurial innovation in the country, and likely lead to talent and companies basing overseas,” Packham said. 

However, if regulators are the greatest threat, crypto projects that ignore regulators are second in line. 

Ben Leff, COO of Sheesha Finance, a DeFi hedge fund, feels that ambiguity is most harmful.

“A lack of consistency of crypto laws and regulations is the most damaging threat at the moment. Currently, it is done on a state-by-state basis and that needs to change. The Federal Government needs to stand up and take a position on both blockchain technology and cryptocurrencies,” Leff said. 

Mriganka Pattnaik, CEO & Co-founder at Merkle Science, “a predictive crypto risk and intelligence platform”, reminded us that at the heart of regulations are stereotypes about the ways crypto is used. 

“The biggest regulatory threat to crypto is the lingering perception that crypto is only used for illicit activity such as crime, money laundering, and ransomware. This is evidenced by the fact that the principal crypto-related initiative of the Biden administration has been to form a ransomware task force. Of course, instances such as the Colonial Pipeline ransomware hack are extremely serious, and merit concentrated response from the government; it is equally important for policymakers to understand the benefits and merits of crypto. It is also extremely important for policymakers to understand the tools that are available and being developed to detect and deter financial crime,” Pattnaik said.

Paige Mason, Managing Director at Guidepost Solutions, a global security, compliance, and investigations firm, is also calling for clarity. 

"Uncertainty is likely the biggest regulatory threat. The U.S. regulatory environment was already complicated to start with, not least of which is because crypto businesses have to identify and meet the right state and federal licensing, chartering, or registration requirements. Key legal questions, such as whether Ripple's sales of its signature virtual asset XRP violated securities laws, are also likely to be tackled in high-profile litigation before any rulemaking and/or legislation. And the attention of the U.S. Congress seems to be increasing, especially when the market is up, or when large civil or criminal forfeitures of virtual currency are announced by the U.S. Department of Justice,” Mason said.

Uncertainty does seem to be the upshot of the whole situation.

Based on Bitcoin’s performance this week, it’s safe to say that ambiguity is bad for business as it shakes the confidence of investors.

The Price of Non-Compliance

Blockchain is intended to be a decentralized digital utopia driven by ideas and innovations improving life for everyone on Earth. Or so we hope.

But to reach that vision, the industry needs to engage with the world it aims to improve - and that creates costs, both in compliance and non-compliance. 

To Packham, the blockchain industry needs to take compliance seriously so that mainstream adoption can continue. 

“By effectively sticking two fingers up at the global financial system, pioneers in the digital asset space are signaling to the wider world they are not serious about achieving mass adoption of blockchain. The consequences are most obvious with the recent surge in "stock tokens" (aka unlicensed security derivatives), which were listed short term by Binance and then have been rapidly removed under pressure globally from regulators. Other ecosystems that are lower profile, but also tokenizing and mirroring such assets will undoubtedly see similar pressure over time,” Packham said. 
A dip in Bitcoin has created a rollercoaster ride in other coins like Ethereum and Dogecoin, but the greater threat seems to be discouraging innovation and new projects, particularly with the stressful waiting game played in the U.S.

“Regulatory threats are already hampering blockchain development in the United States. Very few places have sandboxes for companies to experiment in like traditional markets. As far as foreign nations and their governance of blockchain/cryptocurrency, you can look as far as Australia to Malta to Estonia and many countries in-between,” Leff said. 

EQIBank CEO Jason Blick cited not only a lack of clarity but a lack of consolidated authority and ability to make clear decisions because cryptocurrencies potentially fall onto the desk of many different government departments.

“In the U.S., regulatory enforcement has been an uncomfortable lottery of competing Government departments seeking to define cryptocurrency... At present, there is no single U.S. regulator with the authority to systematically regulate cryptocurrencies... As U.S. regulators squabble over whether crypto is a security, commodity, asset, or currency, the industry cries out for comprehensive guidance,” Blick said. 

Douglas Horn, Chief Architect at Telos and CEO at GoodBlock, believes that lack of clarity and inconsistencies in enforcement present a risk for crypto projects.

“...Lack of clarity and time limitations have made it very risky for US companies to innovate in the crypto space and limited the areas of development for those US companies that do engage. Perhaps Ripple violated regulations, but by coming after them now, the SEC is essentially saying that no statutes of limitations apply. Where they would have three years to prosecute other types of businesses, they can come after companies like Ripple after 8 years or more, so there's no end to their enforcement period and no clear rules to comply with. The net effect is that US investors and industries are effectively boxed out of a world-changing technology while foreign competitors scoop up IP and markets,” Horn said. 

Conclusion

To put it in optimistic terms, cryptocurrencies are still having an amazing year in 2021 with many innovations and giant steps toward true global mainstreaming.

The attention of regulators may be simply the price we pay for success as an industry. 

There is understandable mistrust between crypto projects and regulators, as each side has some progress to make before they fully appreciate and understand the other.

It falls on the crypto and blockchain industry to continue to educate the public at large - disruptive technology is not always warmly received even when the value is very clear. 

If we wish to transform the world around us, we will have to continue one mind at a time. 

Photo: Modified image by herbinisaac from Pixabay