Is cryptocurrency regulation a good thing or a bad thing?
Regulation is often seen as a murky word within the cryptocurrency community, especially when one considers the visionary principles outlined in the Satoshi Nakamoto’s hallmark Bitcoin whitepaper. The ideological objective was to create a financial system that relied on no third party, nor dictated by outside actors such as governments or central banks. As a result, Bitcoin enthusiasts demanded a platform that was free from outside interference.
However, the industry has since grown in more ways than one — notably in terms of a multi-billion dollar market capitalization, global awareness and media interest. As expected, this has caught the attention of national and regional regulators. On the flip side, many believe that if the blockchain phenomenon is to gain mainstream adoption, it requires a stringent regulatory framework to ensure that consumers are afforded with the same safeguards as expected in the real world. The key question is — can this be achieved without hindering innovation?
First past the post — Japan embraces cryptocurrency
A relevant place to start would be to take a look at how the Japanese authorities became the first nation to recognise Bitcoin and other cryptocurrencies as real-world money. The saga that led to the government taking a hands-on approach was in response to the infamous case of M.T. Gox.
The exchange was the first platform to facilitate the buying and selling of Bitcoin with fiat currency. Although the purchasing process was highly inefficient — sometimes taking up to a month for an account to be funded, during its peak the platform was responsible for close to 70% of global Bitcoin transactions.
The story didn’t end well, with the exchange subsequently having the vast majority of its Bitcoin holdings hacked — leaving the cryptocurrency community to ponder whether MT. Gox were a victim of crime or a perpetrator of internal malpractice. Nevertheless, rather than banning cryptocurrencies in their entirety, in 2017 the Japanese government instead decided to embrace the technology — under the remit of a regulatory framework.
In a nutshell, cryptocurrencies are now regulated in the very same way as the nation’s financial services sector — meaning that a range of controls are in place to prevent unsavoury practices. This includes a stringent anti-money laundering (AML) program that ensures that anyone who wishes to enter the industry must first identify themselves through an appropriate Know Your Customer (KYC) process — something that early adopters feared most.
However, many would argue that Japan is potentially the most crypto-friendly nation of the modern world. For example, Japan is now responsible for the largest amount of Bitcoin trading activity globally, with the BTC/JPN trading pair often accounting for more than 50% of daily volume. Moreover, the Japanese Financial Services Agency (FSA) recently released figures indicating that there are now more than 3.5 million citizens engaged in cryptocurrency trading.
And what about outside of the trading sphere? Well, in terms of real-world usage, it is now possible to spend Bitcoin in more than 260,000 stores by simply swiping a mobile bar-code. If this is the result of a regulatory framework, we would argue that the Japanese regime has got it absolutely spot on.
The state of play elsewhere
Although Japan have led the way in cryptocurrency regulation, they are not the only jurisdiction to be considering a more hands-on approach to the industry. In fact, it is very difficult — if not near impossible to purchase blockchain assets in exchange for fiat currency without first going through a KYC process. Whether it’s Coinbase in the U.S., European based Kraken or Coinmama in Israel — the procedure is much the same.
Users must first provide the facilitator not only with personal information such as their full legal name, address and country of residence, but they must also have this information verified in the form of government issued documentation. There is no way out for entities that deal with fiat currency, insofar that if they do not comply with national regulations, they risk losing their relationship with the banking industry. Ultimately, it could be argued that although fiat-to-crypto regulation is still determined on a jurisdiction-to-jurisdiction basis, a global standard is still in place regarding customer due diligence, just like in the banking industry.
So where does this leave us regarding initial coin offerings (ICO’s)? Well, it is important to remember than cryptocurrencies are still yet to approach their tenth anniversary, meaning that it will take some time before other areas of the industry receive the same amount of attention as third-party exchanges. However, it might not be too long before we see a wider crackdown on ICO’s.
In particular, the Securities and Exchange Commission (SEC) have shown strong signs that they are looking to enact a more stringent framework. ICO’s experienced remarkable success last year, with more than $5 billion being raised across hundreds of new cryptocurrency projects. Although this provided a gateway for projects to turn their cryptographic dream into a reality, many have not survived. Even more concerning is the rise of illegitimate actors who have no desire to succeed — instead, their only objective is to dupe as many investors as possible before vanishing from thin air.
The reason that it is so easy for cryptocurrency projects to engage in a multi-million dollar ICO is a lack of regulation. Project whitepapers market their token as a utility, meaning that it has no real-world value, nor are token holders afforded any rights. Although somewhat laborious, a manual look through the top 100 tokens in terms of market capitalization would indicate that each and every one claims to be a utility — which allows project leaders to operate without any regulatory oversight.
This hasn’t gone unnoticed, with a new breed of tokenization beginning to surface. Unlike their utility counterparts, security tokens operate in a highly regulated arena. Essentially, those holding a security token are afforded the same protections as seen in the real-world financial markets. They actually hold a stake in the organization they are supporting and are sometimes attributable to a share of company profits.
In conclusion, the cryptocurrency community should not fear regulation. At SURGE Technologies, we are keeping a close eye on the regulation as well as the tokenized security space while we continue to develop our algorithmic trading bots. As long as governmental agencies can strike a fine balance between consumer protections and innovative freedom, then the industry has the potential to open its doors to much a wider base.