As the entire cryptocurrency ecosystem is gaining ground and its momentum seems to be unstoppable, governments and regulatory bodies all over the world are slowly waking up to a financial revolution under their noses. Nobody, not even the most optimistic and visionary minds of the industry expected this paradigm shift to happen so fast, at least not at this magnitude.
Bitcoin is now one of the 30 largest currencies in the world. According to a 2017 study by the Cambridge Centre for Alternative Finance, the current number of unique active users of cryptocurrency wallets is estimated to be between 2.9 million and 5.8 million with between 5.8 million and 11.5 million wallets are estimated to be currently “active”. This is what scares governments and legislators around the globe, as they are losing their monopoly over the issuance of “tokens of value” (also called fiat currency) guaranteed by the authority of the state and the monopoly over commerce.
Order Out of Chaos
As the industry keeps changing at lightning speed, the need for global harmonization of law and regulation around cryptocurrencies has never been greater. It could be argued that creating order out of chaos is at the core of being human. But how should regulation be achieved? How can the intangible be regulated? Cryptocurrencies are essentially just code, a protocol used to exchange information that humans deem valuable. The nature of cryptocurrencies poses serious regulatory challenges: they are decentralized, encrypted, and recognize no state boundaries. They are not simply money on the Internet, they are, in a sense, the Internet, and the Internet isn’t so easy to contain. One look at the attempts to crack down on illegal peer to peer torrents is enough to make such a judgment. Theoretically, anyone with an Internet connection can download a wallet or mining client and connect to the Bitcoin network, and there is little regulators can do about it.
The Streisand Effect and Approaches to the Bitcoin “Problem”
"The Streisand effect is the phenomenon whereby an attempt to hide, remove or censor a piece of information has the unintended consequence of publicizing the information more widely, usually facilitated by the Internet."
Different countries have come up with their own ideas of how to manage the new Bitcoin World. Some, like Japan, have embraced the idea and made it legal tender. Others, like Russia, China, Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and Nepal have outright banned cryptocurrencies. Apparently, they didn’t follow the blowback from the war on drugs, or the prohibition of alcohol and haven’t considered how suppression tactics tend to turn out. So far, banning Bitcoin has not worked.
In the USA, the EU, Canada, and other Western countries, the approach so far has been to focus legal attention on where the intangible becomes tangible—where digital currency meets fiat currency—on the cryptocurrency exchanges. These exchanges are the points connecting the virtual world and the "real” world where governments hold real power. The first step taken was the application of KYC (Know Your Customer) and AML (Anti Money Laundering) rules to digital exchanges and other currency-related industries. In response to the increased transparency, many have voiced concern over the loss of the anonymity that was so central to Bitcoin’s initial vision. However, a majority of the Bitcoin industry has so far been content with sacrificing anonymity for consumer protection and security. Like the broader conversation around regulation in general, this debate is likely to continue indefinitely.
Finding the Balance
It seems at present that many both on the business and consumer sides agree that too little regulation will leave digital currencies vulnerable to criminal use. The effect of this criminality on consumers and the economy can already be seen through various multi-million-dollar hacks on wallets and exchanges. This kind of activity also degrades the reputation of cryptocurrencies at a time when they have a potential to expand into the mainstream. Too much regulation, on the other hand, is likely to stifle innovation and cause irreparable damage to the industry.
The future of cryptocurrency regulation remains uncertain as governments work on developing legal solutions to the problems of this new emerging world. As we move further into this uncharted territory, one thing is clear: cryptocurrencies require a whole new way of thinking if we want to see the full potential of their benefits for people around the world.