FEATURE
CRYPTO-REGULATION: A BALANCING ACT By William Watts
Crypto-regulation: A balancing act
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Cryptocurrency, the conceptual brainchild of Bitcoin creator Satoshi Nakamoto, has erupted into a financial revolution. With its seeds quietly sowed in the midst of the worst financial crisis the world has ever seen, the monetary technology is now snapping at the heels of Wall Street and central banks alike – with mixed responses from both. Between the critical punts fired by JP Morgan’s Jamie Dimon (Imbert 2017) and the optimism of SEC Chairman Jay Clayton (Suberg 2019), it is becoming abundantly clear that cryptocurrencies must be regulated effectively – and quickly. However, when considering the partisan and anti-establishment vision of Nakamoto, there is a difficult balance to be struck in order to satisfy the interests of ordinary citizens, investors, financial regulators, and entire nations. On one hand, overregulation could trigger a futile collapse of the affected currencies as consumers lose the benefit of financial autonomy and digital security – contradicting the heart of the concept. Alternatively, sparse regulation will be fruitless in protecting consumers from huge price volatility, frequent scams and collateral damage caused by an increase in cyber-attacks. However, regardless of any discussion about regulatory balance, evidence of inherent vulnerability for cryptocurrencies and their stakeholders raises a poignant question: are cryptocurrencies even worth saving?
Worthy of regulation? To understand why we must protect the genuine existence of cryptocurrencies within our economy, and to prevent them retreating into the illicit shadows of underground markets, we must first understand the benefits they may reap. All cryptocurrencies and crypto-assets must be backed by blockchain technology (a type of distributive ledger technology) in order for the currency to operate on a completely decentralised basis that circumvents the need for a middleman. The permanent ledger means that transactions are added consecutively to a ‘chain’ of transactions which 28
cannot be manipulated by any party – not even the creator. Aside from the benefits of cryptocurrencies themselves, the application of blockchain is boundless. Already, distributive ledger technology is being used to protect landowners in Honduras who are susceptible to land title fraud from corrupt state officials (Jean-René 2017); peer-to-peer networks have the benefit of being indisputable – even to those at the highest level of government. This could be a revolutionary change to nations who suffer from corruption. Equally, when considering wealthy democracies such as the UK, the hole which crypto has an opportunity to fill is deep-rooted within a lack of trust in the financial system. The majority of the British public still doesn’t trust banks (White 2018), despite over a decade passing since RBS was bailed out by the UK government at a cost of almost £45 billion, which only goes to show the damage caused by the 2008 financial crash. Cryptocurrency is an attractive proposition for those who find it difficult to place their trust in these intermediaries, and wish for full autonomy over what belongs to them. Consequently, they seem like an asset worth regulating.
Cryptocurrency is an attractive proposition for those who find it difficult to place their trust in these intermediaries, and wish for full autonomy over what belongs to them.
The issue of genuine currencies Taking Dr Raja Ignatova’s $4 billion OneCoin scam as an example (Bartlett 2019), the usual watertight security and privacy of cryptocurrencies disappear when it is revealed there is actually no blockchain technology underpinning it. In genuine cryptocurrencies, transactions have public witnesses which make cyber-attacks more difficult, not to mention the vast number of distributed copies that need to be attacked simultaneously – making malicious changes by a single party incredibly difficult. Should these ‘imitation’ cryptocurrencies become commonplace by seeping through the cracks of weak regulation, it will cause paranoia within investors and consumers. This will inevitably lead to intermediaries creating
