Is regulation really that bad for cryptocurrency?

In the longer term, regulation can promote rust, security, value, and uptake – that's good even for crypto purists.
8 January 2021

Business implication of the proposed US cryptocurrency laws. Source: Shutterstock

  • New US regulations will make it much easier to track crypto transactions from private wallets in the US
  • The proposed rules have been met with dismay by those who value crypto’s potential for privacy and anonymity
  • In the longer term, however, regulation can promote rust, security, value, and uptake

Last year was a progressive year for the cryptocurrency economy with more enterprises and institutions, like PayPal, buying in. The 2018 bear market looked further away than ever and this week, Bitcoin’s value hit new highs. 

Despite this increasing sense of legitimacy, regulations – or a lack of them – have so far remained cryptocurrencies’ biggest barrier to going mainstream. 

Not surprisingly, governments and players in the existing banking system are unwelcoming of payment networks that are “powered by users with no central authority or middlemen.” Many (correctly) fear that cryptocurrencies like Bitcoin can be used to circumvent capital controls, and can be used for money laundering or illegal purchases.

Others are concerned over decentralized currencies’ potential to destabilize or undermine the authority or control of central banks.

Nonetheless, regulation is creeping in. In September last year, the European Union announced a major step to regulating cryptocurrency assets within the bloc, which could lay the groundwork for the wider uptake of the advantages of cryptocurrency by individuals and businesses, “while protecting financial markets”.

Now, new proposed regulations by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) may be good news for the use and accountability of cryptocurrencies and its recognition by businesses, if not by cryptocurrency fans themselves.

Under new proposed regulations from the FinCEN, it may become much easier for regulators to track cryptocurrency transactions. Or, to put another way, they will expand the government’s reach for financial surveillance. The proposed rule would require money service businesses, such as cryptocurrency exchanges, to collect identity data not just about their own customers, but about anyone who transacts with their customers using their own private cryptocurrency wallets. 

It would require regulated businesses to keep records of cryptocurrency transactions over US$3,000 and to report cryptocurrency transactions over US$10,000 to the government.

The Verge called the proposed ruling “the most ironic development in cryptocurrency’s ironic history.”

“[…] born from a weird group of the libertarians, anarchists, and utopians, cryptocurrency promised to be a way to transact absolutely privately, in a trustless system. Bitcoin, the world’s biggest cryptocurrency, arose just after the 2008 financial crisis as an alternative to banks — but these new regulations will make cryptocurrency exchanges act a lot more like banks. Taken in concert with another rule change about international transactions, it may signal that cryptocurrency’s wild years are over — and anonymity will be harder to find.”

But is regulation really that much of a bad thing for cryptocurrency?

The pseudonymous and anonymous potential of virtual assets played a big part in attracting libertarian crypto users but is now often regarded as a weakness hindering mass adoption of cryptocurrencies. And with US$3.8 trillion in payments driven through credit cards alone in the US in 2018, it’s clear there’s a vast opportunity for cryptocurrencies’ widening usage.

Put simply, regulation means regularity. That might not be appealing to crypto purists, but regulations establish order to systems, ensuring they can function consistently, safely, and more predictably. This removes some of the volatility from the asset and makes it more manageable. And while regulations that enable better traceability do detract from the appeal of anonymized transactions, they will help drive bad actors to underground marketplaces where virtual assets will be in violation of the law.

Removing this uncertainty will contribute to the increased value of regulated assets, attracting more investors which will add to the stability and long-term price predictability.

So, while it’s understandable that a large patch of the cryptocurrency industry view new regulations as an assault on the founding principles, particularly in regard to privacy, the benefits of regulations will in the longer term outweigh the negatives, promoting trust, security, value, and uptake.