In recent months, bitcoin has skyrocketed in usage and popular attention. With all this increased exposure and rapidly growing business activity, the public sector was bound to get involved sooner or later.
\nGovernments everywhere are increasingly taking steps to regulate bitcoin and other cryptocurrencies, but these responses have been anything but uniform. And, while some countries are taking a \u2018hands-off\u2019 approach, these are the exceptions to the general trend.
\nCanada and New York are both poised to enact new regulatory measures, Russia has been the first developed country to ban bitcoin outright, and China came pretty close to doing so back in December. While countries may be far apart in the way they tackle the issues raised by bitcoin, their fears are the same.
\nWhen Russian authorities announced that bitcoin was illegal, they outlined \u201claundering of money obtained through crime, as well as financing terrorism\u201d as chief concerns, and that sentiment is echoed across many regulatory agencies.
\nThis uniting aspiration to prevent money laundering highlights the inability of various governments to grasp how bitcoin really works, and how far out of their control it is. Perhaps this ignorance was inevitable, due to the currency\u2019s sudden and meteoric rise, which pressured governments to do something without giving them time to fully understand what was happening.
\nMore harm than good
\nIndeed, even now it still seems impossible to predict how bitcoin and its surrounding services will continue to develop.
\nNonetheless, this widespread failure to understand the fundamental principles behind the Bitcoin protocol and its implications can lead governments to make decisions that will ultimately harm economic development, while impacting criminal activity very little, if at all. One of the glaringly obvious flaws in the patriotic actions of countries like Russia to protect their citizens from terrorists and money laundering is the simple fact they cannot enforce it.
\nBitcoin and all other cryptocurrencies are completely decentralized peer-to-peer systems. There is no central server to shut down, no one to catch and, crucially, no one prosecute \u2013 no one that will cause the currencies to crumble, at least.
\nPut simply, no government on the planet can stop me from downloading a wallet or mining client and connecting to the bitcoin network. Just ask the United States and other developed countries, who have been trying rather unsuccessfully to crack down on illegal P2P torrents over the last decade.
\nHence, anyone who is intent on using bitcoin to launder funds overseas, for which it is most apt, can still purchase them from individual dealers, trusted miners, or even purchase their own mining hardware to turn that dirty money into crypto-coins.
\nIndeed, it\u2019s easy enough to imagine how the bitcoin industry would develop in a permanently illegal context to serve the needs of already illegal organizations, potentially allowing them much more flexibility in both storing and moving funds around the world.
\nThis is what scares governments, but the point they seem to miss, is that for better or worse, they can\u2019t do anything about it.
\nBitcoin and the Deep Web
\nTake Silk Road, the infamous anonymous online marketplace that allowed individuals to purchase just about anything with bitcoin.
\nMany other such markets exist in the Deep Web, and while there will occasionally be a highly publicised bust, criminal activity still continues on a massive basis. Outlawing bitcoin will not affect these already illegal operations in the slightest.
\nIncreasingly, we are seeing the development of ever more organized Deep Web markets, exchanges, and even private currency systems, as criminals move away from bitcoin to other, more anonymous digital currencies. Guess where most of this development seems to be occurring?
\nIf you guessed the only developed country to fully outlaw all cryptocurrencies, Russia, you would be correct.
\nAnother proposed regulatory measure is a ban on \u2018tumblers\u2019 \u2013 tools that allow users to confuse the source of their bitcoins. This idea, discussed in New York\u2019s regulatory hearings, further highlights the unwillingness for traditional regulatory institutions to admit that they have no authority over the matter.
\nTumblers, like illegal markets and exchanges, can be hosted anonymously from any server in the world. New York\u2019s Department of Financial Services may as well ban the sun from setting, as they\u2019d probably have more leverage there.
\nLegal trailblazers
\nThe individuals most affected by government regulation are the ones already engaged in legal business activities and ventures \u2013 that is, those paving the way for an innovative and competitive financial future, and one with a global reach.
\nOutlawing bitcoin simply restricts legitimate business and drives the criminals underground, depriving the private sector at large of benefits of the cryptocurrency. Without government approval, legal businesses and users can\u2019t take advantage of bitcoin\u2019s speed, low costs, flexibility, and anonymity.
\nSo, regulation would simply be driving the creation of another black market, while denying the substantial benefits of cryptocurrency to law-abiding citizens everywhere. We can already see in Canada that even naive talk of cracking down on bitcoin has dealt a crushing blow to developing startups.
\nEven in areas where bitcoin isn\u2019t considered illegal, any regulatory hurdles will inevitably hamper innovation.
\nCountries with a more laid back approach are the ones likely to benefit most from a bitcoin-fuelled financial revolution \u2013 even if it\u2019s still too early to tell what exactly that is going to look like.
\nPunishing the wrong people
\nThis extrapolates to seemingly conventional regulations, such as requiring exchanges and other services to collect the personal information of customers.
\nYes, anonymous exchanges might make it easier for those looking to launder money, but eliminating that avenue by requiring and tracking the personal information of everyone on an exchange does nothing to hinder it, either.
\nIn a world without anonymous exchanges, bitcoin can still be traded privately from person to person, and nothing is stopping fully anonymous Deep Web exchanges and similar services from appearing. The only thing mandatory data collection would ensure is that honest individuals must go through more hurdles and lose even more privacy in the world of Big Data and growing government surveillance.
\nLevel-headed approach
\nBut is all potential regulation bad? Of course not, there are many steps that can be taken to create more confidence within the mainstream population without severely hampering innovation or the privacy of users.
\nSomewhere to watch if you are looking for sensible rules in the bitcoin industry seems to be New York, where Ben Lawsky has been noticed for his level-headed approach in bitcoin talks.
\nOne sensible requirement would be to set a standard for security in public businesses that wish to store or facilitate bitcoin conversions or escrow. Another will be to make it illegal for such a business to move, invest, or otherwise use customer funds (essentially fractional reserve banking) without explicitly stating this to customers, who have the right to take their own risks with their investments.
\nRequiring bitcoin companies to have a good reserve of bitcoin and publicly publish their balance sheets would offer customers some peace of mind.
\nNaturally all companies operating would be liable for their customers funds, if lost, which would be paid to either them personally, if personal information is recorded, or to an existing offline wallet linked to their account. All of this would help increase legitimacy, confidence, and consumer protection in the industry without negatively affecting innovation, and would also end the \u201cWild West\u201d era of cryptocurrencies.
\nAntiquated thinking
\nWhile some will argue that all of these standards and services would probably evolve organically from a free market anyway, it at the very least gives regulatory agencies something to do that isn\u2019t just a knee-jerk reaction, with no positive benefits for legitimate businesses and customers.
\nCurrently, most legislators continue to think of bitcoin in antiquated terms, and that\u2019s the problem.
\nBitcoin promises to create a whole new paradigm in the game of finance \u2013 the biggest technological innovation in the field in many years.
\nThe entire cryptocurrency ecosystem, both legal and otherwise, is evolving so quickly that government regulations can\u2019t even keep up, let alone plan. Legislators are now preparing to make rules for circumstances that have no precedent, that can be hard to understand in their current form, and that will likely not exist tomorrow.
\nBitcoin requires a whole new way of thinking, and a much more flexible approach from governments, to allow it to develop legally within the free market and to bestow its benefits on the world\u2019s citizens.
\nTo learn more, register here!
\nWriter, Krish Sri
\nThe post Why Regulating Bitcoin Won\u2019t Work appeared first on TiEcon 2019.<\/p>\n","protected":false},"excerpt":{"rendered":"
In recent months, bitcoin has skyrocketed in usage and popular attention. With all this increased exposure and rapidly growing business activity, the public sector was bound to get involved sooner or later. Governments everywhere are increasingly taking steps to regulate bitcoin and other cryptocurrencies, but these responses have been anything but uniform. And, while some…<\/p>\n