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Current Regulatory Issues Surrounding Crypto and Decentralized Finance
Current Regulatory Issues Surrounding Crypto and Decentralized Finance

Current Regulatory Issues Surrounding Crypto and Decentralized Finance

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The US remains the most favorable place for blockchain regulation despite the adversarial rhetoric coming from 2021’s government.  From 2013 to 2019 the US has slowly regulated crypto from afar, but there hasn’t been much substantive change since secretary Minuchin’s attempt to regulate digital wallets. Currently, everyone interested in Crypto is waiting for the SEC position regarding stable coins.

If a crackdown on crypto were coming it would come in one of two forms: (1) The SEC will strictly interpret the Howey Test in a manner which determines that the majority of token/protocols are securities; (2) enforcement actions against the developers of decentralized exchange protocol. Liberal interpretation of the Howey test is a forgone conclusion.  Securities laws always have and always will apply to decentralized protocols that issue tokens.  Enforcement against developers is a slippery wicket considering the first amendment protects the publishing of computer code.  Although there is little precedent, the SECs counter argument would likely be that the development of the code behind a decentralized protocol is akin to aiding and abetting illegality.  At some point the government will be forced to test the line of when a security becomes so decentralized that the developers code is no longer imperative to the overall functionality. 

It is clear that the SEC does not consider Bitcoin to be a security because Bitcoin doesn’t make any promises and there is no third party to depend upon regarding profits.  Other than the Howey test, there is no test regarding decentralization.

The rhetoric regarding crypto is expected, but also unfair.  The adversarial tone comes from governmental worries regarding investor protection, ransomware and challenges to the dollar.  Cryptocurrency has and likely will always have rampant violations of investor protection laws and considering the newfound meme stock environment, the SEC is on high alert.  In regards to ransomware the Colonial Pipeline issue comes to mind, but banning cryptocurrency doesn’t stop ransomware, it may even make it hard to control.  In regards to whether cryptocurrency could challenge the dollar, I think the government is worried more about stablecoins that Bitcoin overtaking fiat.  The SEC doesn’t have the man power to go after every crypto scam, which is disappointing to some.  Instead they will pursue choke points (IE Stablecoins like Tether) which they perceive they cannot control.

When considering solutions to these problems the government should be keen to remember that blockchain intends to assuag consumer protection issues and ransomware.  Society has already entrusted third parties(IE Equifax and Target) to control their information only to have their personal data exploited by consumer protection issues and ransomware.  The organic encryption aspects of the blockchain is a solution to consumer protection issues as opposed to blockchain being regular offender.

With all the speculation regarding blockchain regulation the US is still the most amenable climate for the technology due to its laws and regulations.  The simple concept of the first and fourth amendment puts the US in a different dominion than the rest of the world.  Lets not forget in Brazil truth is not a defense to defamation of a public official and China goes back and forth between banning cryptocurrency and starting their own.  Further, the fact that it is extremely hard to alter US law coupled with strict reliance on precedent such as the Howey Test makes the US the most likely to have a consistent regulatory scheme.  This is especially true for developers.

Blockchain is no longer an idea, it is a reality.  Future regulation should be tech neutral. Problems with cryptocurrency are acute problems that do not need to be applied to blockchain or decentralized protocol proactively.  That being said, crypto doesn’t need to be a scapegoat for regulation.  Lately it feel like the media simply attaches the word “Crypto” in front of [INSERT MONEYLAUNDERING SCHEME] and asks the government to regulate.  The US is the most likely to continue to enforce AML laws while also creating the appropriate environment for crypto, while most other countries will enforce strict prosecution on even the slightest indication of decentralization.

The most recent regulatory discussion regarding crypto involves the government’s infrastructure bill.  The obvious question is why would an infrastructure include crypto regulation? It isn’t as bad as it seems.  Some misconceive that the government is attempting to raise taxes on crypto, although this might happen down the line, the infrastructure bill is only attempting to require reporting on crypto actors, which will allow them to apply taxes later.  The crypto public is up in arms because these regulations are being inputted at the last minute by an entity that is already multiple trillions of dollars in debt, but this is not the real issue.  The real issue comes down to the vague language regarding application.  The language could apply to any, including even miners who technically don’t have customers.

The regulation of blockchain and crypto will test 1st and 4th amendment law, but considering the government has been giving bank a pass for several decades it is undeniable that the industry will survive.  The US succeeded in the information age because they embraced the internet.  The US has always been a place where the crazy thrive because of the 1st and 4th amendment.  The infrastructure bill will be one of many recent attempts to regulate crypto, but decentralization speaks for itself and will likely be one of many attempts to jump on the bandwagon while also attempting to break off a piece of the blockchain.