Why regulating cryptocurrencies is like trying to catch a falling knife
Investments are changing as the influence of cryptocurrencies and blockchain technology grows, with rising numbers of investors prepared to move away from state-regulated markets. High-street banks face competition from online-only providers, state television is challenged by streaming services and social media, hotels compete against apps that offer a room in someone’s home, which may not have had basic safety checks on its electrics.
But regulations exist for a reason — to ensure safety, fairness and accountability. As well as to generate taxes for government spending to provide a country with services.
One area that is yet to be globally regulated, for taxes or consumer protection, is cryptocurrency and the blockchain industry. But how easy is it to regulate these areas?
Some countries have moved to adopt Bitcoin, with El Salvador accepting the cryptocurrency as legal tender last September. But others such as Saudi Arabia, China, Bahrain and Russia, restrict who can trade these coins. And other countries have banned them outright — Yemen, Algeria and Qatar.
Shri T Rabi Sankar, deputy governor of the Reserve Bank of India, spoke out against Cryptocurrency in February, concerned about how private currencies risk destabilising the international financial system. He was worried about the dangers of unregulated digital coins, whose purpose, in part, is to bypass the government.
Current global financial sanctions on Russia and some of its billionaires as a result of its war with Ukraine, shows how cryptocurrencies are potentially able to undermine international measures. Blockchain allows anonymous transfers from any computer in the world to another as long as the user has an account. Also, the anonymity and lax regulation of cryptocurrencies has led to their use in criminal activities, such as money laundering and dark web transactions of drugs and guns.
It is easy to see why governments want to regulate these technologies. If central banks lose control of money, they cannot create credit, and face the calamitous possibility of a run on their national currencies. The volatility of cryptocurrencies is a huge risk, as is the addictive nature, for some, of dealing in volatile markets. Gambling has a similar appeal.
However, despite Sankar’s misgivings India does not want to ban cryptocurrency, merely regulate it, particularly as the Reserve Bank of India itself, as well as several high-standing Indian nationals, hold substantial investments in digital money.
Blockchain is poorly understood by legislators on the whole, yet any laws made need to be flexible enough to adapt to new developments, while protecting the public. A difficult balance to manage.
Some authorities have passed legislation to attract blockchain firms to their jurisdictions, such as Estonia, Switzerland and Wyoming in the US.
Current regulation is piecemeal and varies wildly, but most regulators agree that where cryptocurrencies and blockchain technologies involve the selling of digital assets to the public, standard rules must be set. Issues of care around consumers have been heightened because there have also been significant failures around data protection, such as the theft of digital identity and privacy breaches.
Michele Benedetto Neitz, a blockchain expert from Golden Gate University in California, suggests legislators should focus on the purpose and end users of this technology, rather than trying to understand its minutiae. The World Economic Forum attempted to bring some sort of order to blockchain by launching its Presidio Principles in 2020, to among other things, agree on transparency and accountability rules. But care needs to be taken in setting regulations, the US Federal Cryptocurrency Act of 2020 was called too vague by its critics.
New technologies, such as blockchain and digital coins are unlikely to go away, with governments and investors using them, regulation is necessary. But it is most likely that international organizations such as the WEF or the Organization for Economic Co-operation and Development will need to be involved in an activity with such a fluid global reach. This is the best chance for comprehensive regulation that best serves the
the needs of businesses and consumers.
• Dr. Bashayer AlMajed is a professor of law at Kuwait University, visiting fellow at Oxford